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How filing bankruptcy can improve your credit score.

For those individuals who are up to date on their payments and have their credit debts under control, filing bankruptcy would drastically hurt their credit score.  But for those buried up to their neck in debt, facing insurmountable balances on their credit cards, or dipping into their savings to pay the monthly bills, bankruptcy may be the best way to stop the bleeding and get their credit score moving in the right direction. Read more

The Benefits of a Chapter 13 Bankruptcy

The world of bankruptcy is often misunderstood.

The vast majority of Americans have a negative perception of the concept, and even cringe or recoil when they hear the word.  Many feel that they have some type of duty to fully repay their creditors at all costs, even when facing a severe financial hardship.  Debtors in this type of dire situation must put their own needs before that of the creditor and consider all possible options. Often a Chapter 13 bankruptcy is a viable, noble and effective option.

A Chapter 13 bankruptcy petition is often referred to as a wage-earner’s plan, as it is only available to individuals who are currently earning an income and can show an ability to repay most of their debts in a three or five year plan.  Individuals who qualify must have less than $360,475.00 in unsecured debt (debts like credit cards and medical bills) and less than $1,081,400.00 in secured debt (debts like a mortgage or car payment).  Secured debts are those debts that if you default, the creditor can take a piece of tangible property from you in repayment of the debt.  Debtors who have not discharged debt in a Chapter 13 bankruptcy within the last two years, or in a Chapter 7 bankruptcy within the last four years, are eligible for a Chapter 13 discharge.  A debtor may still file a Chapter 13 if they previously filed in the past four years and received a discharge, but they will NOT get a discharge on the current Chapter 13.

How does the Chapter 13 proceed?

First, the debtor and his attorney meet to prepare the petition.  The petition must include all debts, obligations, and creditors of the debtor.  Prior to filing, the debtor must take a credit counseling course, which is offered online.  Once the petition is filed and all filing fees are paid, a bankruptcy judge reviews the petition.  If the petition is approved, the debtor will make his first payment to the trustee within the first 30 days of filing.  The trustee then distributes that payment to all of the creditors of the debtor, in a proportional manner.  Secured creditors are paid first, and then all unsecured creditors are paid in proportion to their individual claim.  This type of payment plan is kept in place for three or five years, or until the debtor decides to withdraw the petition.  If the plan is completed, a discharge order will be granted to the debtor.

So what can a Chapter 13 do for a debtor?

  • Stop a home foreclosure.  If facing a foreclosure on a home and the debtor files a Chapter 13 petition, the foreclosure is immediately stopped.  The foreclosure cannot proceed because an automatic stay is created by the filing of the petition, which attaches to all assets of the debtor.  Proceeding with the foreclosure would be in direct violation of the automatic stay.
  • Stop harassing creditor calls.  Once the petition is filed, all creditors are given notice of the bankruptcy filing and the automatic stay that has been put in place.  Creditors must halt all collection activities after the automatic stay is in place or seek relief from the stay order from the bankruptcy court.  Failure to do so would be a violation of the Fair Debt Collection Practices Act.
  • Remove a wage garnishment. As part of the automatic stay, all collection actions, including wage garnishments, are stopped once the Chapter 13 plan is put into place.
  • Eliminate credit card debt, or other unsecured debt. If a debtor is earning a living wage but has unsecured debts that are no longer manageable, a Chapter 13 petition would allow the debtor to consolidate all debts into one single payment.  Any amount of unsecured debt that is in excess of the approved plan payments is discharged.
  • Discharge a second mortgage. If a debtor has a second mortgage on his home, and the value of the home is less than the debt owed on his first mortgage, then the second mortgage is treated as unsecured.  As an unsecured debt, the second mortgage holder will only receive a fraction of what was originally owed, or perhaps nothing at all.
  • Keep your assets. The most beneficial aspect of a Chapter 13 is that the debtor gets to keep all assets and reorganize all debts.  It is a chance to get caught up on all past debts without going through the heartache of a Chapter 7 liquidation.
  • Rebuild your credit. Sure, the debtor’s credit score will take a hit after filing bankruptcy, but as the debtor makes consistent plan payments to the trustee throughout the life of the plan, his score will rise over time.
  • Catch up on the mortgage payments. If a debtor has fallen behind on a number of mortgage payments, those mortgage arrears can be factored into the plan payments and spread out over the course of three or five years.
  • Have a driver’s license reinstated if suspended for too many traffic tickets. Chapter 13 provides a repayment plan for traffic tickets and court fines that are keeping a debtor’s drivers license suspended.  After filing the petition, a debtor can take that documentation to a Washington State Department of Licensing office and have his license immediately reinstated.

