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Feb 2011

Bankruptcy discharge or "charge off?" What’s the difference?

Posted by / in General Information About Bankruptcy Law / 160 comments

Discharge?  Charge-off?  The two words look a lot alike.  Do they mean the same thing?

Nope.  Discharge is a magic word.   A legal word, anyway.  At the end of your bankruptcy case, you get a bankruptcy discharge.

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

(If the debts are attached to your house or car, they can still go after the property; but they cannot go after you.)

bankruptcy judge

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

The bankruptcy discharge is a court order that the people you owed money to cannot do anything to collect those debts from you.

The purpose of the bankruptcy discharge is to help you get a new start.

Charge-off” is an accounting term.  It’s an accounting term that also shows up on your credit report.  Charge-off means you are probably not going to send in next month’s payment.

Why is that important?  A “charge off” is very important to the bank.  The Federal Reserve keeps close track of charge offs.  The Federal Reserve (and other regulators) wants to be sure that each bank has enough money to cash checks that people might bring to the bank each day.  When it comes to figuring that out, probably the next payment on your charged off debt won’t be there.  The Federal Reserve will close banks that can’t cover their checks, so the bank better make sure some other money is there since yours won’t be.

How is the charge off important to you?  The bank or credit card company puts a “charge-off” on your credit report.  Having a charge off on your credit is a “major derogatory.”  Major derogatory are the worst things you can have on your credit report.  Plus, you still owe the money!

When is a debt charged off?  Federal Reserve regulations require that credit cards be charged off when they are 180 days late.  Car loans and installment loans charge off when they are 120 days late.  (When they figure whether a bank will have enough money next month, they are allowed to hope that your next payment will be there, if you are only 90 days late.  They do not expect you’ll start paying again if you are 180 days late.)

What happens after a charge off?  Sometimes they send it to a lawyer to sue you.  (In Virginia, if it’s less than $15,000, you get sued on a warrant-in-debt.)

Sometimes it goes to a debt collector.  A debt collector will send you a letter, and call you day and night to make a payment.  They will also show up on your credit report as a “collection account.”

A collection, like a charge off or bankruptcy, is a major derogatory that is very bad for your credit.  It’s worse than a bankruptcy, because it keeps piling on.  That charge off, from your original creditor–like Bank of America–has now been joined by a “collection account.”  Your same debt now shows up as two major derogatories–first the charge off, then the collection account.  Later on, if they sue you, then you get a judgment.  That would be your third major derogatory on the same debt.

Besides all this damage to your credit report, you still owe the money.  There’s a whole industry–debt collectors, debt buyers, collection lawyers, who make their living collecting charged off debts.

Credit bureaus are part of the debt collection industry in two ways.  First, although they like to deny it, credit bureaus are used by creditors to pressure you to pay.  Creditors set up credit bureaus as a way to pressure people to pay.

Second, the credit bureaus  alert the collection agencies when charged off debts have a chance of being paid.  Debt collectors can subscribe to email alerts, so they are notified when they have a good chance to collect charged off debt.

How does that work?  Suppose Chuck has been out of work for over a year, and five credit cards have bee charged off and gone to collection. After he told them each ten times that he was out of work and could not pay, Chuck was lucky and they left him alone.

Now Chuck is working again.  He looks at his credit report and decides to try to settle up on his charge offs, one at a time, starting with the smallest.

Boom!  As soon as he settles the smallest one, the phone starts ringing off the hook, with calls about the other four–each trying to be meaner than the other.

When that first settlement hit his credit report, the bureaus sent an email to all Chuck’s creditors, telling them to come and get it.  Pay off one creditor and they all jump on.

How does it all add up?  If you have a charge off, that’s a major derogatory on your credit report.  There’s a whole industry that tries to collect charged off debt.  Each step can put another major derogatory on your credit report.  Charge off does not protect you from any of that.

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Feb 2010

Bankruptcy, foreclosure, 1099-A and 1099-C

Posted by / in General Information About Bankruptcy Law / 31 comments

You don’t need to worry about getting a 1099-A.

