If Congress fails to come to an agreement before year's end, will it really have an impact on you, or is it all hype? It sure can. With the expiration of the Bush-era tax cuts, your payroll taxes are going to go up, leaving you with less money to pay for everyday living expenses. The impact on homeowners could be even more egregious. Right now, the Mortgage Debt Forgiveness Act is set to expire at the end of this year. If Congress fails to get its act together, if you suffer a short sale or foreclosure in 2013 (or beyond), you will have to pay taxes on the amount of debt forgiven through the short sale or foreclosure. As always, filing for bankruptcy would prevent this taxation if you do so before the 1099C is issued by the creditor, but many people have been able to avoid bankruptcy and get out from under the burden of underwater homes because of the Mortgage Debt Forgiveness Act. In addition, the mortgage interest deduction may go away. In addition to getting rid of one of the biggest financial benefits of owning a home, this could further depress home prices as new buyers may decide against purchasing.
QUESTION: If I file bankruptcy & include my home am I covered from tax implications with the Mortgage Debt Relief Act (if extended into 2013) on a charged off Account with my 2nd mortgage ? I was given an 80/20 loan at the time of purchase!
ANSWER: If you mean by "including" your home in a bankruptcy, that you will surrender it to the bank, you will not suffer any tax consequences because the Internal Revenue Code at 26 U.S.C. § 108 (a)(1)(A) specifically excludes from income debt cancelled through a Title 11 (Bankruptcy) case. Outside of bankruptcy, the Mortgage Debt Relief Act would protect you on any amounts forgiven on the first mortgage, but not the second. If it is your goal to save the home, you might be able to strip off the second mortgage in a Chapter 13 bankruptcy, and I would encourage you to explore that potentiality.
QUESTION: If I have to file a Chapter 13 Bankruptcy ... could I convert it later to a Chapter 7 (if I move out of Hawaii) and no longer have the same income, etc. Wondering how difficult that is to do?
ANSWER: If you have a change in circumstances, particularly a loss of income, which would make the Chapter 13 not feasible, you would have to convert to a Chapter 7. Upon doing so, you would have to attend another 341 hearing for the Chapter 7 case, so if you will be leaving Hawaii, please be sure to let your attorney know in enough time to plan, as attendance at the 341 hearing is mandatory. It is not logistically hard to convert from a Chapter 13 to a Chapter 7, but much of the outcome depends on why you were in the Chapter 13 in the first place. If you were in the Chapter 13 to strip off a second mortgage, or catch up on arrears on the first mortgage, it will be unlikely that you could keep the house when you convert, unless you have obtained a modification, or made some other arrangement with the mortgage lender. If you were in the Chapter 13 in order to protect assets that are not otherwise exempt, you need to be prepared to lose those assets if you convert to a 7. If you were in the Chapter 13 because you are considered a high income debtor, you will need to have a good explanation for why you are giving up a good job to move elsewhere (another job offer and lower costs of living, presence of family, etc.) As with anything, make sure you discuss these circumstances with your attorney.
This is one of the most common concerns of people who are considering filing for bankruptcy. Usually this is not a problem, but it depends on a few things. First, if you have a loan on the car, are you able to afford the monthly payment? If not, you may want to consider surrendering the vehicle back to the bank. Another option is to renegotiate the terms of the remainder of the loan through a reaffirmation agreement so you can get a lower monthly payment. Yet another option is to redeem the vehicle, which means paying the lender the current market value of the vehicle in exchange for a release of the lien. This is particularly beneficial when you have a large balance remaining, but a low value.
If you do not have a lien on the vehicle, how much is the vehicle worth? A Debtor is only allowed a certain amount of equity in one vehicle. Under federal exemptions, you would be allowed equity of $3,450. If your vehicle is worth considerably more, under federal exemptions, we could use some of the wildcard exemption. Giving you a definitive answer about whether you can keep the car becomes more complicated because I would not be able to give you an answer without knowing more about your other assets. Under Hawaii exemptions, if you used the vehicle for work, it is completely exempt no matter how much it is worth. We analyze your circumstances and let you know how you will fair best.