A Washington Chapter 13 bankruptcy can be a very powerful tool for consolidating debts into one affordable monthly payment while discharging unsecured debts such as credit card bills, medical bills, personal loans, lawsuits, judgments, and almost all other debts not secured by collateral. But, Chapter 13 bankruptcies are tough. The petition is often difficult to draft, and is a tedious process to work through. It is not advised that a debtor attempt to draft and file a petition on his own. It is worth the time and money to consult with a lawyer who has experience dealing with Chapter 13 and the bankruptcy courts.  Stop fighting a losing battle with debt and seek help. The bankruptcy courts were established to give debtors a way out and way to start their life again. It is time to utilize that option.

Attorney Jared Bellum is a contributing author to this blog.

The New Amsterdam

This past week, with the passage of the controversial Initiative I-504, Washington, along with Colorado, became the first States to legalize the production, possession, delivery and distribution of marijuana.

If politics make strange bedfellows, I-504 was no exception. The Washington Association of Sheriffs and Police Chiefs and proponents of Medical marijuana joined forces in opposition of I-504. Despite this political odd couple, I-504 passed with 55% of the vote.

While WASPC’s motives for opposition are clear, you may be wondering, why would proponents of Medical Marijuana would oppose such a measure? Well like most things in life, the Devil is in the details. In addition to legalizing the possession of small amounts of marijuana, less than one ounce, I-504 created a presumptive limit of how much THC (the active chemical in marijuana) an individual can have in their system when operating a motor vehicle.
Under the new Driving Under the Influence of Drugs (DUID) law, it is now a crime to operate a vehicle with an active THC content of greater than or equal to 5 nanograms per milliliter, much like the .08 limit for alcohol related DUIs. Citing a study published by the National Institute of Drug Abuse, the Medical Marijuana folks argued unsuccessfully, that 5ng/mL is too restrictive for individuals that use marijuana regularly and those individuals could be arrested even if they hadn’t smoked anything that day.

For those of you who aren’t Chech or Chong and don’t have a PhD in Toxicology, here’s what the study said. It looked at levels of active THC in 25 heavy, long-term marijuana users over a seven-day period. The report found that only one of the participants had active THC levels above 5 ng/mL on day 1, which suggests that the woman was high when she arrived, and the rest had levels lower than 5 ng/mL. The woman had reported smoking four joints per day. However, the day after smoking, her THC levels had dropped to 2.9 ng/mL. Every other participant’s THC levels had dropped even lower by day two. By day six, the levels were undetectable in most of the participants and all of them were far below 5 nanograms.

Two conclusions can be drawn from this. First, the Medical Marijuana folks were likely medicated when they read the study. Second, smoking marijuana the previous day is unlikely to result in a conviction for DUID.

However, it’s important to remember that you can still be arrested for DUID even if you are under the legal limit provided the officer believes you are under the influence of or affected by Marijuana. So, when your out-of-town friends or relatives come to visit the new Amsterdam, make sure you tell them to smoke responsibly and to always have a designated driver. After all, a taxi cab is less expensive than defending a charge of DUID.

Joe Schodowski is a contributing author to this blog and has been admitted to practice law in the state of Washington. He limits his practice to the areas of criminal and civil traffic matters. The Law Offices of Joseph Schodowski, PLLC works in association with the Law Offices of Richard D. Seward, PC.

