After months of wrangling, the long-awaited foreclosure settlement between the government and the banks appears to be at hand.

A $26 billion settlement was announced Thursday morning between the federal government, state attorneys general and the five largest banks in the mortgage market: Ally Financial (GMAC), Bank of America, Wells Fargo, JP Morgan and Citigroup.

While many of the details still have to worked out, the major points are fairly clear:
(a) The settlement will only impact mortgages that were held by the five banks. If a loan was sold to Fannie or Freddie it may not be part of the pool that may be eligible to share in the pot.
(b) Five ($5b) Billion has been earmarked for payments to homeowners who may have been improperly foreclosed upon between September 2008 and December 2011. Borrowers could receive up to $2,000.00, depending on the number of claims filed nationwide
(c) Seventeen ($17b) Billion has been earmarked for various principal writedowns and other relief up to $20,000.00 per household
(d) Three ($3b) has been earmarked for refinancing mortgages currently underwater.

According to various reports, there are at least 1.5-2 million households who could be eligible for the $2,000.00 payouts. In addition, there are an additional 1-2 million homeowners who could be eligible for some relief under the remaining prongs of the settlement.

The major questions still to be answered are:
(1) How does the pot get split up between the states – rumors have been circulating that California alone could get up to eight (8%) percent of the pool; and
(2) What are going to be the eligibility requirements – who will be lucky and who will not?

Stay posted – The banks have up to three (3) years to implement and fulfill the requirements of the settlement. It will still take another couple of months at a minimum to begin to get clear direction on how it will be implemented.

In bankruptcy, you are allowed to protect various assets, such as cash or cash equivalent assets such as the right to receive a tax refund. This is called exempt property or exemptions.

When the exemption laws were overhauled in New York in January 2011, it proved to be a major benefit to homeowners and renters alike. Homeowners are now allowed to protect up to $150,000.00 in equity in their primary residence. Renters are now allowed to protect up to approximately $12,000.00 in any personal property, including tax refunds.

Despite the above benefits, there has always been, and still remains, a tradeoff for homeowners. If a homeowner must declare the “homestead” exemption, they can only protect $1,000.00 in cash or cash equivalent assets, such as a tax refund.

As we are now in tax season, homeowners must be wary of the timing of their Chapter 7 bankruptcy filing. Although the tax year has just recently ended, many Chapter 7 Trustees have taken the position that a pro-rata share of the current year’s tax refund may be considered property of a bankruptcy estate under Section 541 of the Bankruptcy Code. For example, if a homeowner filed on November 1st, the Chapter 7 Trustee may claim that approximately 83% of the tax refund for 2011 is property of the estate, and a homeowner may be required to be turn over that portion of the refund, when received, to the Trustee for distribution to creditors.

If you are a homeowner with equity in your primary residence and have traditionally received a substantial tax refund, you must ensure that this issue is discussed with your attorney. Your attorney’s job is to provide you with guidance to obtain the maximum protection under the law. It is hard enough to make the decision that a bankruptcy filing is necessary. You should not lose an asset that could be protected. Only an experienced bankruptcy attorney will raise this issue and help you work it through.

Most individuals or couples filing for protection under either Chapter 7 Bankruptcy or Chapter 13 Bankruptcy are required to meet certain income eligibility requirements under the “Means Test.”

Under the Means Test, you must first determine if your average monthly income for the last six months is below the median income for your state, based upon the size of your household.

If your average monthly income for the past six months is below the median income in New York, you have passed the first hurdle, and so long as you meet the other eligibility requirements, you can file for protection under Chapter 7 Bankruptcy.

If your average monthly income for the past six months is above the median income in New York, you must proceed to the second hurdle – do you have the ability to repay a portion of your debt?

The second hurdle is the determination of your ability to repay a portion of your debt. Under the law, you are required to perform an analysis of your income and expenses (based upon certain Internal Revenue Service guidelines) – the Means Test..

With respect to expenses, some expenses are deducted on a dollar for dollar basis, others on an allocation basis, based upon family size and county of residence. The largest single deduction on an allocation basis for renters has always been housing/shelter expense.

Prior to November 1, 2011, renters who reside in Nassau and Suffolk Counties were required to deduct a ridiculously low amount for shelter expense as compared to homeowners who have mortgage obligations.

