Rosenberg, Musso & Weiner, LLP

Stay Clear of Payday Lenders, Bankruptcy Is So Much Safer

stevenwaseda — Mon, 23 Jan 2012 14:05:10 +0000

For too many people, bankruptcy feels like giving up. Choosing other, riskier options may make them feel as though they’re still in control, and who knows? Maybe things will turn around for them. They run down their savings, rely on credit cards, and then as a last resort make a visit to a payday lender.

Payday lending is a straightforward concept: The borrower writes the payday lender a post-dated check that’s valid after two weeks, and in exchange the payday lender gives them that amount of cash, minus a fee. After two weeks, the lender deposits the check. The chief problem is the interest the payday lender demanded. Payday loans often charge interest rates of 18 percent per two week period. That means that if the borrower doesn’t repay the interest in time, the lender will likely assess a late fee, and watch the interest compound upon itself. If the original check turns out to be bad, the borrower’s debt will double in 59 days. The annualized rate is 7,295 percent.

It gets worse. The lending fee can go as high as 25 percent, which is added to the principal on Day 1. If the borrower’s check is bad, he or she has two options: either let the check bounce and watch the interest recapitalize onto the principal along with any assessed late fees, or take out another payday loan with a new origination fee and make everything worse. If the amount grows out of control, the payday lender will sue. Worse, two law professors wrote a paper titled, “Do Payday Loans Cause Bankruptcy?” in which the authors discovered payday lenders discourage borrowers from paying on time.

Also, as with other creditors, payday lenders will occasionally lie to borrowers by telling them they will be sent to jail if they don’t pay. This is untrue. Even if the check bounces, the borrower can only be charged with criminal fraud if he or she had no intention to make good on the loan, which is almost never the case.

Payday lending is not an optimal way of solving credit problems, and if you are at your wits end, there’s no time better than now to consult with an experienced New York bankruptcy lawyer.

For more questions about payday loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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House Costs Are Greater than Sticker Price

stevenwaseda — Fri, 20 Jan 2012 14:08:54 +0000

New Yorkers who are on a tight budget might look at their mortgage payments in isolation from the other costs of owning a home. This is a serious mistake as the other, hidden costs of home ownership might be harder to budget, but they can easily turn a shoestring budget into a reason to sell, refinance, or file bankruptcy. It’s one of the reasons to look at mortgage payments differently from rent for an apartment. Here are several examples:

(1) Property taxes. Obviously, property taxes vary depending on your home’s value, which has more to do with its surrounding community than the buildings sitting on it. New Yorkers living outside the five boroughs might be happy to know that the state passed a law capping property taxes last summer. This will undoubtedly save homeowners outside New York City some money and provide them with breathing room if they’re having mortgage difficulties.
(2) Utilities. Some of these can be higher or lower depending on whether you own or rent. Providing heat, electricity, gas, water, sewer service, landlines, cable, satellite, even garbage service can all take a substantial amount out of your monthly incomes.
(3) Insurance. Obviously renters pay renters insurance and homeowners pay homeowner insurance, but there are quirks, such as if your house is older, it’ll cost more to insure. It’s a cost to bear in mind, even though most people pay it yearly rather than monthly.
(4) Maintenance. Part of this is cost but another part is time. Renters can require landlords repair and maintain the premises. This comes out of the landlord’s pocket, which ultimately comes out of your rent. Homeowners, though, have to do all the work themselves and pay for it too. This requires setting aside a budget for emergencies as well as the time necessary to conduct the repairs or wait for tradespeople to do it instead.
(5) Exterior maintenance. Homeowners have to trim trees and bushes, maintain lawns, shovel snow, etc. Renters do not. This means renters have less yard work to do, less equipment (like snow blowers) to store and maintain, and they don’t have to worry about whether neighbors’ unkempt lawns affect their homes’ values if they’re considering selling.

These costs (on top of mortgage payments) might escape those who are trying to maintain a house on a tighter budget. As a result, it’s worthwhile to consult with a bankruptcy attorney, or a financial planner if things aren’t so dire, before trying to cut corners or max out on credit card to maintain a house you can’t afford.

