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The Tax Deduction No One Tells You About

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Money on the tableDid you file Chapter 13 to save your house from foreclosure?

Making payments to the trustee to catch up on the mortgage?

If you haven’t claimed a tax deduction for the plan payments that go to the lender, you’re leaving money on the table.

That’s money that fattens Uncle Sam’s coffers at the expense of your own.

You don’t really want to do that, do you?

Mortgage interest deduction

If your Chapter 13 plan is getting you current on your home mortgage, the plan is funneling a part of each month’s Chapter 13 payment to the lender.

Missed mortgage payment are largely interest, unless you are years in to a fully amortized loan.  So when your Chapter 13 plan proposes to get current on the loan through payments to the Chapter 13 plan, you’re proposing to pay the interest due.

The tax benefit in homeownership revolves around the fact that mortgage interest is deductible if you itemize your deductions.  Interest paid reduces the income on which you pay tax.

And, you don’t forfeit that tax benefit when you file Chapter 13.

Yet, for reasons I cannot explain, mortgage lenders seem to have gotten a pass on the reporting requirements that govern non bankruptcy payment of interest.  They don’t report to the IRS and to you, the ultimate payor, the interest paid through the bankruptcy plan by means of a 1098 form.

Find the deductible interest

To claim your deduction, you’ll have to dig a bit.  All Chapter 13 trustees now have websites where you can access a report about distributions made to creditors by the trustee.

You may have to figure out whether the proof of claim for the mortgage loan was filed by the original lender or by the servicer, or sometimes by the trustee of the Wall Street trust that owns the note.

Step by step instructions to calculate mortgage interest paid by the trustee

The claim usually stands out because it will include the total balance owed on the loan.

Buried in that mass of numbers will be the amount paid to the mortgage lender.

Make sure to print out the reports that show the amount.  Since the IRS didn’t get a copy of a 1098 showing payment of mortgage interest from the lender, you may have to back it up from your files.

Deadline to amend back returns looms

If you’ve been in your plan for several years, think not just about the return due soon.  Consider amending earlier returns to claim the deduction, and get a refund of what you overpaid in taxes.

You get three years from when you filed the tax return to amend it.  The IRS has a handy, dandy fact sheet on amending returns.

Don’t leave your money on the table for Uncle Sam.  Claim that deduction.

Image courtesy of Flickr and TracyO

Your Right To Credit Reporting After Bankruptcy

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credit report after bankruptcy

You’ve finished your Chapter 13 and emerged from bankruptcy with your home loan current.

But your credit report is a blank page as to your mortgage.

The mortgage servicer isn’t reporting your payments to the credit reporting agencies.  

Nothing. Nada.  Crickets.

So, even though you’re making regular payments, you’re not visibly rebuilding your credit.

Ask the servicer and they’ll tell you that they can’t report your payments “because of your bankruptcy discharge“.

But they are wrong:  a little-discussed provision of Chapter 13 says that long-term mortgage debt is not discharged in 13.

Yup.  The mortgage loan is not discharged as a personal obligation.

And therefore, there is no bar to the servicer reporting your payments, and every danger should they not report.

Servicer’s obligation to report

Put simply, if a creditor reported to credit reporting agencies before the bankruptcy was filed, then there is an obligation to report after the bankruptcy.  The “furnisher”, the creditor who supplies information to the credit reporting agency, has an obligation to make the information on file fully accurate.

In contrast to an unsecured debt like a credit card, which should be reported as having a zero balance after the discharge, the mortgage loan after Chapter 13 has a balance.

Presumably, it is also current.  Both facts which should appear on your credit report.

Mortgages excluded from Chapter 13 discharge

I’m certain you will have to cite to bankruptcy law when you challenge the improper reporting on a mortgage loan after Chapter 13.

Here’s the part of the Bankruptcy Code that excludes long term debt like your mortgage.

Section 1328 says,

(a)… the court shall grant the debtor a discharge of all debts provided for by the plan …, except any debt—

(1)provided for under section 1322(b)(5); 

The section that 1328 incorporates, Section 1322(b), says

(b)Subject to subsections (a) and (c) of this section, the plan may—

(5) … provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due;

Get mortgage payments reported

If you find that your post discharge payments on your home loan aren’t being reported, challenge the accuracy of what is on your report about that loan with the credit reporting agency.

It is the CRA’s responsibility to see that information in your credit file is accurate.  The CRA is supposed to ask the furnisher to reinvestigate the challenged tradeline.

