If your house is “under water” you need to read this.
The general rule of tax law is that debt forgiveness is income—if I lend you $1,000 and then say you don’t have to pay me back, you’ve made $1,000. And you’re subject to tax on that.
That matters in a big way when there’s a short sale. You could be taxed for the amount the sale is “short.” That tax was repealed for the duration of the housing crisis.—2007-2016. But that repeal is now expired.
So if you need to unload a property that’s “under water,” from a tax viewpoint bankruptcy is lots better. (There’s no debt forgiveness tax on debts wiped out by law in a bankruptcy.)
If you owe $340,000 on your house and get approved for a short sale at $300,000, you’ll get a $40,000 1099-c at the end of the year. And owe something like $15,000 in taxes.
If you file bankruptcy and give up the house in the bankruptcy, no tax.
Starting in 2017, you can get hit with the debt forgiveness tax on a short sale. You’ll get a 1099-C on the amount the short sale is “short.” And the IRS will expect you to pay taxes on that.
Looking Back on HAMP and Forward on Student Loan Relief
Congress should soon take a look at fastest growing category of consumer debt—student loans. During the 2016 Presidential election, Donald Trump added his voice to the Democratic law makers, led by Senator Elizabeth Warren, calling for student loan relief. President Trump was elected on the promise of quick action for hard working Americans. Here’s why student loan relief is a good place for the Republican Congress to start. And why it’s important that Republican student loan relief avoid the mistakes the Obama Administration made with HAMP.
Student Loan Debt is a Job Killer
Student loan relief is one way President Trump and the Republican Congress can deliver on their promise of faster economic growth.Forty three million Americans have student loans. One third of those, fourteen million Americans, have student loans greater than $25,000.00.
Fourteen million Americans have more than $25,000 in student loans. That holds down economic growth for all of us.
One cause of the slow recovery from the recession—which was a major factor in Hillary Clinton’s defeat—is student loan debt. This article from Business Insider explains. Student loans are “having a crippling effect on economic activity, says Barbara O’Neill, a specialist in financial resource management for Rutgers University.”
Here’s one example of how that works. A debt free college graduate can expect to save enough money to be a home owner five years after graduation. With $28,950.00 it takes ten years. And 13 years for people with $50,000.00 in student loans. That’s fewer jobs in construction and in manufacturing household appliances and furniture. It puts off the age when young people get married and start a family. And it makes it harder for young families to start college savings for the next generation.
So What Does Student Loan Relief Have to Do With HAMP?
January 1 2017 marks the end of President Obama’s Home Affordable Modification Program (HAMP). The Obama Administration hoped that HAMP would help three to four million people save their homes. It reached far less than half of that. My own clients, like the people in this news article, reported constant frustration in applying for the program and lost paperwork the banks. However, the banks “will continue to receive billions in incentive payments for helping borrowers who signed up for HAMP for seven years.”
No wonder commentators have said that HAMP was designed to help the bankers, not the home owners.
HAMP was a Political Disaster
HAMP failed the Obama Administration as badly as it failed the home owners. As early as January 2010, the New York Times warned President Obama that the lack of “serious relief for homeowners” was damaging the Democratic party politically. Voters watched while “the federal government rescued banks, financial firms and auto companies, but they themselves feel adrift, still awaiting the kind of decisive leadership on jobs and housing — in terms of both style and substance — that Mr. Obama promised in 2008.”
The Administration failed to heed the warnings of its media supporters. The political damage caused by HAMP continued the present.
The decision to protect banks over homeowners was debilitating. A tide of cynicism swept out Democrats in the last…elections, with voters more skeptical than ever that government can solve problems, or take the people’s side over the financiers. Two-thirds of voters in exit polls found the economy to be rigged for the wealthy.
“The consequence of these decisions was the disillusionment of his base in believing that political action is going to work,” says Damon Silvers. “They weakened the Obama presidency in ways he could never recover from.”
That prediction that the Obama presidency would never recover from the damage caused by the HAMP Program was written February 2015. It was born out by the collapse of the Obama coalition and the defeat of Hillary Clinton in 2016.
No Bureaucratic Program Please!
Republicans could have predicted that HAMP would fail. In fact, they did, as early as 2011.