If the bank took over your house in a foreclosure, either before or after filing a bankruptcy,  you will receive a copy of a 1099-A.  Form 1099-A is a form the mortgage company is required to file to show that they acquired your property.  It’s what the IRS calls an informational return–it just gives information to the IRS.

You should not receive a 1099-C, which is a cancellation of debt return.  You should not, but you might anyway.  You should not, because there are NO tax consequences for debts discharged in bankruptcy.  So you are NOT taxed on what they didn’t get at the foreclosure sale.   The bankruptcy protects you from that tax.  Here’s the link to the IRS website that says that.    http://www.irs.gov/newsroom/article/0,,id=174034,00.html.

If you get a 1099-C anyway , the IRS may later write to you and say, hey, you owe us another $XX,000.00 because of the debt cancellation.    If you get that letter from the IRS, you need to write them back and say this debt was discharged in bankruptcy.  Send them a copy of your papers.  I’ve always seen that work.   I can get you another copy of your bankruptcy discharge, if you lost yours.

(One thing I should add; I’m assuming your property is here in Virginia or another state that has similar mortgage laws.   If your property is in a state like California, where the mortgage company cannot chase you after a foreclosure, in certain circumstances, it would be really important to file your bankruptcy before the foreclosure sale, not after.)

So, here’s the summary.

Get a 1099-A.  Expect to get one; no need to do anything.

Get a 1099-C.  Should not get one, if you do, expect to hear from the IRS.

IRS letter saying, you owe us all this money.  Write back and say, no I don’t, because of the bankruptcy.  There is a deadline for replying, so make sure you do write back and send them the bankruptcy info.   They are easy to deal with if you reply quickly, but get stubborn if you ignore it until they try to collect the money,

(If you want, you can fill in the IRS Form for this.  Check the very first box, 1a.  Title 11 means “bankruptcy.” )

PS If you get a 1099-C after a bankruptcy, there should be an A in box 6.  That’s explained here Letter Codes for Box 6 of the 1099. 1099-C, A in box 6, tells the IRS there’s no tax on the cancellation because the cancellation was a bankruptcy.

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Jan 2010

Bankruptcy Outlook for 2010

Posted by / in General Information About Bankruptcy Law / 1 comment

New Years

There were 10,634 bankruptcy cases filed in the Alexandria bankruptcy court in 2009.  That broke the record of 9,769 set in 1997.

About 750 of those cases were my clients, and each had their own series of events that brought them to my office.

Many were directly related to the mortgage crisis.  (In the last half of 2007, it seemed like half the people I saw were either people who worked in real estate or the mortgage business, or people who had gotten into mortgages that never made any sense.)   But the recession itself has now passed the real estate crisis as the biggest economic cause of personal bankruptcies.   Layoffs, reduced hours and reduced pay, people who just can’t get work.

National studies show the biggest cause of filing bankruptcy, year after year, is medical.  Either medical bills, directly, or lost time from work for medical reasons, or medical expenses for other family members that ends up on the credit cards.

Divorce often goes hand in hand with bankruptcy, as the costs of living separately is almost always more than the cost of living together.  (Some of those divorces are causes by the financial stresses, and now and then I think a marriage could have been saved if people had come to see me sooner, instead of fighting with each other about their lack of money.)

Nationally, there were 1.4 million personal bankruptcies in 2009.  The American Bankruptcy institute expects the number to go higher in 2010.   The national record was set in 2005, when Congress passed the new bankruptcy law, which many people feared would make filing bankruptcy far more difficult.

The cities and counties served by the Alexandria VA bankruptcy court have a population of two million people–that’s about 1.5 million adults.  That 10,000 bankruptcies represents about 15,000 adults, since about half are husband and wife cases.  So pretty close to one out of every hundred adults in Northern Virginia filed for bankruptcy last year.  At that rate, about half of all Americans file bankruptcy at some point in their lives.

(Bankruptcyaction.com keeps an update on national statistics.  http://www.bankruptcyaction.com/USbankstats.htm)

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