If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about mortgage debt forgiveness.
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build, or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental properties, business properties, credit cards, or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more detail about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any foreclosed property.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Tisha Black Chernine, Esq.
Rebuilding your credit score after bankruptcy is not as difficult as one might imagine. Whether you file bankruptcy or not the most important factor in improving your credit score is the ability to demonstrate a positive-payment history which really comes down to common sense. With that in mind, below are some common sense ideas to help you get started:
First, pay the debts that survive bankruptcy ON TIME. Certain debts may be non-dischargeable such as student loans. Other debts, such as car loans may have been reaffirmed during the bankruptcy. Pay these monthly debts religiously and early!
Second, you can obtain a secured credit card from a bank. A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. For instance, the cardholder who puts down $1,000 will be given credit in the range of $500 to $1,000. However, do not make the mistake of using your available credit. Maxing out your credit cards hurts your credit score.
Also, all secured credit cards are not the same. Before signing up for a secured credit card, look for the following:
- No application fee and reasonable annual fee. Some secured cards tack huge upfront and annual charges onto their accounts; you do not need to pay these to build your credit;
- Reporting to the major credit bureaus. You are not helping your credit score unless your payment history is being reported to the three major bureaus: Equifax, Experian and TransUnion. Before you apply for a card, call and ask if the issuer regularly reports to all three; and
- The option to convert to an unsecured card after 12 to 18 months of on-time payments. Good behavior should get you upgraded to a regular credit card within a year or two.
Third, obtain revolving debt. It is very difficult on the immediate months after receiving a discharge for a bankruptcy to obtain revolving debt. However, in some cases, a friend or family member may be able to add you as an authorized user to an existing credit card account. If the card holder is responsible with the monthly payments, the credit card company will report these payments as a positive payment history on your credit report.
Fourth, a high-interest credit card, should be considered as a last resort because the terms and interest rates are horrific. People who have recently declared bankruptcy tend to be amazed at the number of credit card offers they receive after their bankruptcy. Remember that using these types of cards got you into this mess to begin with. Therefore, be judicious and sensible in deciding which offers to accept.
Finally, monitor your credit reports from all three bureaus: Equifax, TransUnion, and Experian, on a regular basis. It is very common for a credit report to have numerous errors. If there are errors on your credit report, FIX them. To fix a mistake, go to each credit bureau website and file a formal dispute. Since you just filed bankruptcy, your credit score is VERY fragile and requires vigilance and regular attention. A single late-payment further hurt your already-damaged credit score beyond repair.
The ultimate goal in rebuilding your credit is to demonstrate a history of responsible credit management. This requires time and effort. Remember, because of the bankruptcy on your record, your credit score is very fragile and requires vigilance and regular attention. Fortunately, with each month, and each on-time payment, your credit score will increase.
Randy M. Creighton, Esq.
1. What is a Chapter 7 bankruptcy and/or a Chapter 13 bankruptcy?
Chapter 7 bankruptcy is a liquidation proceeding. The debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months. In the vast majority of cases the debtors have no assets that they would lose so Chapter 7 will give that person a relatively quick “fresh start”.
Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. In Chapter 13, the debtors retain ownership and possession of all of their assets, but must allocate their future income to repaying creditors, generally over a period of three to five years. The amount to repay depends on how much is earned, the amount and types of debt owed, and how much property is owned.
Perhaps most significantly, Chapter 13 offers homeowners an opportunity to save their homes from foreclosure. Under this chapter, homeowners can stop foreclosure proceedings and pay mortgage or car arrearages current during the next 30-60 months. This prevents the need to do so immediately to avoid foreclosure or repossession. Nevertheless, all mortgage payments are due during the Chapter 13 plan on time.
Another benefit of a Chapter 13 bankruptcy is the debtors may retain all their property that would otherwise be liquidated by a Chapter 7 bankruptcy Trustee.