“To many struggling Americans seeking permanent mortgage relief, HAMP offered little more than false hope. More homeowners have been kicked out of the program than have received permanent relief,” Rep. Darrell Issa, the California Republican who chairs the House Oversight Committee, said in a statement.
HAMP was a complex government program. As Republicans are quick to point out, complex government programs often don’t work as promised. You can look at this 255 page instruction manual, written by Fannie Mae, and see why: bureaucracy “in action.”
Rather than a new program, there’s a simple change in the law that will work wonders. Less than twenty years ago (before 1998), hard pressed consumers could discharge their student loans in bankruptcy, as long as the student loan had been in payment status for seven years.
Before 1976, student loans were dischargable in bankruptcy the same as any other debt. The special status of student loans is a recent change in the law. It can easily be corrected.
What’s Wrong With Just Expanding the Obama Public Service Loan Forgiveness
Congress authorized, and the Obama Administration implemented, a program for forgiveness of Federal student loans for people working in “public service” who make 120 monthly payments (10 years worth). Rep. Karen Barr (D-CA-37) introduced a bill, HR 5487, that would remove the “public service”requirement—making student loan relief possible for people working in the private sector.
(The “pubic service” requirement essentially discriminates in favor of government employees, who are probably not underpaid. But expanding a failing program is not the best way to do that.)
Like the HAMP program, the PSFL is set up by Federal regulations which the private loan servicer is required to follow in dealing with the consumer. Little wonder that only a tiny fraction of those eligible have signed up. (Only 295,000 people, according to one estimate, out of 43 million student loan debtors, one quarter of whom may be eligible for PSLF. A participation rate of 2%.)
Like its bigger cousin HAMP, PSFL has become the subject of litigation in court, for unfair rulings on what is and isn’t “public service.”
None of the websites describing this program give credit to George Bush, who signed it into law. Nor are any of the handful of people who might be finishing the ten year commitment likely to remember him.
The promise of student loan relief ten years down the road does nothing to provide economic growth now. As long as that student loan debt sits on a consumer’s credit report, it weighs down the consumer’s debt to income ratio, making it harder for that consumer to buy a home, start a family and save for the future.
For those who need it, Bankruptcy Provides Student Loan Relief Now
In 2005, Congress enacted more stringent tests to discourage unnecessary bankruptcy filings. Bankruptcy filings are at a historic low, with only 30 people per 1000 filing bankruptcy annually. Restoring the pre-1998 legal status of student loans in bankruptcy, Congress can provide immediate student loan relief to borrowers who need it—with safeguards already in place to prevent abuse. Economic activity will increase, as more young families are able to buy homes.
This approach implements the commitment of the Trump Administration to change with immediate impact and no bureaucracy.
Can I Cancel the Homeowners Insurance—I’m Moving Out
Are you giving up your house as part of your bankruptcy? If you are, can you cancel the homeowners insurance?
I say, No. You homeowners insurance does two big things. First, it would pay to rebuild your house after a fire. If you’re giving the house back to the bank, maybe you don’t care about that. (Maybe you do.) Second, it protects you against liability for accidents on your property. That’s still important. In fact, if you are moving out it might be even more important.
Your homeowners insurance protects you from liability for accidents on your property. So don’t cancel the homeowners insurance.
Until there’s an actual foreclosure, the property owner—that’s you—can be liable for accidents caused by unsafe conditions on the property. Most obviously something like dangerous ice on your sidewalk. But maybe an abandoned refrigerator. All those dangers are small, but they can add up.
Isn’t the bank the owner once I move out?
No, the bank does not become the owner until there is an actual foreclosure. If you’ve stopped paying and filed bankruptcy, that can be as little as three months, but usually four or five and sometimes much longer. I explain a little more about that, here.
So if you are asking me is it safe to cancel the homeowners insurance, when you move out, my answer is, No.
A real example: Rainstorm and falling tree.
Dan and Stephanie filed Chapter 7 bankruptcy with me in the Spring of 2016. A year later, the bank still had not foreclosed on a small rental property they had in Ohio. The next month, a tree from their property, during an unusual storm, fell on their neighbors’ house and car. Now the neighbors can look to their insurance to get the house and car fixed. But that insurance company will want to show that it wasn’t just an accident—that Dan and Stephanie are responsible for not taking proper care of the trees. That’s why it’s even more important, if the property is vacant, to keep up the insurance.