As of November 1, 2011, the playing field for Long island renters has now been leveled. Housing allowances for Nassau and Suffolk County residents have increased by 30% on average

The following is a chart of comparing the allowances:

Household                 1                2                  3                      4
                             Pre   Post   Pre   Post   Pre  Post    Pre  Post
Nassau County    1545 2027 1814 2300 1911 2508 2131 2796
Suffolk County     1385 1806 1626 2121 1715 2235 1911 2492

The net effect of this change is that, even if your income is above the median for the State, residents of Nassau and Suffolk Counties has been provided with an additional $6,000.00 allowance based upon the cost of housing on Long Island. This can make the difference between qualifying for Chapter 7 Bankruptcy and discharging all of your dischargeable debt and filing for Chapter 13 Bankruptcy and having to devote all of your net disposable income to a repayment plan of up to five years.

If you have been previously advised that you are “on the border” to qualify for Chapter 7 Bankruptcy, it’s time to look again and see if you qualify under the new housing allowances.

Special Note: Means Test Allowances are updated every six months. The above allowances will only apply to cases for between November 1, 2011 and April 30, 2012.

Earlier today, I was listening to a business report on the radio in which an economist actually recommended that homeowners who purchased a home in the mid-2000′s with little or no money down, who are now at least 12 months behind on their mortgage and have been unable to modify their mortgage because of insufficient income, actually file for Chapter 7 bankruptcy and GET IT OVER WITH – MR. OBAMA IS NOT GOING TO SAVE YOUR HOME!!!

Unfortunately, this mantra is going to going to get louder in the coming months as (a) banks may have already modified the vast majority of those who can truly afford to make timely mortgage payments, and (b) State Courts are now beginning to allow more foreclosure actions to move forward.

One of the ways that the economy can get moving again is to allow these remaining foreclosure actions to begin to again flow through the system. There are too many properties in the pipeline that are being stalled by my brethren without any legitimate financial grounds – namely – THESE HOMEOWNERS CANNOT AFFORD TO PAY ANYTHING NEAR WHAT MAY BE REQUIRED TO ADEQUATELY SERVICE THEIR DEBT.

Even if some are successful in modifying, has anyone really looked at the terms. In many cases, while the payment may become affordable in the short term, the payment of a modified mortgage has become the equivalent of indentured servitude or glorified rent (whichever cliche you may choose). Banks are not reducing principal balances – they are merely deferring them. A homeowner will may minimal payments over the next 30+ years and at the end of the period, could still owe the bank in excess of $100,000.00.

Doesn’t it just make more financial sense to file bankruptcy, begin to save what you would be paying for a mortgage (or rent), and let the bank foreclose? At the end of the process, when it is time to make the transition to new housing, you will hopefully have a small nest egg to allow you to start over again. ISN’T THIS WHAT BANKRUPTCY IS ALL ABOUT?

Now I am not advocating intentional or structured defaults on mortgage obligations, I am just asking those whose situations have gotten beyond the “point of no return” to temper their expectations and be more realistic in viewing their financial futures. Think about it before you spend more money paying consultants that make unrealistic promises….

I know this sounds completely bizarre, but it may start happening more frequently in the near future.

In the past 30 days, I have encountered three new clients who have been “informally” advised by their mortgage lenders to file bankruptcy to deal with their unsecured debt PRIOR to completing a mortgage modification.

Lenders, in addition to the 31% rule (previously discussed in another post), are now taking a closer look at a homeowner’s total debt ratio – also known in the banking business as the “back end number.”.

In the cases I have encountered thus far, each client had a total debt ratio (mortgage payments, auto payments and credit card minimum payments) of in excess of 50% of their monthly gross incomes. It is my understanding that lenders may now not consider a homeowner for a modification unless their total debt ratio is less than 40% of their gross monthly income. For many homeowners, bankruptcy may now be the best alternative to eliminate credit card debt BEFORE applying for a mortgage modification.

As a former banker, I know that although the two ratio formula has been around forever, it has shifted over the years. Back in the early ‘90s (before mortgages began to be sold en masse), the rule of thumb was that mortgage debt should not exceed 28% of homeowner’s gross monthly income, AND that their total debt ratio should not exceed 34% of income. In the early 2000′s, the ratios shifted to as high as 35%/45% (and this was in addition to all of the other types of mortgages that were available, such as “liar” loans).

The pendulum now appears to be swinging back to the more “traditional” guidelines. If you are attempting to modify your mortgage, I suggest that you first calculate your total debt ratio and then speak to your lender . Instead of wasting valuable time processing an application for a modification which could be doomed from day one, it may be a good strategy to be proactive with your lender and ask whether they would be willing to consider you for a modification if you agree to deal with your unsecured (credit card) debt in a bankruptcy proceeding. In this environment, anything is possible….

In the recent past, I have seen a trend develop that, even as a parent, I find extremely disturbing – parents seeking bankruptcy protection in mid-life or in preparation for retirement that will remain saddled with their children’s student loan obligations long after they have discharged of their other debts.