For more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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Why Using a ‘Loss Carryforward’ before Bankruptcy Is a Good Move

stevenwaseda — Fri, 20 Jan 2012 01:08:42 +0000

Business owners entering bankruptcy almost always have more complex cases than simple private bankruptcies, especially because the business owners themselves are filing on their own behalves as well. The differences in how the tax code applies to small businesses as opposed to individuals don’t help either.

One quirk business owners need to be aware of in particular is called a “loss carryfoward.” What is this?

Let’s say you own a small business, and it loses money in one year. (This is referred to as “negative net operating income” in business lingo.) Obviously, it won’t pay any income tax that year. However, if the business posts profits in two of the seven subsequent years, the business can apply the loss from the first year to the income gained in a profiting year. The losses from a previous year are “carried forward” to the subsequent year, and your business benefits because as far as the IRS is concerned, your business made less money than it actually did, and so it pays less in income taxes. So far so good.

In a business bankruptcy, though, holding on to a loss carryforward is often a not a good idea. The reason is that the bankruptcy Trustee collects all the business’ assets into the bankruptcy estate and essentially assumes financial control over it, meaning he or she files the business’ income tax returns. The Trustee, though, does not have the business’ long-term financial future in mind. The goal is to free up as much income as possible and transfer it to the business’ creditors. Moreover, the Trustee receives a commission on the amount of money the bankruptcy estate transfers to the creditors, so if the business has a poor year before and then a solid one subsequently, the Trustee won’t hesitate to use the business’ loss carryforward. It’s easier money than liquidating the business’ physical capital.

The loss carryforward is one of a few unique ways the tax code allows the bankruptcy Trustee to find money in the bankruptcy estate, and the easiest way to keep it is to use it yourself by amending a previous tax return, if possible. If you own a business and it’s running into financial difficulties (and you may be yourself), quirks like the loss carryforward are things you want your bankruptcy attorney to knowledgeable of. It’s one situation where experience counts.

For more questions about businesses in bankruptcy, bankruptcy and tax attributes, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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Note to New Yorkers: “Charged Off” Debt is NOT “Zombie Debt”

stevenwaseda — Thu, 05 Jan 2012 14:05:07 +0000

“Zombie debt,” for New Yorkers unfamiliar with the term, is a debt you no longer owe that a collector has bought from a creditor nonetheless—whether it originated the loan or not—for a fraction of the price. The collector then tries to enforce the loan hoping you’ll repay it. Elsewhere, you may have heard the term, “charged off debt,” and wonder if it’s the same thing, or if it isn’t, what it means. Well, for one, it’s not zombie debt. What is it exactly?

“Charged off” debt is an accounting term, unlike zombie debt, which is a collection term. A bank charges off debt by declaring that it doesn’t expect the debtor to ever repay it. The important distinction here is that the zombie debt is unenforceable while charged off debt is. The debtor still owes the money, and if the bank sells it to a collector, it will have a valid enforcement claim against the debtor. The bank benefits by charging off debt because doing so gives it a tax exemption. Banks business is to buy and sell money, so a debt that has gone unpaid for a significant period of time is merely a business loss to the bank. Declaring the debt as a loss means it can remove it from its income for income tax purposes, so it pays less in taxes to the government.

There are a few rules banks must follow to charge off debt, otherwise they’d do it as often as they could around December to avoid having to pay income taxes. Installment loans cannot be charged off until 120 days after the first delinquent payment. For credit card debt, the rules are different. The minimum amount of time it must wait to charge off the debt is 180 days, and once it’s charged off, the account is no longer usable by the debtor.

The effects of a charge off on a credit score are significant. If it appears on your credit score, you will have significant difficulty obtaining new credit, and it stays on there for seven years. Even if you pay down the debt or settle it, the credit agencies will only change the entry from “Charged Off,” to, “Charge-Off Paid,” or, “Charge-Off Settled.” Paying down or settling a charged-off debt does not reduce the seven-year window, but it certainly looks better on one’s credit report.

Like zombie debt, banks will bundle charged off debt and sell it to collection agencies at a fraction of the cost. There are some defenses to collection attempts over charged-off debt, and they’re similar to typical collection efforts: you can claim the statute of limitations has run out if the creditor or collection agency has waited too long to collect on it (the limitations period begins at the first delinquent payment). If the limitations period runs out, the charged-off debt becomes zombie debt.

