Who Is Considered A Dependent In Bankruptcy?

/1 Comment/in , , , , /by

Boy Holding HandsA dependent is an individual who requires and is actually receiving financial support from the debtor on a regular basis. This is usually children, grandchildren or an elderly family member. Generally, if you provide more than half of that person?s support, that person is considered your dependent.

When it comes to bankruptcy, the rules relating to whether or not a person can be claimed as your dependent are complex. There are various opinions on this topic and often times are determined on a case to case basis. Some Courts determine who is a dependent on the basis of who qualifies under the IRS standards while others use different standards. Most of the time, if they are considered dependents on your taxes the the bankruptcy courts will also consider them dependents.

The number of dependents you have is important in bankruptcy filings because it plays an important role in your Means Test calculations. Properly determining who is or is not a dependent may mean the difference between filing a Chapter 7 bankruptcy or having to file a Chapter 13 bankruptcy.

If you are uncertain as to whether an individual qualifies as your dependent, your best bet would be to consult with your bankruptcy attorney.

Does Your HELOC (Home Equity Line of Credit) Have You Locked?

/in , , , , , , , /by

A few years ago when your home had equity, you obtained a Home Equity Line of Credit or HELOC to consolidate your debt and payoff credit cards, medical bills, personal loans, etc.  It seemed like a great idea because you could eliminate all of your revolving debt and make only two payments each month…your first mortgage and your HELOC payment.  This approach also provided a way to lower your monthly payment, since the interest rate on the HELOC was less than what you were paying on credit cards.  And we all thought at that time your home would appreciate in value!

Family Walking Holding HandsThat was circa 2008 and here you are in today.  You are lucky if your home is worth what you owe on the first mortgage, there’s no way will it will cover the HELOC.  So your HELOC has you locked!  What are your options?

Do absolutely nothing – You can see what is the HELOC creditor is going to do.

The HELOC creditor could foreclose on your home but probably not, since they would receive little if anything from the sale.  However, your credit will be negatively impacted because of late, slow or no payments on the HELOC.  The impact on your credit will make it difficult for you to obtain other credit for another car or other needs.

The HELOC creditor may actually decide to foreclose on the property.  They know they will receive little or nothing from the foreclosure, but they can write-off the bad loan from their books making the company more financially sound.

The HELOC creditor may write-off the debt on the loan and send a 1099C to you and the Internal Revenue Service.  It appears that this voluntary non-payment is excluded from the Mortgage Forgiveness Debt Relief Act of 2007.  At this point you will be responsible for taxes on the forgiven debt.  You should also remember that the creditor writing off the debt does not eliminate the lien by deed of trust on your home.  If you try to sell the house in the future, you must still deal with the HELOC creditor before you can convey the deed to another person.

Sell the home – You would sell the home, but you can’t get enough to pay the first mortgage and the HELOC.

You’ve talked to the HELOC creditor about a short-sale, and they want you to come to the closing table with at least some money to pay them.

Since you don’t have the money at closing, they have agreed to release the lien for you to sell the house, but they want you to sign an unsecured loan on at least a portion of the debt you owe them.  That is an option, but do you really want to pay for a house you do not own?  If you default on this unsecured loan in the future, they can actually sue you for the unpaid debt.

Chapter 13 bankruptcy – You can file a Chapter 13 bankruptcy to resolve the HELOC and any other outstanding debt.

The key is that your first mortgage must be greater than the value of your home.

You will be required to file a lawsuit or adversary proceeding in bankruptcy against the HELOC creditor.

You must complete your bankruptcy and receive a discharge.

This approach will allow you to retain your home and make it a more valuable asset, since you will no longer be saddled with the HELOC.

We you speak with your accountant or a bankruptcy attorney to determine what option is best for you.

What Happens When I Surrender My Property in Bankruptcy?

/4 Comments/in , , , , , , , , , , /by
Read more

Will My Children’s Privacy Be Protected If I File Bankruptcy?

/1 Comment/in , , , , , , /by
Read more

Bankruptcy v. Deed In Lieu of Foreclosure

/10 Comments/in , , , , , /by

Foreclosure Sign in Front of HouseClients have frequently asked us what is the difference between a deed in lieu of foreclosure and a bankruptcy?