The Consumer Financial Protection Bureau has a how-to, with a template letter, on how to dispute inaccurate information on your credit report.

Get the good information reported.

More

How to find and fix credit reporting errors

Your post bankruptcy to-do list

Annual IRA Contribution: Use It Or Lose It

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IRA contribution

 

Tax day approaches. Only a few days remain to make an important decision.

You expect to live for decades after you’re eligible for Social Security, don’t you?

Then, you have only until April 15th to use the 2018 allowance for contributions to a tax-advantaged IRA.

Miss making that 2018 contribution and it’s gone for all time.

So, you miss out on that contribution growing, tax free, until you withdraw it.  You miss the miracle of tax-free compound-interest.

Do you really want to miss this opportunity?

Contributions have annual limits

For reasons that I’m sure made (some) sense at the time, Congress capped how much you can contribute to your IRA each year.

For 2018, the contribution cap is $5500, unless you are 55 or over, when it rises $6500.

These numbers are caps;  you can contribute less if that’s all you can manage.

Window for contributing closes

Whether or not you choose an IRA where you can deduct your contribution from your taxable income for the year or not, contributions for 2018 have to be made by the standard date for filing tax returns.

Even if you get an extension to file the return, the window to make a 2018 contribution closes on April 15th this year.

Once the standard date for filing tax returns passes, you can’t go back and add money to your IRA under the 2018 cap.

IRA doesn’t have to be complicated

It’s easy to get paralyzed by the choices you have for retirement savings:

  • banks or brokerage firms;
  • deposit accounts or stocks;
  • traditional IRA or Roth IRA.

If you’re overwhelmed, just open an IRA account and make a contribution.  There are no bad decisions when it comes to savings.

When the dust settles, you can evaluate what to invest the money in or whether to convert the account to a different flavor.

But snooze here, and you lose forever the chance to make a contribution to your old age.

Why I obsess about IRA’s

Why I’ve given up talking about “retirement”.

Too many people who need me for help with their debts have NOTHING saved for their old age.  Those who have saved something generally have under $10,000.

Hard times lie ahead for these folks:  lives are longer and Social Security rises only with the cost of living.  The average Social Security check is about $1300/month.

You don’t live well, anywhere, on $1300 a month.

Or you become dependent on your family, if you HAVE family.  Dependency is never appealing.

Take the first step toward taking responsibility for a better old age.

More

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Retirement savings are safe in bankruptcy

 

 

The One Person You Must Tell About Your Bankruptcy

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Spill the beans concept.Most people who file bankruptcy don’t want anyone else to know.

Some of my clients try to hide their break for financial freedom from friends and neighbors.

Others are worried about their boss finding out.

Occasionally, someone will try to keep it from their mate.

But trying to hide his bankruptcy nearly cost one client $103,000!

Because he hid his bankruptcy filing from his accountant.

It’s all about the tax

When my client got his bankruptcy discharge, stripping off the junior lien on his house, the mortgage lender dutifully sent him a form 1099.

The tax form correctly reported that $288,000 of debt had been forgiven in the last tax year.

And my client delivered the 1099 to his tax preparer, who in turn said,

That will be an extra $103,000 in tax, due and payable on April 15th.

Only, once the tax preparer got the news about the bankruptcy filing, it wasn’t so.

Debt forgiven in bankruptcy isn’t taxable

A discharge in bankruptcy is the first exception to the standard tax rule that debt that is forgiven is treated as if it were cash income.

When the discharge occurs by reason of a  bankruptcy case, the discharged debt is not taxable income.

Responsibility for connecting the dots on discharged debt falls to the debtor/taxpayer.  The creditor whose debt has become worthless is obligated only to report to the IRS that the debt has been forgiven, as a matter of law.

The 5 most common errors banks make on 1099’s

The creditor generates a 1099 form, without comment on the circumstances.

The taxpayer is charged with filing the form that says, in IRS speak, “yes, but….”

Yes, the debt was discharged;  but, no, the discharge didn’t increase my taxable income.

The “because” is the discharge in bankruptcy.

Accountant needs to know about discharge

Had my client told his tax preparer upfront about the bankruptcy, he could have avoided several hours of intense stress.

Retired and living with family, he probably doesn’t have $103,000 in net worth, much less that kind of money sitting around for Uncle Sam.

I’m an advocate for openness about bankruptcy.  It’s not shameful nor the mark of failure.