2. If I file for bankruptcy can I keep my property?
Probably. When you file a Chapter 7 bankruptcy you are allowed to keep certain property that is deemed “exempt,” subject to a monetary limit. Under Nevada law, you are allowed to keep your house, car, clothing, jewelry, bank accounts, household goods, money and so on. However, issues surrounding exemptions can be quite complex and you should discuss your case with an attorney.
If you file for Chapter 13 bankruptcy, you don’t have to hand over any of your property. Instead, you repay your debts out of your income. In exchange for keeping your property, your plan will have to pay your creditors at least the value of your nonexempt property.
3. Can I keep my car and/or house after bankruptcy?
Probably. Regardless of whether you file Chapter 7 or Chapter 13 bankruptcy, you are allowed to keep your car and/or home as long as the equity in such property does not exceed Nevada’s exemption limit. Equity is what the property is worth minus what you owe on it. So, if your car is worth $10,000 and you owe $5,000 on it, there is $5,000 in equity.
In Nevada, you are allowed to protect up to $550,000 of your home’s equity and $15,000 in your car’s equity. For example, if your house is worth $200,000, and you owe $98,000 on a first mortgage and $2,000 in taxes, you would have $100,000 in equity, ($200,000 less total mortgages and liens of $100,000), and thus, be able to keep your house.
However, even if you qualify to keep your house and/or car because your equity in these properties does not exceed Nevada’s exemption limit, you can only keep them if you are current on these payments. If you are not current, you can file Chapter 13 bankruptcy that will allow you to repay the past-due amounts over three to five years. Your lawyer will be able to guide you in this regard.
4. Can bankruptcy stop foreclosure?
Yes. When you file bankruptcy an automatic stay goes into effect, which will prohibit any creditors from trying to collect the debts you owe, including a foreclosure on your home. It’s automatic because no action is required to obtain the stay other than filing your bankruptcy petition.
5. Will bankruptcy stop creditors from trying to collect the debts I owe?
Yes. Again, when you file bankruptcy the automatic stay prohibits any creditors from trying to collect the debts you owe. Thus, a creditor cannot continue pursuing collection actions (calls to your home, work, cell phone, letters, lawsuits, and so on) after a bankruptcy case is filed.
6. Can I stop a garnishment of my bank account or paycheck?
Yes. Almost all garnishments can be stopped with the exception of child support or spousal support obligations. Some creditors that hold claims that will not be discharged like student loans can start garnishment again as soon as your discharge is entered.
7. How long will a Chapter 7 or a Chapter 13 bankruptcy stay on my credit report?
A Chapter 7 will stay on your credit report for 10 years from the date of filing and a Chapter 13 will stay on the credit report for 7 years from the date of filing.
8. Will I be able to buy a car or a house after I have filed for bankruptcy?
The simple answer is yes. Most individuals will be able to purchase a car within a few months of their bankruptcy case being discharged. Therefore, a wise financial move may be to surrender a car that is upside down (meaning it has a lot of negative equity). An individual should be smart and shop around for the best offer and not accept the first car creditor’s offer that is presented to them.
In regards to purchasing a house, realtors advise waiting at least 2 years before becoming eligible to qualify for a home mortgage. However the individuals must keep their credit in good standing during this time and try to rebuild their credit by obtaining one or two debts and keep them current. Remember, a bankruptcy stays on an individual’s credit report for 10 years but does not keep one from rebuilding credit during that time.
9. May employers or governmental agencies discriminate against someone who files bankruptcy?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment due to bankruptcy. It is also illegal for local, state, or federal governmental units to discriminate against a person as to the granting of licenses, including driver’s license, permits, student loans, and similar grants because that person has filed bankruptcy.
10. May bankruptcy eliminate my second mortgage?
Yes, but only if you file a Chapter 13 bankruptcy petition. If you have multiple mortgages on your home and the balance on the first mortgage is greater that what your house is currently worth, your attorney can ask the court to strip away your second mortgage. Your second mortgage can then be converted to unsecured debt and included in a Chapter 13 Bankruptcy repayment plan, where at the end of the repayment period any remaining amount will be discharged.