Short Sales Made Easier

If you’re underwater and facing financial distress, Fannie Mae’s and Freddie Mac’s new short-sale-reform policies may provide the help you’ve been looking for.

Even if you are current on your mortgage payments, and never felt that you could qualify for a short sale and principal reduction, you could be in luck.

Short sales allow borrowers and lenders to avoid the crushing costs of foreclosure by bringing in a new purchaser for the house at what is normally a price well below the amount owed to the lender. In a successful sale, the distressed owner receives a write-down of the portion of the principal not covered by the new buyer’s price.

Starting November 1, 2012, owners whose loans have been purchased or guaranteed by Fannie or Freddie may qualify for a short sale if they fit key hardship criteria including:

  • unemployment;
  • divorce;
  • long-term disability;
  • a change of employment that is more than 50 miles from the current home;
  • a business failure;
  • death of the primary or secondary wage earner; or
  • a natural or man-made disaster.

In what could be a far-reaching change, Fannie and Freddie will allow borrowers who are current on their mortgage payments — not seriously delinquent as traditionally required — to qualify for short sales, provided they fit the hardship criteria.

Besides waiving the requirement that borrowers must be behind on their mortgage to qualify for a short sale, borrowers will also be eligible for streamlined processing of short sales, involving reduced documentation and much speedier resolutions than usual.

Under rules that took effect in June, loan servicers already are required to operate on fast timelines for short-sale requests. They are supposed to respond to borrower requests for short sales within 30 days of receipt of an offer by a purchaser, and must give applicants a final decision within 60 days of receipt of a completed short-sale package.

In the past, short sales often have been drawn out and contentious, sometimes taking nine months or more to close. They have also had a high rate of failure and cancellations, when buyers get frustrated and bail out of the transaction after waiting for banks and loan servicers to make decisions and process paperwork.

Banks that hold second mortgages or credit lines secured by the house have been another choke point. As lien holders, they can block the entire transaction if they feel they are not being properly compensated along with the first mortgage holder, and they have frequently blown up deals with their demands. Under the new Fannie-Freddie rules, second lien holders will be entitled to a maximum of $6,000 out of the proceeds of the sale.
The broadening of short sales to those who are current on their mortgage payments but encountering serious hardships could help huge numbers of underwater homeowners. Though the Federal Housing Finance Agency has no estimates of how many borrowers might be assisted by the change, its acting director, Edward J. DeMarco, has said that 4.63 million loans in Fannie’s and Freddie’s combined portfolios are underwater, and that about four-fifths of these are current on payments.

Additional key changes in Fannie and Freddie short sales:
•Members of the armed forces who receive permanent change-of-status orders and are underwater will be automatically eligible for short sales, even if they are current on their loan payments.
•In states where Fannie and Freddie have the legal right to pursue “deficiencies” when short-sale proceeds do not pay off the existing debt, they will waive that right and instead ask borrowers who have sufficient assets or income to make “cash contributions” or execute promissory notes to cover part of the shortfall.

To find out whether your loan is owned by Fannie or Freddie, visit either FannieMae.com/loanlookup or FreddieMac.com/corporate.

Attorney Jared Bellum is a contributing author to this blog.

2013 Could be a Rough Tax Year

Starting January 1, 2013, a number of tax breaks are set to expire, as well as a number of tax rate increases are set to come into effect.

They will hit families, small business, big businesses, investors, and just about every other category of Americans.  Personal income tax rates will increase, the capital gains tax rate will increase, business tax exemptions will be cut and educational tax exemptions will be decreased.  Be prepared…this may be a year we all have to tighten our belts a bit more.

Personal income tax rates will rise on January 1, 2013.
-The 10% bracket rises to a new and expanded 15%
-The 25% bracket rises to 28%
-The 28% bracket rises to 31%
-The 33% bracket rises to 36%
-The 35% bracket rises to 39.6%

Higher taxes on marriage and family coming on January 1, 2013. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of taxable income. The child tax credit will be cut in half from $1000 to $500 per child.  he standard deduction will no longer be doubled for married couples relative to the single level.