If everyone who had filed bankruptcy admitted it, those who are now struggling with the decision to file wouldn’t feel like they are the only ones  who ever chose bankruptcy rather than perpetual debt.

But regardless of whether you’re willing to share with others the fact you’ve filed bankruptcy and gotten a fresh start or not, share the facts with your CPA.

It will save you money.

More

Who profits when bankruptcy is source of shame

Tax deductions hidden in Chapter 13

Easy steps to maximize your bankruptcy discharge

Image © Fotolia 

Home Remedies For Foreclosure Breed Bankruptcy Tragedies

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Warning: virulent outbreak of do-it-yourself bankruptcies all around.

Symptoms:  panic over prospect of foreclosure

Supposed remedy:  file your own skeleton Chapter 13 bankruptcy

Prognosis: enjoy the stay for about 2 weeks, followed by foreclosure relapse

Homeowners facing foreclosure

Three different would-be clients called in a 10 day period this month, facing foreclosure.  And all three had the same tragic, but avoidable story.

I was on the trail of an epidemic.

Each had filed an emergency bankruptcy petition to address a looming foreclosure.  They then did nothing to file the balance of the schedules necessary in their cases.

How dismissal differs from discharge

Without schedules,  the case was dismissed, automatically. No court hearing, just tossed out for failure to follow the order that says “you’ve got two weeks to file the rest of the papers”.

And they did the same thing all over again a little bit later, again filing only the bare minimum of paperwork, before the second case is dismissed.

With two cases dismissed in the past 12 months, there will be no automatic stay in a third case.  The  bankruptcy won’t prevent the lender from foreclosing.

As a bankruptcy attorney, my bag of remedies was essentially empty.

Why homeowners sucked in

I understand the appeal of the automatic stay: it’s a lynch-pin of bankruptcy relief.

The automatic stay is powerful:  it applies to all creditors, it makes actions in violation of the stay void, and it becomes effective instantly upon filing bankruptcy.

The necessary paperwork to initiate a case is minimal, and the filing fee is just over $300.

Pretty seductive if you are panicked about losing your home.

Multiple filings labeled abuse

The pattern of debtors filing, getting dismissed, and filing again irked lawmakers back when the last round of bankruptcy amendments passed Congress in 2005.

After “reform”, every debtor gets a stay in their case.

File a second case within 12 months after the first was dismissed, and the stay lasts only 30 days.  The court will consider extending the stay if the debtor applies and gets an order within that 30 days.

File a third case, after two dismissals within 12 months, and there simply is no stay.

Chapter 13 can save your home

The tragedy in all of this is that Chapter 13 works, if you want more than just a two week stay.  Few problems that threaten foreclosure can be solved in two weeks.

How 13 can save your home

Understand that letting your case be dismissed cripples your  ability  to use bankruptcy in another case.

More

What should bankruptcy cost

How to interview a bankruptcy lawyer

Don’t wait til the day before foreclosure

Image courtesy of torange.biz.

Should You Pay Your Creditors Rather Than File Bankruptcy?

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bankruptcy alternative

Is there an alternative to bankruptcy, my clients often ask. Can I realistically avoid filing bankruptcy?

A fellow bankruptcy lawyer outlined what it takes to get out of debt without bankruptcy.

  • make more money;
  • spend less on today’s expenses; and
  • use all your savings to pay off debt.

If you could do all three,  for long enough, and, your debt isn’t too large, it probably works.

I want to pose the question: even if that’s possible, is it smart?

Cost of paying off debt

What do you forgo in that scenario?

If it’s travel; lattes; and premium cable that go, I’m OK with that.

But, what if the things you do without are emergency reserves; health insurance; and retirement savings?  I think that continuing to live on the financial edge is a poor choice.

One small glitch, car trouble, ill health, or fewer hours at work, and your fine and honorable plan to pay comes unraveled.

Make good decisions about your future

Whether your financial difficulty was caused by bad luck or bad choices, don’t make a bad decision, driven by pride, to compound the trouble by living without a safety net.

Studies prove being in debt makes you stupid

Too many of my clients arrive in my office with the conviction that they incurred this debt and, by damn, they want to repay it.

At some level, I applaud that desire. But what are the likely consequences of repaying that debt if it means making no provision for financial stability now and in the future?

Have you just traded one sort of bad situation for another?

Part of reforming your financial situation involves looking beyond this month’s bills to the needs of the next decade and beyond.