Otherwise, if the collection agency or the bank has a legitimate claim against you over charged-off debt, you will need to pay it, settle it, or discharge it in bankruptcy. At this point, you would likely need an experienced New York bankruptcy lawyer to handle your situation before it worsens.

For more questions about charged-off debt, zombie debt, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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Mortgage Modifications in New York: A Quick Guide

stevenwaseda — Wed, 04 Jan 2012 14:05:42 +0000

After the housing bubble burst, millions of Americans found themselves underwater in their mortgages, meaning they owed more to the bank than their houses were currently worth. In this nasty situation, people are still looking for options for making things easier for themselves, particularly because selling a house at a loss leaves the homeowner liable for the balance of the mortgage. One option that gained much publicity was obtaining a loan modification.

A while back, the New York Times reported on a handful of banks that were modifying loan principals of those who had “option ARM” mortgages. However, aside from these lucky few, typical loan modifications only apply to the interest rates and the lengths of the loans. A modified loan usually has a lower interest rate, which reduces monthly payments on the principal, but banks will frequently ask for more payments to compensate. This can help homeowners rebuild equity more quickly because more of their monthly payments go to principal, and hopefully to positive equity.

The federal government created the Home Affordable Mortgage Program (HAMP) to facilitate modifications. The program successfully reduced the median mortgage by 40 percent, which equaled $520 per month. Those who are ineligible for a HAMP modification can still try to negotiate a modification with their lenders. Often they are willing to negotiate if it means keeping loans out of default, but beware modification scams, which appear as offers to help with a mortgage modification for a fee. These are illegal.

Nevertheless, HAMP loans have not reversed the negative equity problem as the median modification resulted in a mortgage of 118 percent the house’s value. This means that a single calamity such as an injury or job loss can eliminate the hard-earned benefits of the loan modification. Many loan modifications still fail.

Mortgage modifications can benefit some people, but it’s important for homeowners to consider all their options, including filing bankruptcy, which can discharge second mortgages with zero equity in them. Bankruptcy also benefits homeowners by protecting them from foreclosure via the automatic stay.

For more questions about mortgage modifications, HAMP, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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What Is Form 1099-C?

stevenwaseda — Tue, 03 Jan 2012 14:05:19 +0000

When a creditor cancels a debt owed to it in New York or elsewhere, and the debt is greater than $600, then it must send the now-former debtor IRS Form 1099-C. The debtor includes this in his or her income tax filing to demonstrate that the canceled debt is in fact income subject to income tax. Debtors are often surprised to receive these forms and believe it unfair.

Most of the time, people receive 1099-C forms when a bank cancels their mortgage deficiencies after either a short sale or deed-in-lieu of foreclosure agreement. In other circumstances, they’ve settled their debt via a debt management or debt settlement company, and now they must pay income tax on the forgiveness, which can force them into bankruptcy anyway. The one time debtors should not receive these forms is after their debts have been discharged in bankruptcy. In those situations, the debt is not canceled but is rendered unenforceable by court order. That means it’s the bank’s problem, not yours.

There are a few ways people can exempt a forgiven loan from their income taxes. One, if the debt was discharged in bankruptcy, then it is exempt. Two, the form allows people to claim insolvency if their total liabilities (debts) is greater than their assets (income, including the forgiven loan). Three, since 2007, the Mortgage Forgiveness Act allows people whose mortgage debt on their principal residences is restructured or forgiven in foreclosure by a bank to claim an exception. The IRS discusses it here.

If your financial situation is dire, particularly if you have an underwater mortgage, or credit problems, it’s best to discuss it with a New York bankruptcy lawyer to sort it out. It’s best to be prepared because receiving a 1099-C can pose challenges.

For more questions about debt forgiveness, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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401(k) Loans Can Put New Yorkers Deeper into Debt

stevenwaseda — Wed, 07 Dec 2011 14:05:28 +0000

Starting in the 1980s, 401(k) plans rapidly become one of the most popular retirement savings vehicles for workers in New York and elsewhere. The concept grew to replace the corporate pension because it became more common for workers to move between industries instead of work in just one company.