Middle Class Death Tax returns on January 1, 2013. The death tax is currently 35% with an exemption of $5 million ($10 million for married couples).  For those dying on or after January 1 2013, there is a 55 percent top death tax rate on estates over $1 million. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors on January 1, 2013. The capital gains tax will rise from 15 percent this year to 23.8 percent in 2013.  The top dividends tax will rise from 15 percent this year to 43.4 percent in 2013.

Full business expensing will disappear. In 2011, businesses can expense half of their purchases of equipment. Starting on 2013 tax returns, all of it will have to be “depreciated” (slowly deducted over many years).

Tax Benefits for Education and Teaching Reduced. The deduction for tuition and fees will not be available. Tax credits for education will be limited.  Teachers will no longer be able to deduct classroom expenses. Employer-provided educational assistance is curtailed. The student loan interest deduction will be disallowed for hundreds of thousands of families.

Charitable Contributions from IRAs no longer allowed. Under current law, a retired person with an IRA can contribute up to $100,000 per year directly to a charity from their IRA. This contribution also counts toward an annual “required minimum distribution.” This ability will no longer be there.
As you can see, we are in line for a number of major tax changes that will impact our lives at nearly every level. Of course, all of this is subject to Congress doing nothing and making no changes. We will have to just wait and see and be prepared if these tax burdens to come into effect. We will need to make necessary changes to our budgets and our retirement savings strategies in order to be able to survive this tax increase and keep our fiscal goals within reach.

Attorney Jared Bellum is a contributing author to this blog.

What if Congress Does Nothing in 2012?

Two years ago, in 2010, there was a quirk in the Estate Tax laws. For one year, there was no estate tax because Congress did nothing that year. It was the first time there was no estate tax since the start of World War I in 1916. We were (in jest, to make a point) advising high net worth clients to, “hurry up and die”. In fact, George Steinbrenner and Glen Bell Jr. (founder of Taco Bell) died in 2010 costing the federal government billions in estate taxes when it could little afford it while waging two wars.

Now, two years later, with the Bush tax cuts looming to go away unless Congress acts, and with little or no change in the political makeup of Congress, the possibility that Congress does nothing between now and the end of the year is a strong reality. Will this country fall of the “fiscal cliff”? What will that mean to the average taxpayer and what can we do to plan for this possibility?

If Congress does nothing:

  • Ordinary income tax rates will increase across the board from 10%, 15%, 25%, 28%, 33%, and 35% TO 15%, 28%, 31%, 36% with a top rate of 39.6%
  • Capital Gains Rates will increase from 15%[1]TO 20% for taxpayers in the 28% bracket and above [2]and 10% for everyone else.
  • Dividends will be taxed as ordinary income instead of net capital gains
  • The Medicare Surtax of Obama Care will start at 3.8% of net investment income [3]
  • Itemized deductions will be limited and high income taxpayers could lose up to 85% of their deductions.
  • The Estate Tax exemption equivalency amount and gift tax exemption will go down from $5.12 million TO $1 million with rates moving up from a flat 35%, progressively, up to a maximum of 55%.

So what is our advice for high net worth clients? 

  • MAKE THAT “BIG GIFT” BEFORE YEAR END
  • ACCELERATE INCOME RECOGNITION INTO 2012
  • ACCELERATE GAINS FROM SALES OF CAPITAL ASSETS INTO 2012
  • PUT OFF DEDUCTIONS INTO 2013 EXCEPT FOR BONUS DEPRECIATION

Even if Congress acts, you can anticipate that there will be heightened focus on the Estate Tax as a way to increase revenues without “raising taxes”. Congress can just do nothing and allow the exemption equivalency amount to revert back to $1 million. That would be consistent with the $60,000 exemption amount in 1957 based on the Consumer Price index [4] which has increased at a factor of 8 times since 1957. At $1 million, the exemption will have increased by a factor of 16.67 times, which even the current Congress should be able to justify.