11. What’s a discharge?
A discharge is an order from the bankruptcy court stating that you are no longer obligated on any of the debts you listed in your bankruptcy case, therefore the creditors no longer have the right to collect those debts. In most cases, it is the reason a person files bankruptcy. In a Chapter 7 case, the court issues the discharge order about three months after the 341 hearing. In a Chapter 13 case, the court issues the discharge order about one month after you have made all the payments required under your Chapter 13 plan.
12. Which debts are dischargeable?
If the bankruptcy court grants a discharge in your bankruptcy case, you are no longer legally obligated to pay most debts such as:
- credit card balances
- deficiencies on auto repossessions
- medical bills
- personal loans.
In order for debts to be discharged, they must exist on the date the bankruptcy case was filed and be properly listed in the bankruptcy.
In addition, creditors are prohibited from attempting to collect a debt that has been discharged. Therefore, creditors cannot contact you by mail, phone, or otherwise, file or continue a lawsuit, or attach wages or other property. It is important to understand that if a creditor has a security interest against your property (personal or real) and you are not current on those payments, they may still proceed against that security interest and try to take back possession. They may not, however, seek to collect any money from you for a debt that has been discharged.
13. What debts are not dischargeable in bankruptcy, or in other words, which debts will I be required to pay back regardless of bankruptcy?
As a general rule, certain debts cannot be discharged, and thus, you are still legally obligated to pay these debts. These include taxes (in most cases), alimony, child support, student loans, criminal fines, debts related to drunk driving, debts not listed in the bankruptcy petition, and certain debts incurred within 60 days of filing the petition.
A few exceptions to the general rule of nondischargeability exist, but they are difficult to establish and typically require a filing with the Court of, in addition to the Chapter 7 petition, a Complaint to Determine Dischargeability. For example, 11 U.S.C.A. §523(a)(8) allows a student loan to be discharged if it is (1) not “insured or guaranteed by a governmental unit,” and not “made under any program funded in whole or in part by a governmental unit or nonprofit institution.” A student loan may also be discharged if repaying it will “impose an undue hardship on debtor and the debtor’s dependents.” But the “undue hardship” exception is difficult to establish. Any questions regarding these debts should be discussed with your attorney.
14. How long does it take to obtain a discharge?
In a Chapter 7 case, the court issues the discharge order about four to six months after the filing of the petition. In a Chapter 13 case, the court issues the discharge order about one month after you have made all the payments required under your Chapter 13 plan.
15. Will bankruptcy affect my spouse?
Your spouse will not be affected by your bankruptcy if they are not responsible (did not sign an agreement or contract) for any of your debt. If they have a supplemental credit card they are probably responsible for that debt. However, in community property states, such as Nevada, either spouse can incur a debt without the other spouse’s signature on anything, and still obligate the marital community. There are a few exceptions to that rule. For instance the purchase or sale of real estate requires both spouses’ signatures on contracts. But the day to day debts, such as credit cards, do NOT require both spouses to have signed.
Your lawyer will be able to guide you in this regard.
16. I am a co-signer for a debt. How does bankruptcy affect my obligation?
If the debt is primarily your debt, then you must provide for payment under your Chapter 13 plan. If the debt is primarily the debt of the person with whom you co-signed, then you may provide for payment of the debt under your Chapter 13 plan. If your plan does not provide for full payment of the co-signed debt, the creditor could get permission from the Court to collect the debt from the co-debtor. While you are in Chapter 13, and if your plan provides for full payment of the debt, the co-debtor is protected against collection efforts outside the Court.
17. Will I have to go to court?
In a Chapter 7 bankruptcy case, you generally would not have to appear in court. Debtors are required to attend a creditors’ meeting at the Trustee’s office, during which the Trustee and creditors can ask the debtor questions regarding their finances. In a Chapter 13 bankruptcy case, there is a plan confirmation hearing that is also required.
Randy Creighton, Esq.