Here’s how they work, if you didn’t already know. Workers deposit money into the 401(k) account, and often their employers will match their deposits. At six months before their sixtieth birthdays, workers can withdraw money from the accounts without paying a 10 percent early withdrawal penalty and income tax.

Because people have been finding it difficult to get credit, some workers are turning to their 401(k) accounts, not to withdraw from them and take the penalties but to take loans from them. In 2011, according to the Wall Street Journal, 401(k) borrowing reached a record high of 30 percent. The benefits of borrowing from a 401(k) is that the interest goes back to the account, which makes it very cheap compared to other loans, no credit check is necessary, and it only costs $75 for the initiation fee. The early withdrawal and income tax penalties only occur if the loan’s term is greater than five years.

Despite these benefits—especially the interest going back to the account—there are reasons not to take a 401(k) loan. One, borrowers who lose their jobs have sixty days to repay the loan, otherwise it will be deemed an early withdrawal and the full balance will become due. This is bad, and it’s even worse for workers who are under more than six months from their sixtieth birthdays. Second, most people who borrow from their 401(k) accounts do so because their spouses lost their jobs and now the family is relying on one income. In these circumstances, it’s probably a better bet for the unemployed spouse to file bankruptcy. A 401(k) loan would work best for someone who will very likely find work soon, and in this economy that is fairly unusual. Finally, 401(k)s are exempt from the bankruptcy estate, and repaying a 401(k) loan is permissible in a Chapter 13 bankruptcy. Thus, it’s better to let the 401(k) be and file bankruptcy anyway. If worse comes to worse, the fact that there are no credit checks means that borrowing from a 401(k) after bankruptcy is still a viable option, though it’s still not recommended.

401(k) loans are a tempting option for cash-strapped families, but bankruptcy is a better option.

For more questions about retirement income in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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How to Deal with “Zombie Debt” Collectors in New York

stevenwaseda — Tue, 06 Dec 2011 14:05:23 +0000

At some point, if it believes it will never be repaid, the original bank that makes a loan will sell it to a debt collection company. The loan will be bundled with numerous other ones in the sale, and the price will be a fraction of the total value of the loans. In one example, the Denver Post reported on a Virginia-based debt collection agency, Portfolio Recovery Associates, which paid $1.6 billion for $52.9 billion in consumer debt. That’s a 97 percent discount. Because of the small price the collection company paid for the debt, it only needs to successfully collect on a fraction of it to make the transaction worthwhile. Such is the game of debt collection.

Sometimes, though, these debts aren’t actually valid. They were paid down, settled, or even discharged in bankruptcy. Frequently, the sole information the collector bought was a name, an account number, and a balance. This debt is called “zombie debt” because it’s no longer valid, but the collection agency is calling the former debtor anyway. The debt has been brought back to life to torment the living.

Nevertheless, the collection agency will try to enforce the debt anyway, starting with phone calls, ending with lawsuits. The collection company hopes that the debtor will conclude that the cost of defending the lawsuit is greater than the value of the debt, and the debtor will choose to pay.

If this happens to you, the first thing to do is call your lawyer. Often a phone call from an attorney will cause the debt collector to back down. If you are sued, act promptly, but know your defenses. Many zombie debts are long passed their statute of limitations, meaning they’re unenforceable, and since they’ve been paid off, you can argue that the collector has failed to state a valid claim.

Next, you can assert all your own counterclaims against the collection company, including the Fair Debt Collection Practices Act and Fair Credit Reporting Act. These laws sometimes protect debtors by giving them punitive damages to help defray their attorneys’ fees. If you discharged the debt in bankruptcy, it’s a violation of discharge, and your bankruptcy attorney can return to the bankruptcy court and ask for a contempt order against the collection agency, which may be required to pay attorneys’ fees as well.

Zombie debt doesn’t strike often, but when it does it’s very frustrating, and an experienced New York bankruptcy lawyer can help.

