Nolo’s Bankruptcy & Foreclosure Blog

People often ask me about how Chapter 7 bankruptcy will affect their ability to keep their car. If you aren't making payments on a car, then it's just a matter of using whatever exemptions are available to keep it, just like any other asset. However, if you are making payments on your car, it's not so simple. As part of your bankruptcy you must decide how you want handle the note. You do this by filing an official form called the Statement of Intention (SOI) with your other bankruptcy papers as well as mailing a separate copy of the SOI to your lender.

For the full text of this article, head over to Nolo's Online Legal Encyclopedia.

A couple of months before the government takeover of Freddie Mac and Fannie Mae, Congress passed a new law providing financial backing for these quasi-governmental agencies, straight out of the U.S. Treasury. The fact that they have now been taken over means very little, except that a new crop of mis-managers will take over operations at somewhat lower compensation rates.

According to a plethora of financial market pundits, the takeover will "calm financial markets" and hasten the day when real estate values can be determined with some amount of certainty. As long as prices keep falling, sales will not keep up with inventory. Undoubtedly true. However, perhaps the time has come when America really is bankrupt in deed, if not in name, and it will just take a few respected leaders (possibly a presidential candidate or two) to call out the naked emperor. In the meantime, we can expect to be treated to a series of "light at the end of the tunnel" statements by the "powers that be", all designed to calm the savage consumer beast and keep the big money in America instead of some other, more financially stable, country.

Although the real estate fiasco can be hard to understand, a brilliant article in the Sunday, September 14^th San Francisco Chronicle pulls it together about as well as anybody can. The most important point in the article is that the new housing recovery law will likely only benefit the most irresponsible of the impacted homeowners -- this because of the abililty of the lenders to pick and choose which loans they will cash out at 90% of the home's current appraised value. While this approach may help the bottom lines of the various banks that got caught shorthanded, it does little for our sense of fairness. Or, to put it another way, it makes the old saw "let no good deed go unpunished" a little less funny in the case of the millions of homeowners who have struggled to stay current on their mortgages but who will now be deprived of relief because their loans aren't bad enough to justify the lender taking a hit.

An article titled "Lose Homes, Pay More Tax" by Jonathan Glater, published in the May 30, 2008 edition of the New York Times, accurately described a little-known oddity of our tax laws (described in the article as a "tax bomb"). If a lender forgives or writes off debt (same thing), the amount forgiven can be treated as taxable income by the IRS. So, for instance, if you have a second home (not your primary residence) and you lose it to foreclosure or even a short sale, you will be taxed on the shortfall to the lender. Fortunately, loans made to acquire or improve primary residences are excluded from this rule for tax years 2007 through 2009.

What the Times article left out -- strangely, seeing as so many bankruptcy lawyers were quoted -- is that there are two exceptions to the tax bomb. If you are insolvent at the time of the debt forgiveness, you will also be forgiven your tax liability. And, here's the kicker: If you file bankruptcy prior to the debt forgiveness (read: foreclosure) the bankruptcy will not only hold off the foreclosure (at least temporarily), but also discharge the debt, so there's nothing to forgive and no income to tax.

Insolvency can be difficult to prove after the fact, but there is no doubt about the bankruptcy exception. Although many people shy away from bankruptcy, it can be a marvelous remedy when dealing with the possibility of foreclosure. It's beyond my comprehension why that point wasn't made.

If you have old, unpaid debts, you may be safe from a lawsuit to collect the debt, because a creditor or debt collector has a limited number of years to sue you for the debt. To get a better understanding of time limits for debt collection, check out this newly published article in the Nolopedia, "Time-Barred Debts: When Collectors Cannot Sue You For Unpaid Debts".

And if you want further information on debt collection & credit, you might also be interested in my previous post, "When Credit Bureaus Report Debts Discharged in Bankruptcy: It Should Be a Crime".