First, a deed in lieu of foreclosure (DLF) is when the homeowner signs over and transfers the deed to the home to the mortgage company without the legal process of a foreclosure. Most people believe this will look better on the credit report than a bankruptcy or a foreclosure. This is possible, however a DLF does not wipe out the pre-existing debt on the home as a bankruptcy would do. In other words, you as the homeowner would still owe the deficiency debt on the mortgage, the DLF just saved the mortgage company the time and expense of foreclosing. It does not eliminate the debt you owe them! This is the same on a “short sale”.

The mortgage company will eventually sell the home, usually at a loss, and demand you pay them the difference in money unless you have agreed in writing to wipe out the debt still owed. This debt is usually several thousands of dollars and possibly tens of thousands of dollars.  The difference in what you owe the mortgage company and the amount they sold the house for is called a “deficiency balance”.

If you do not pay the mortgage company the money they have demanded, they could sue you for the difference they lost from the sale of the home. The mortgage company will usually win the lawsuit because you do owe them the deficiency balance unless you have reached an agreement with them saying that you will not owe the deficiency balance.

In the alternative, the mortgage company could believe the debt is “uncollectable” from you and forgive the debt.  You may think, “that’s great!”  However, there’s a catch. The mortgage company will try to “write off” these thousands of dollars of loss on their taxes by filing a 1099(c) with the IRS eliminating your debt to them.  The drawback is the IRS will consider this “forgiven” debt to be gross income if it totals more than $600. In other words, you don’t have to pay back the full amount of the debt but the IRS will tax you on that forgiven debt as gross income. For example, the mortgage company losses $50,000 on the sale of your home.  The IRS will expect you to pay taxes on the $50,000.  If you are in the 25% tax rate, you would have to pay $12,500 in taxes to the IRS.  If you do not have the $12,500, the IRS could start assessing you penalties and interest. That could, in turn, lead to the garnishment of your paystubs!

In contrast, a bankruptcy will usually eliminate any deficiency balance you owe the mortgage company.  Therefore they cannot sue you or attempt to collect the deficiency balance you owe them. The IRS usually cannot tax you for the deficiency balance you owe the mortgage if you file the bankruptcy.  If you file bankruptcy, you are considered insolvent, and the IRS must waive the tax liability on the 1099 if you are deemed insolvent.

In conclusion, consider your options. However we believe surrendering the home in bankruptcy and wiping out any deficiency balance and eliminating your other unsecured debts, such as credit cards and medical bills, is usually a better alternative than a deed in lieu of foreclosure.

What To Look For In A Credit Card After Bankruptcy

/in , , , , , /by

Credit Card DebtYes, credit cards are the evil culprit for many folks who have had to file bankruptcy, but credit cards are not entirely terrible.  Having a credit card helps in many ways to help build your credit, you just need to get the right one that is tailored for you and your needs.  For someone who is coming right out of a bankruptcy, all you wish to do is move forward and a credit card is one of your first steps in establishing good credit.  There are a few things that you need to look for in one when you are ready to start establishing credit.

What are the start up fees?  Are there hidden fees?

Many cards do not have an application fee, but will have annual fees that will be incurred in the future and in many cases, you must pay it when you first sign up for the card.  You will want to do thorough research on this, because in some cases, the annual fee may be low, but the hidden fees may hit you hard!

What is your interest rate?

This is a given.  Just like you would not want to buy a car with a high interest rate, you do not want a card with one either.  Once you leave a balance (i.e.: you do not pay the card off immediately after using it) your credit card company is going to charge interest.  Even if you are not using the card, they will still charge interest on the balance of the card.

Keep your balance low

Credit bureaus do not determine your score solely by whether or not you have made your payments on time.  They also look into your balances.  You do not want to have a high balance on a card because it will bring your score down.  A high balance is how much you owe on the card.  If you have a card that only has a $300 credit limit, you need to try to keep your balance owed on the card under $150.

Get a secured credit card

This is sometimes, but not always, a great way to start to establish credit.  You will have to put money “down” on the card (which is what your credit limit is based upon, for example, you put $300 down, then your credit limit would be $300.)  You will need to look into it whether these cards report to the credit bureau.  If they don’t, the card won’t help you establish payment history.