Here’s an example: A couple in their early-mid 50′s that rent an apartment, with a combined income of in excess of $80,000 per year has $50,000 in credit card debt. In addition, while their child was in college, they co-signed for an additional $50,000 in student loans. Their child, now is his/her late 20′s, is having difficulty getting their career off the ground and cannot meet their student loan obligations. Mom and Dad, as the joint obligors, begin to make student loan payments for their child that could be as high as $500/month. Dad’s job then gets downsized and his $60,000 income is now $30,000. Mom and Dad now seek advise from a bankruptcy attorney (me). I now have to deliver the good news and the bad news that (a) they qualify for Chapter 7 bankruptcy; (b) they can obtain a discharge of their credit card debt; but ( c) they will still be obligated for their child’s student loans.

The reason for this is that, despite the provisions contained in Section 523(a)(8) of the Bankruptcy Code, which state that certain student loan obligations may be discharged in bankruptcy, in reality, this is NOT the case.

The rule of thumb in the case law on this issue was provided in In re Brunner The Court in Brunner basically held that so long as an obligor on a student loan is able bodied, has some net disposable income above their usual and customary living expenses, and is capable of making some type of payment on a student loan obligation, that student loan cannot be discharged in bankruptcy.

As a parent and a bankruptcy attorney for over 20 years, I give every parent this word of advise: Love Your Children, But Don’t Sign For Them! I know that you want to do everything you can to help your child to succeed in life, and this includes providing financial support. Financial support, though, does not have to mean co-signing for your child’s student loans.

If your child needs student loans to supplement their college expenses, let your child sign for them, even if you can afford to make the payments. You can always help them to make the payments for as long as you can afford to do so. The key is to love your child, and help them any way you can financially – so long as it is within your means. I am seeing too many couples who put their children ahead of themselves and are being forced to pay their children’s student loan obligations well into their retirement years. This trend will have to be dealt with by Congress at some point, but unfortunately, I do not see it materializing until our present economic house gets put back in order.

You are constantly getting offered new credit card accounts but, it’s important to not have too many. If you open a new account because of a lower interest rate or a promotional offer, you should always close a current account you are no longer using or are replacing. Closing unwanted old credit accounts has many benefits including:

• Helps to keep track of credit cards
• Lowers the amount of revolving debt, helping you qualify for more loans
• Keeps your credit report cleaner
• Helps you avoid unnecessary fees
• Prevents identity theft

To help you understand what you should and should not do when closing old credit card accounts, here are a some dos and don’ts:

CLOSING YOUR CREDIT CARD ACCOUNTS DOs:

DO close unused and idle accounts – This prevents identity theft and being charged fees for unused cards.

DO cancel accounts with balances that you want to pay off – If you don’t want to use a card anymore that has a balance, you can close the account and just concentrate on paying off the balance.

DO be sure you still have several credit card accounts open – Creditors view signs of activity and responsible credit use positively.

DO always have one card designated for regular use and pay it off each month – This one card can be reserved for everyday spending while your other credit cards can be used for emergency or specific purposes, such as vacations, business trips, etc.

DO check your credit report – After closing an account, check your credit report to ensure that the accounts have been marked as closed and to determine whether there are any errors.

DO destroy any canceled credit cards – It is important to cut up closed credit card accounts by cutting through the account number.

CLOSING YOUR CREDIT CARD ACCOUNTS DON’Ts:

DON’T close your oldest credit card account – This could cause your credit history to appear shorter and could harm your credit score. Better to keep the account open and not use it or just use it infrequently. If you want to close it because of a higher interest rate, contact the credit card company to see about lowering the APR.

DON’T expect accounts to close automatically – The only way an account is closed is if you contact the credit card company and ask, preferably in writing, to close the account.

DON’T be pressured into canceling several accounts at once – It is better to gradually pay down and then close the accounts if you are unsure about the impact doing so will have on your credit score or you are uncertain as to the amount of debt you need to carry. You may need those credit cards again in the future.

DON’T over-consolidate balances onto one card – If your credit balances rise to above 50 percent of your available limits, you may see a drop in your credit score.

Remember, be smart when closing old accounts to ensure you get the best possible APR’s and benefits from your credit cards. If you have further questions about this, please don’t hesitate to contact our offices.