Why do debt collectors keep calling me at work after I tell them to stop?
The Fair Debt Collection Practices Act protects you from debt collectors calling your workplace. But, if you tell them you want them to stop, the debt collectors keep calling.
To get them to stop calling, you need to know the right words to say.
“Don’t call me here” doesn’t work. Nether does “please don’t call me at work.” On this, debt collectors do not have to pay attention to what you want. You need to tell them your employer doesn’t allow you to take debt collector calls at work.
Here’s the right way to say it.
“I told you not to call me here.” Say that, and the debt collectors keep calling.
“The boss doesn’t let me take your calls at work.” Or, “I’m not allowed to get personal business calls at work.”
The legal authority for this is found in the Fair Debt Collection Practices Act (FDCP) at 15 usc 1692c(a)(3). It says “a debt collector may not communicate with a consumer in connection with the collection of any debt—at the consumer’s place of employment if the debt collector knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.”
You have to say it’s the boss—not you—who doesn’t want debt collectors calling.
What Else Works to Stop the Debt Collectors Calling?
There are three other magic word phrases that work. Two of them have to be in writing.
“Don’t contact me any more.” On the phone, “don’t contact me anymore” does nothing. But if you send it in writing they have to stop. That one is pretty straight forward.
“I refuse to pay.” This is another phrase where it’s easy to get the wording wrong. “I don’t know what debt you’re talking about” doesn’t help; the debt collectors keep calling. “That’s not my debt” doesn’t help. “I’m out of work and can’t pay you anything” doesn’t help either.
To all those reasons why you are not paying, you need to add “I refuse to pay.” Like this: “I don’t know what debt you are talking about and I refuse to pay.” The refuse to pay response, like the don’t contact me response, has to be in writing.
(One of the top FDCPA lawyers in the country, Dick Rubin, told me that sometimes telling them “I refuse to pay” can really hack off them, so instead the debt collectors keep calling. But if the debt collectors keep calling, after you put in writing that you refuse to pay, you can sue their pants off.)
“Call my lawyer”
“Call my lawyer”—those are more magic words. “Call my lawyer” can be on the phone; it doesn’t have to be in writing. My clients often tell me that saying “call my lawyer” to pushy debt collectors can be a lot of fun. (You do have to tell them who your lawyer is. But the lawyer’s name and contact info is all you have to give them.)
This only works on debt collectors
The law assume that original creditors, like the credit card or car finance company or hospital, will be relatively polite in collecting their own debts. (They don’t want a bad reputation in the community.) But debt collector want to be known for being mean; so the law protects you against those debt collectors. Here’s what Congress said: “Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.” 15 USC 1692.
When debt collectors stop calling, they can still send you court papers
Stopping the phone calls is only a temporary solution. The debts are still there. If you only have one debt that’s gone bad, maybe you can work something out. If you have lots of debt problems, maybe it’s time to talk to a bankruptcy lawyer.
Some people think bankruptcy is some kind of punishment because you can’t pay your bills. But actually, the purpose of bankruptcy is to help you. If you have honest debts that you just can’t pay, call me today. You’ll like our friendly service with a smile.
Nolo has this wrong. They say, “simply tell the debt collector to stop calling you at work.” That doesn’t work.
Donnell’s Chapter 7 bankruptcy got discharged this month. We have about 30 to 40 bankruptcies discharged—that means approved and done—every month. But Donnell’s was special. He explained why, when he wrote me one of our best reviews ever. You can read it here.
Eight lawyers told Donnell he could not get approved for Chapter 7 bankruptcy. I told him he could; and he did.
Donnell says he went to eight bankruptcy lawyers who told him he could not get approved for a Chapter 7 bankruptcy. I told him he could; and he did.
Every bankruptcy case is different.
Your case will be different from any of the 14,000 cases I’ve handled before. I want to handle it the best way possible, for you.
That’s why I insist on having complete information about your situation when we sit down and talk. Every week people say to my staff, “why do I have to fill out your 37 page form—and bring you all this other information—when I don’t even know if you can help me.” Exactly.
