Congress’s fiscal-cliff deal extends a tax break for struggling homeowners that advocates say is key in supporting distressed communities and the housing market.
The Mortgage Forgiveness Debt Relief Act of 2007, signed into law by President Bush, enables struggling homeowners to avoid paying taxes on forgiven mortgage debt from short sales or loan modifications. The tax break was scheduled to expire in the new year, but has been extended through 2013.
Without the break, forgiven debt can be treated as taxable income, and already struggling homeowners would face taxes from a short sale or loan modification. For example, an underwater homeowner in the 25% tax bracket could pay $12,500 in taxes for a short sale in which his house sold for $150,000, but he previously owed $200,000. With the tax break, the homeowner would not have to pay taxes on the $50,000 of forgiven debt.
Extending the tax break has support from both the financial-services community and consumer advocates.
“This tax law has bipartisan support and is critical to helping homeowners and communities struggling with the ongoing foreclosure crisis. Furthermore, the housing market is beginning to show signs of a recovery, and expiration of this law would threaten that recovery,” according to a November letter from chiefs with the Financial Services Roundtable, Center for Responsible Lending and Housing Policy Council to U.S. lawmakers.
Before a fiscal-cliff deal was reached, analysts warned that allowing the debt-forgiveness break to expire could hit a recovering housing market.
“This relief has helped to boost short sales—a smoother way to sell a distressed property, helping the recovery in home prices. If this is not extended, a greater share of delinquent borrowers will likely be resolved through foreclosure instead of short sale, which would depress average home prices,” according to a research note from analysts with Bank of America Merrill Lynch.
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The CA Legislature just OK'd a bill which would codify the material provisions in the AG Settlement, giving much more bite to protection for homeowners. The Bill provides for a single point of contact for modifications and prohibits foreclosure proceedings while lenders are considering homeowner's foreclosure alternatives. More importantly, it provides a private right to sue the lenders if they violate this law. Score 1 for CA homeowners! For more information click here http://www.businessweek.com/ap/2012-07-02/vote-set-on-writing-bank-settlement-into-calif-law
Lately I have been receiving more phone calls (more than usual) from potential clients who are being sued or pursued by 2nd Mortgage Lenders many years after their homes have been foreclosed. They are quite surprised that the foreclosure did not "take care of all liability." California's antideficiency laws protect against liability for purchase money 2nd mortgages. Despite the protection, that has not stopped debt buyers from pursuing collection efforts. The Creditors and debt buyers who have purchased these pools of foreclosed mortgages shoot first ask questions later. I've seen them all "You are liable. Please pay." Often times I am able to present the antideficiency defense or other defenses to get them to stop collection efforts. However, a fellow NACBA attorney (Thanks Ray Shimmel) posted this article where a Texas firm sues homeowners with foreclosed 2nd mortgages using a defense to the antideficiency defense (fraud). See the article here: http://abcnews.go.com/Business/texas-firm-sues-calif-homeowners-foreclosed-mortgages/story?id=16433371&page=2#.T8UEENWvKSp
I am left wondering if other debt buyers are taking notice and begin taking their shoot first ask questions later attitude to the courts?
AG Settlement Update-What I Learned at the 20th Annual NACBA Convention-Part 1
I'm back from an invigorating week in San Antonio meeting and gathering with almost 700 consumer bankruptcy attorneys from all over the country at the latest National Association of Consumer Bankruptcy Attorneys Convention. As promised in my last post, I would try and get the "scoop" on the latest AG Settlement. Despite the fact that it was a Saturday late afternoon and there was the City's best parade right outside the hotel room, the session room was packed! Everyone wanted to hear from Joseph Smith, Jr. what the settlement can really do.
Thanks to Norma Hammes, Esq. she broke down the massive settlement documents into a manageable summary. There's lots there but here's what stood out the most to me:
1) There is no absolute right or entitlement for the consumer under this settlement for a modification or principal write-down.
2) The Servicers receive "credits" instead of paying actual money in providing "consumer relief"
3) California negotiated extra relief mechanisms for its residents
4) Borrower's whose homes have been previously foreclosed during period of January 2008-December 2011 may be entitled to a case payment of $1500 to $2000, and enforced by the State Attorney General's Office
5) At the moment, there is no current portal or formal mechanism for consumers to apply to this program, but it is in the works and hope to get one up soon
6) Fannie a Freddie Mac mortgages do not apply to this settlement
7) There are special protections for debtors in an active bankruptcy to continue to participate in this settlement
8) The website for more information is www.mortgageoversight.com
9) There was not enough time allocated to this session! We could have spent another 3 hours on this topic.