If Congress does act by year end, you can expect a combination of some tax increases and revenue cuts, but given the election results, Obama will not have to go as far to the right as he did during his first term in attempting to reach a compromise.  The “fiscal cliff” battle field has changed considerably which might help us see some positive results for this country before year-end, in any event, we recommend tax planning that recognizes that tax increases are inevitable, even if Congress does nothing.

 

[1]  for taxpayers in the 25% brackets and above
[2]  18% tax rate if the capital asset is held for more than 5 yrs.
[3]  The Patient Protection and Affordable Care Act of 2010 surcharge is equal to 3.8% of a taxpayers “net investment income” from dividends, rents and capital gains, or, alternatively, taxable income minus a threshold amount of $250,000 for married couples filing jointly, $125,000 for single filers, and $200,000 for all others.
[4]  All Urban Consumers (CPIU) U. S. City Average (1982-84 = 100)

Foreclosure Fairness Act

There have been some important revisions to the Act which protect distressed homeowners by requiring lenders to participate in mediation before proceeding with a non-judicial foreclosure in Washington.

The bank must explore all workout options and review the borrower’s financials for a possible loan modification. It is proving to be an effective way to force the servicer to make a decision on a modification and give the homeowner the opportunity to move forward with reduced loan payments, often with the past due amount tacked to the end of the loan. It often makes sense to stay in an underwater property if the monthly payments are low enough.  A homeowner can lock in a monthly payment (affordable, defined as 31% of gross income) that is lower than current rental rates for 30 or 40 years.

If the modification is denied, the loan servicer must provide the reason why the loan modification was denied and explain it to you in understandable language. The Obama administration’s HAMP (Making Homes Affordable) program was expanding to include a tier 2 review which is resulting in more modifications being approved for eligible borrowers. Interest rate reductions, extension of loan terms, principle forbearance (and in rare cases, forgiveness) are increasingly approved under the new federal guidelines.
Important deadlines:

  • The homeowner can request mediation under the Act on their principle residence, provided it is not a duplex or investment property. The borrower and the bank split the $400 mediation fee.
  • If you receive a Notice of Pre-Foreclosure, the non-judicial foreclosure process has begun and the lender will have the right to sell your home at auction. That letter is time sensitive – you have 30 days to schedule a “Meet and Confer”. This is a meeting with your servicer to explore possible workout options.
  • If you do not reach an agreement at the Meet and Confer, then the next step in the process is the Notice of Default. This notice will be tacked to the subject property. This is your first opportunity to request that an attorney refer you in the mediation program through the Department of Commerce
  • 30 days after the Notice of Default, the lender can record a Notice of Trustee Sale. The borrowers’ right to request mediation ends 20 days after this notice, which will be sent by certified mail. Four months after this notice, the property can be sold at auction.

What is our advice?

  • DO NOT IGNORE CORRESPONDENCE FROM YOUR LOAN SERVICER
  • GET INTO SOLUTION MODE – ONCE THE PROCESS BEGINS, TIME IS OF THE ESSENSE
  • CALL AN ATTORNEY OR HOUSING COUNSELOR IMMEDIATELY TO DISCUSS OPTIONS
  • AVAIL YOURSELF OF THE PROTECTIONS OF THE FORECLOSURE FAIRNESS ACT. IT IS PROVING TO BE VERY EFFECTIVE IN ACHIEVING MUTUALLY BENEFICIAL SOLUTIONS FOR ALL PARTIES INVOLVED.

Paul di Furia is a contributing author to this blog and has been admitted to practice law in the state of Washington. He is a licensed mediator who also works in association with the Law Offices of Richard D. Seward, PC.

Eminent Domain – The Government’s Right to Take Your Property

It may be hard to imagine, but that home you worked so hard to obtain can be taken by the government for the benefit of the greater good.  In fact, the power of eminent domain has been a fundamental part our Constitution from the very beginning.  Originally adopted by the American colonies from the common law, James Madison included as part of the Fifth Amendment the premise that “nor shall private property be taken for public use, without just compensation.”  And, if you think about it, there would be no highways, schools, bridges or parks without the ability of our federal, state and local governments to acquire the real estate necessary to make those public projects a reality.  Read more