Until you fill in my 37 page form—and bring all the other info I need—I don’t know if I can help you. I can guess, but I don’t know. Eight lawyers guessed that Donnell could not get Chapter 7 bankruptcy approved. I knew that he could. When you make an appointment to talk to a lawyer, do you want the easiest answer? Do you want the obvious answer? Or do you want the best answer?
If you really have a simple question you can email me.
People tell me, I only have a simple question. If you only have a simple question, you can email me. For example: Will Chapter 7 bankruptcy discharge my DC parking tickets. Answer: No.
But most people have a serious question: What’s the best way for me to fix my financial problems. Answer: We need to talk. I need complete information on your financial picture to answer that question.
Chapter 7 bankruptcy is serious
Would you want a doctor who scheduled you for surgery based on a 15 minute phone call? Why would you want a lawyer to schedule you for bankruptcy with less than complete information?
It’s not really as serious as some surgery can be, but it’s serious. Would you trust a doctor who talked to you for 15 minutes on the phone and then scheduled an operation? Most doctors want a complete examination. If not, you want to talk to a bankruptcy lawyer who will only schedule you for a bankruptcy based on your complete financial picture.
Why Filing Bankruptcy Stops Payroll Garnishment: Virginia Law, Virginia Form
I’m surprised a couple times each month by Virginia employers who don’t know that bankruptcy stops payroll garnishment. Some employers think they need to keep on garnishing, until they get an order from a judge saying to stop. But if you read the Garnishee’s Answer Form, it tells you exactly what to do.
(If you don’t have the form handy, please check the link so you can follow along. I’ve inserted the form down below, but it’s too small to read.)
Please Mail Checks or Responses
If you read the form, up at the top, point 4 says, “Please mail checks or responses….” That tells you right there, you can mail a “check” or a “response.” So you don’t have to mail a check. You can mail a response.
Below that, you have ten boxes you can select. The first one is “Enclosed is a check…”
There are 9 Excuses for Not Mailing Checks
After “enclosed is a check,” there are nine other responses. Those nine are your excuses for not mailing a check. Those nine excuses are listed right on the form. They are called responses. Responses you can legally send in instead of checks.
After the “Enclosed is a check” response, look at the nine other boxes. The first one is pretty obvious: “the garnishee holds no money…” If the debtor does not work for you, or bank with you, you don’t have to send in any money. That’s clear.
The second one is slightly different: “The garnishee does not have sufficient information to reasonably identify…” If the garnishment is for John Smith, your company might have eight John Smith’s. If there’s no social security number and the address doesn’t match any of the eight, you’d select that box. (Or if your company only has one John Smith, but there’s no social security number and the address doesn’t match.)
Then there are other boxes for: doesn’t work here anymore; the amount of the garnishment isn’t filled in; not making enough money to be garnished; already being garnished by someone else.
“The judgment debtor has filed a bankruptcy petition”
“Judgment debtor filed bankruptcy” is one of the nine reasons to NOT send checks. Sorry this is so small, but you can see the form full size, here.
The eighth box is “the judgment debtor has filed a bankruptcy petition…” Like the other boxes, the debtor’s bankruptcy is a legal answer to the garnishment. Filing bankruptcy is a legal excuse for not sending in a check. It’s a response that’s right on the form that asks you to mail “checks or responses.”
So if you get notice that your employee has filed bankruptcy, you don’t need to wonder what to do. Pick up the form. Select the box that says “The judgment debtor has filed a bankruptcy petition.” Mail that response. That’s it; you’ve done what the court asked you to do. Finished. You are supposed to send checks or responses. You’ve sent your response.
You’ve checked the box you are supposed to check and done what you’re supposed to do.
Bankruptcy Stops Payroll Garnishment: Does The Form Seem Too Simple?
Even if you didn’t have the form, you should know (or your lawyer, anyway, should know) that bankruptcy stops payroll garnishment. Bankruptcy Judge Stephen S. Mitchell explained why that is, in 18 pages, in the case of Madge Lebrun. (I was Ms. Lebrun’s lawyer.) If you don’t believe the form, you—or your lawyer—can read, here how Judge Mitchell explained bankruptcy stops payroll garnishment.