Part 2- coming soon on what I learned about Student Loans
The landmark $25 billion settlement between the state attorneys general and the 5 leading banks is pretty amazing. While everyone is still trying to decipher through the massive settlement documents, some highlights of the settlement are:
1. 60% of $17 billion for principal balance reductions for borrowers in default or at risk of default of loan payments;
2. $5.2 billion for other homeowner assistance such as short sale approvals, unemployment forebearance, deficiency balance waivers, relocation assistance, and payments to fix blighted properties;
3. $3 billion Refinancing Underwater Homes for those not late on mortgage payments
4. New standards requiring bank servicers to adhere to tougher foreclosure and loss mitigation processes and documentation (including an appeal process), hopefully stopping foreclosure while borrowers are actively seeking loan modification;
5. $1.5 billion to foreclosure victims who were wrongfully foreclosed upon, approximately $2,000 per borrower
6. $2.5 billion to participating states for additioal housing relief programs, foreclosure relief, and alternatives as distributed by the attorneys general.
Pretty amazing right? But now what? If you're like me you are asking questions like "Do I qualify?" "How do I apply for relief?" "What relief is available to me?" and so on. I am excited to attend this year's upcoming National Association of Consumer Bankruptcy Attorneys annual convention in San Antonio next month where a special panel with Joseph A. Smith Jr. - the former North Carolina banking commissioner who has been named to oversee the independent monitoring and enforecement under the agreement, pending approval of the settlement by the U.S. District Court for Washington, D.C., will be held and yours truly and hundreds of other bankruptcy lawyers can ask more questions and get the answers you want. Stay tuned!
With the costs of higher education sky rocketing, many students are faced with accepting student loan packages that include subsidized loans as well as private loans totalling tens of thousands of dollars. Graduates who are struggling with finding employment post graduation are faced with little repayment options for their private student loans. Current bankruptcy laws do not allow debtors to discharge student loan debt, except in very limited exceptions. There are no consumer protections for debtors who are facing financial hardship in repaying private student debt. Fortunately, a new bill introduced by Illinois Senator Dick Durbin proposes elimination of the bankruptcy provision which makes private student debt nondischargeable. Whether this will pass despite growing support for the need of student loan reform, is anyone's guess. I am holding my breath.
For more information, http://www.bloomberg.com/news/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html
How an Automatic Stay Stops Harassing Creditor Calls
There is nothing more annoying than receiving 10-20 phone calls or more every day from creditors, credit card companies, and collection agencies asking you why you have not been paying your balances and threatening legal action unless you begin paying now.
You may have lost your job or had to use your cards to pay off medical bills for an emergency medical situation. Although some credit card or collection agencies may seem sympathetic and try to work out a payment plan, most of these companies only want you to use any means possible to pay them, and to pay them now.
One way to stop harassing phone calls is for you to refer the creditor to the Fair Debt Collection Practices Act, which was passed to prohibit particularly offensive creditor calls. These include threats to put you in jail, of possible bodily harm, of misrepresenting the amount of the debt or that you even owe it, or calling you dozens of times per day at all hours of the day and night. Some creditors pretend to be attorneys or someone else. They cannot call you at work if you tell them it is prohibited by your employer, and cannot use profanity or obscenities. You do have to at least answer one of the calls and advise the caller to stop calling you.
However, if your debt has become unmanageable, you do have the option of filing for either a Chapter 7 or a Chapter 13 bankruptcy. The difference between the two is that a Chapter 7 is a liquidation and will discharge or eliminate unsecured debt such as credit cards, and a Chapter 13 is a debt reorganization. You do have to qualify based upon your disposable income to file a Chapter 7.
Both filings are similar, however, in that filing either initiates an automatic stay of any legal proceedings, including foreclosures,
collection activities, lawsuits, and any contact or attempt to collect a debt. The automatic stay goes into effect when your petition is filed. When a creditor, collection agency, or attorney calls, you merely advise them that you have filed either a Chapter 7 or 13 and give them the court file number on your documents. At this point, the creditor will stop calling you.
There are instances when creditors keep calling, which is a violation of the automatic stay. If this occurs, you should write down the dates of the calls, times, who called, the name of the person who spoke to you, and for which debt they are calling. Then, call your attorney with this information.
A creditor who continues to contact you after the automatic stay becomes effective and the creditor has been so advised is in contempt of a federal court order. Once your bankruptcy case has been granted a discharge and the unsecured debts eliminated, these creditors are permanently enjoined from contacting you. A contempt violation can result in a fine.
There are some situations where a creditor can obtain relief from the automatic stay. The most common situation is where a homeowner is in arrearages on the mortgage and the lender needs to continue to foreclose on the property. Other “interested parties” may also obtain relief, usually for secured debts. The bankruptcy code lists situations where a creditor can request relief
from the automatic stay and then continue to contact you.