Lots of folks got into credit card debt focusing on their ability to make the monthly minimums, rather than on their ultimate ability to pay the debt off.  They forget that minimum payments on most credit cards are set to keep you in debt for several decades.

Particularly in times of profound economic uncertainty, consider the merits of a fresh start and a make a plan for financial self sufficiency.

More

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How to evaluate your choices about debt

Leave a legacy not a pile of debt

What you keep despite bankruptcy

When Can I File Bankruptcy Again

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calendarYou can file bankruptcy tomorrow, so long as you don’t currently have a bankruptcy case pending.

When you can get a discharge in that case is a different story.

The Bankruptcy Code limits the frequency of getting a discharge, not the filing and completion of the bankruptcy case.

My friend Gene Melchionne wrote a marvelous piece about the timing of the bankruptcy discharge that conjures up the old high school cheer:  2, 4, 6, 8, who do we appreciate.

The waiting period between cases, if you want a discharge, can be 2 years, 4 years, 6 years or 8 years, depending on what kind of case you filed before and what kind of case you want to file now.

You count those years from the filing of the first case to the filing of the second case.

But, contrary to the usual thinking, the discharge isn’t everything.

Sounds like heresy from a bankruptcy lawyer, doesn’t it,  but let me tell you a couple of stories.

The no discharge Chapter 7

My client had a house with equity, a recent bankruptcy discharge, and a criminal conviction that had him heading to prison, soon.

He faced a future with no income and no way to pay the mortgage.  And at the point he didn’t live in the property, his right to claim a California homestead in the property was in doubt.

But the recent bankruptcy case meant he couldn’t get a discharge in a new Chapter 7 case; and prison wages were not going to support a Chapter 13.

But what we wanted was the automatic stay, the sale of the house, and the homestead paid to the client.

The balance of the equity was beyond saving, on these facts.  We were content to have the balance go to pay toward the restitution judgment.

So, we filed a Chapter 7.  The fact that my client wasn’t eligible for a discharge wasn’t important .  What we needed was a sale managed by the trustee while my client was behind bars and the homestead carved out and paid to the debtor.

No discharge Chapter 13

Much more common than prison-bound debtors are no-discharge Chapter 13 cases.  When they follow hard on a Chapter 7, we sometimes call them Chapter 20 cases:  7 + 13=20.

After BAPCPA’s changes to the bankruptcy code in 2005, the four year rule applies to getting a Chapter 13 discharge after a Chapter 7.  There must be four years between the filing of the 7 and the filing of the 13 in order to get a discharge of your debts in the Chapter 13.

But the discharge isn’t everything.

Pay debts that survived

Often what you need in a Chapter 20 is the automatic stay and time to pay debts that didn’t get discharged in the Chapter 7.  Those debts might be priority taxes, back family support, or even student loans.

It is the payment plan and the predictability that you need, not necessarily the discharge.

Catch up mortgage

Chapter 13 works to give you time and protection to bring a mortgage current.  Because the mortgage is a lien and wasn’t wiped out in the Chapter 7,  failure to get right with the lender will lead to foreclosure.

Liens that survive the discharge

File a Chapter 13, and you’ve got time to get current.

Strip off the worthless lien

While you can’t strip off liens in Chapter 7 unless they impair an exemption, in Chapter 13 you can void an utterly underwater mortgage AND  strip or bifurcate a tax lien.

Two recent 9th Circuit decisions make it clear that it is completion of the Chapter 13 plan, not the discharge, that entitles you to strip a lien, and that the balance on a lien that survived the Chapter 7 doesn’t count for the Chapter 13 debt limits.

When can you file

So, like lots of legal questions, it depends.  It depends on whether you can achieve your goal without getting a discharge.

Image courtesy of Flickr and Hichako.

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What To Disclose In Bankruptcy Papers

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gecko-wikimedia-cropped.If the headline drew you in, like the Geico gecko, you can complain you’ve been duped.

In bankruptcy, you disclose everything. Period.

Disclosure is the price of the bankruptcy discharge.

Shortchange the system by leaving out inconvenient facts and you risk both the omitted asset and the discharge.

Understand the difference between discharge and dismissal.

A false oath on the bankruptcy papers or transfers intended to conceal assets from creditors are each grounds on which the discharge of all of your debts can be denied, while the trustee recovers and sells the assets.

It’s nasty and comes at a very high price.

Tell the whole truth

The reason for incomplete bankruptcy schedules is seldom an intention to conceal.  It’s the filer’s failure to take disclosure seriously.