The answer to this question all depends on how you intend on using it. Many assume the term “charge card” is interchangeable with “credit card,” when they are very different. In the simplest terms, credit cards allow you to carry debt every month but charge cards don’t – they require full payment every month. Therefore, you can’t use them to get into debt. You also cannot get into debt with a debit card, which is linked directly to your bank account. Basically, you can only spend with you have. Here are the highlights of all three:

CHARGE CARDS:
Charge cards are a good option for people who want the convenience of using plastic but know they’ll pay their bill in full each month. Charge cards have been around since 1950, when Diner’s Club came out with their first card, which was made of cardboard. In 1959, American Express debuted the first plastic charge card and is still the primary charge card issuer today. The idea of a charge card has evolved over the years and now American Express offers certain cards that allow flexible payment plans. These balances do incur interest charges, just like on a credit card. A big advantage is that charge cards do allow you to improve your credit score, because you’ll build a history of paying on time.

CREDIT CARDS:
If you are a timely payer and are not prone to going into debt, a credit card is a good option for you. It allows you to defer payment (at a price), maintain and/or improve your credit history, and rack up rewards on the cards that offer them. There is generally no annual fee associated with a credit card, and you get free purchase protection and the opportunity to earn points and rewards. However, with a credit card, you have a spending limit; if you go over that limit, your charge can be denied or you can face over-limit penalties.

DEBIT CARDS:
Debit cards, which are linked directly to a bank account, can be beneficial if you prefer to pay cash but don’t like to carry cash with you. Debit cards are great if you want the convenience of a credit card without the temptation to spend more than you actually have — especially since debit cards are generally accepted everywhere a credit card is. You may also be able to earn points, perks, or cash-back by using your debit card if you get one from a bank that offers such a promotion.

Effective January 22, 2011, New Yorkers filing for bankruptcy will have the added benefit of higher bankruptcy exemptions. The major change is thanks to Governor David Patterson, who signed the bill into law (his last while in office) just before Christmas last year.

Exemptions are the legislative tools that a debtor uses to protect their property when they file for bankruptcy. The purpose of exemptions is to assure that debtors are able to continue living a productive economic life. If a debtor loses all of their belongings when they file bankruptcy, they will have a more difficult time getting back on their feet. The more property that can be exempt, the more a debtor can keep. If the property is not exempt it must be given over to the bankruptcy trustee. But exemptions do have limits. If there isn’t enough room left in a debtor’s exemptions to protect ALL of their property, they have to decide what to keep and what they are willing to part with. The following are the major exemption changes that have taken effect:

Cash Exemption – increased from $2,500.00 to $5,000.00
Auto Exemption – increased from $2,400.00 to $4,000.00
Tools of the Trade – increased from $600.00 to $3,000.00
Aggregate Personal Property exemption – increased from $5,000.00 to $10,000.00

I have written a few posts since the bill was signed explaining just how these changes would impact renters and retirees, looking to file for bankruptcy protection. The higher exemptions will have a major impact to the facilitation of the Chapter 7 bankruptcy process in that Interim Trustees should be closing bankruptcy cases more quickly instead of keeping cases open to administer small recoveries for creditors, such as those which would have resulted from tax refunds or the value of late model automobiles. With tax season in full swing, this is GREAT news for New Yorkers. Now, if a debtor receives a significant refund, they will not risk losing it when they file for bankruptcy.

If you have been debating whether to file bankruptcy, you owe it to yourself to contact our offices at 800-479-6330 and schedule a free, non-obligation consultation in which we can assess your current situation and determine whether you may qualify under the new exemption guidelines.

It is commonly misunderstood that bankruptcy cannot eliminate any tax liability. Although treatment of tax liability is one of the most complex aspects of consumer bankruptcy law, the Bankruptcy Code does offer many debtors substantial income tax relief. Whether or not your bankruptcy filing relieves your tax debt depends on several factors including the nature and the status of tax liability and the type of bankruptcy proceeding. Remember, only individuals can discharge certain tax debts, not businesses.

An individual can discharge debts for taxes in Chapter 7 bankruptcy only if all of the following conditions are true:

1. They are only personal income taxes. Taxes, other than income taxes, cannot be dealt with in either Chapter 7 or Chapter 13 bankruptcy. Bankruptcy will not relieve liability for excise taxes such as estate and gift tax, sales tax, or fuel taxes and taxes for which the debtor was responsible for collecting from others such as payroll taxes withheld from employees.
2. You did not commit fraud or willful evasion. Bankruptcy will not relieve liability if you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return.
3. The debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you file for bankruptcy.
4. You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
5. You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (This time limit may be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.)

Dischargeable taxes are eliminated in Chapter 7 and are treated as general, unsecured creditors in Chapter 13. 

Secured tax liens cannot be discharged in Chapter 7. The secured portion of tax liability must be paid during a Chapter 13, in full and with interest, but without further penalty.

If you have tax debts, contact me today for a free initial consultation. You have nothing to lose. No two situations are the same, but Bankruptcy may be the answer for you.