For more questions about consumer debt, zombie debt, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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How to Handle the “Exclusion of Gain from Sale” in New York Bankruptcy

stevenwaseda — Mon, 05 Dec 2011 14:05:14 +0000

People who file New York bankruptcies often have a lot of credit card debt, auto debt secured by their cars, and mortgage debt. Some people, though, own their houses outright or at least have significant equity in them. In these circumstances, the equity can be placed into the bankruptcy estate and sold to the creditors to satisfy debts. Fortunately, New York has fairly large homestead exemptions that protect home values: $150,000 for properties in Nassau, Suffolk, Kings, Queens, Bronx, Richmond, Rockland, Westchester, and Putnam counties; $125,000 for homes in Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster counties, and $75,000 in the rest of the state.

For those who can’t fit all their home’s value into an exemption—and keep it out of the bankruptcy estate—they may lose money due a tax issue called the “exclusion of gain from sale.” Congress created this exclusion in the 1997 Taxpayer Relief Act, which allows taxpayers to exclude up to $250,000 of appreciated home value from their income tax returns. This means that if you bought a home at $200,000 and sold it for $500,000, you would be able to claim $250,000 in the exclusion.

Bankruptcy trustees know this too, and they will use it to the creditors’ benefit because they file the bankruptcy estate’s income tax returns. Saved money from income tax goes to the creditors and to the Trustee’s commission. So how can one avoid losing the exclusion?

There aren’t many options. One, obviously, the real estate bubble that popped a few years ago probably means most landowners in bankruptcy won’t have much “gain from sale” to exclude. Two, New York’s homestead exemption is fairly generous, so it’s unlikely that debtors will lose much money. Three, in the situation in which someone is able to claim a gain from sale yet still have large amounts of unsecured debts, the only viable option is to sell the house and use the excluded gain to purchase something else that’s subject to an exclusion.

It’s worthwhile to know the tax implications of a New York bankruptcy, but they don’t play a significant role in most cases. When they do, it’s important to have an experienced New York bankruptcy attorney to help you through the process.

For more questions about the tax implications of bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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How to Use Bankruptcy to Reduce Auto Loan Payments in New York

stevenwaseda — Fri, 02 Dec 2011 14:05:50 +0000

Many New Yorkers have difficulty with auto loans. In some cases, the car’s value has depreciated significantly, making resale difficult, and in others the car was over-financed to begin with, which is more common when the dealership plays the role of lender as well. Unlike the underwater mortgage, the bankruptcy code offers solutions that are more practical than those for underwater homeowners, but they differ based on which chapter you choose to file in. There are two doctrines in this scenario: redemption in Chapter 7, and cramdown in Chapter 13.

Redemption in Chapter 7. Chapter 7 is the most common one people use when filing bankruptcy. It’s meant to discharge excess credit card debt and any other unsecured debts. One option it offers auto-owner debtors is the right to redeem their vehicles by paying the market value of the car to lender in a single lump-sum payment. The petitioner benefits from this because he or she does not pay the total principal value of the vehicle when it was purchased or any remaining interest on the loan. The problem, though, is that unless the car’s market value is very low, most petitioners will not have the cash on hand to redeem the vehicle. But they may be able to borrow money from a redemption lender to purchase their vehicles.

Nevertheless, redemption gives debtors leverage in negotiations with the lenders. The debtor can offer the option of a reduced monthly payment as an alternative to redemption, and the lender may be better off with the former.

Cramdown in Chapter 13. If debtors who bought their vehicles within the last 910 days (two-and-a-half years) file bankruptcy, then they will have to repay the full balance of the loan according to the Chapter 13 repayment plan the parties ultimately arrive at. This means, there’s a minimum amount of time debtors must own their vehicles if they wish to take advantage of the Chapter 13 cramdown. For cars older than 910 days, the bankruptcy court will adjust the monthly payments to reflect the car’s current market value. The court is “cramming down” the loan because it’s reducing the total interest and principal owed on the loan, and unlike houses (in most years), cars do not appreciate in value, meaning the lender will be forced to accept the loss. Like redemption, the cramdown power gives automobile owners the option to leverage a deal with their creditors if they so choose.

The vast majority of Americans need their automobiles to go to work or buy groceries, and losing a job or suffering a medical misfortune makes the need for an automobile even more acute. In these circumstances, a high auto loan is not something that debtors should tolerate if they do not wish to.

For more questions about auto loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation. ]]>

Rosenberg, Musso & Weiner, LLP

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