People ready to file bankruptcy don’t want to read the questionnaire that prompts them for various kinds of assets they might have. They don’t commit to thinking about how this question might apply to their situation.

Or they assume because an asset has little market value, it’s excluded from the schedules.

Not so. The schedules don’t ask for your significant assets or things you have with value;  they ask that you list what you own.

You would not believe the number of clients whose completed questionnaires tell me they have no clothes.323171462_9528e70afa_z_opt

Yet I’ve never met with a naked client.  They just perform some sort of mental shortcut when we ask about what they own.

Transparent assets

The hardest kind of things for laypeople to “see” as assets are those that are just legal rights, or even, possible legal rights:

  • the worker’s compensation claim,
  • the claim against the landlord,
  • the participation in a class action.

All of those are assets that need to be listed.

Often a trustee will elect not to administer even non exempt assets, because the effort to pursue them is too great compared to the possible return.

But even if the trustee were to administer the claim for the benefit of creditors, the loss to the debtor is usually far less than the value of the discharge of debts  you get  in bankruptcy.

More

What your signature on your bankruptcy papers says about you

Your court appearance in bankruptcy

Who you need to pay after bankruptcy

Image courtesy of Wikimedia and Frank Wouters.

Woman without clothes:  Gisela Glardino and Flickr

What Mythbusters Star Says About Money Troubles

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mortar-board-32277_1280_optLook at the big picture.

That was the point Adam Savage of the TV show Mythbusters made as the speaker at my son’s graduation as a mechanical engineer.

He was talking about using engineering skills after college.

But, it struck me as equally applicable  to my audience of the indebted as it was to his audience of newly fledged engineers.

For engineers, Savage hoped that they would look beyond the technical challenges of any task at hand to see where they, and the gadget they were making, fit in the larger world.

Your technical skills don’t exist in a vacuum, he said.  Or shouldn’t.

For debtors, I want clients to look at their financial life on a canvas larger than just this month’s payments.  Looking at the bigger picture, years and decades, even,  is there any meaningful chance of paying off your debt and achieving economic stability?

Look at only the short term and you miss the sweep of your life. [Read more…]

Getting Rid Of Junior Home Liens In Bankruptcy

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One of Chapter 13’s superpowers is its ability to strip off otherwise valid, voluntary liens on a home.

Ordinarily, liens survive a bankruptcy discharge as a charge on the collateral;  it’s the borrower’s personal liability that is wiped out.

But Chapter 13 allows the elimination of liens when the lien isn’t really secured by any value in the collateral.

Rules of lien stripping

This is law, so you knew there’d be rules:

  1. A voluntary lien, like a deed of trust securing a second loan, line of credit, or HELOC, can be voided only in Chapter 13 or Chapter 11.
  2. It can be stripped only if there is no equity in the property after deducting the payoff balances of the liens senior to the lien from the fair market value of the property.
  3. The lien is permanently voided only upon the successful completion of the reorganization plan.

Thanks to lobbying by the mortgage lenders more than twenty years ago, bankruptcy courts are prohibited from compelling any changes to mortgages liens secured only by the debtor’s home.

So, the work-around, if you like, is a finding by the bankruptcy court that the junior lien isn’t really “secured” by any value in the home.  If it’s not secured, the prohibitions don’t apply.

If there is a dollar’s worth of equity in the property, the lien must remain. A dollar out of the money, and the whole lien is gone.

Limits on bankruptcy relief

As a result of the limitations imposed by Congress, the help for homeowners that bankruptcy reorganization provides is limited to voiding totally unsecured liens and to eliminating other debts of the homeowners.

Limitations don’t apply to real property not acquired to be the borrower’s principal residence

Neither can the bankruptcy court  require the senior lender to modify a mortgage or to defend its decision to reject a modification.

Legislation passed by the House of Representatives in 2009 would have overturned the prohibition on modifying home loans and allowed judges to reduce mortgage balances to the present value of the home and alter other terms of the loan if the borrower was willing to file bankruptcy and successfully made the plan payments. The Senate defeated the bill, so bankruptcy judges remain powerless to weigh in on the tug of war between the mortgage bankers and the homeowners.

As always, you need to determine whether you should keep the house. and what the viability of a modified mortgage is.

You’ve got choices for a house even after you file bankruptcy.

Stripping off judgment liens

Eliminating tax liens

Cancel by Nick Youngson CC BY-SA 3.0 Alpha Stock Images

 

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Phone: (650) 694-4700

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