How Cancellation of Debt Occurs

When you borrow money money, and the debt is canceled or forgiven by the lender, you sometimes have to consider this canceled debt income for taxes. If you borrowed $50,000 dollars, and paid by half of that, $25,000 would be considered as income for tax purposes. So if you bought a home for that price, you can expect some of the resultant debts to show up after bankruptcy.

What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

More Info on The Cancellation of Debt and Taxes
This income isn’t always taxable. The most important part of the Mortgage Debt Relief Act of 2007 was how it applied to homeowners; if you have a qualified principal residence which went into foreclosure or where the debt was forgiven, you do not have to pay taxes on the forgiven debt.

Also, debts discharged through bankruptcy are not considered taxable income by the IRS. There are other ways your canceled debt may not be taxable, but let’s focus on the Mortgage Debt Relief Act of 2007 and how it applies to debtors and home owners.

How the Mortgage Forgiveness Debt Relief Act of 2007 Works
If you have debt reduced by mortgage restructuring or by foreclosure, you qualify for the relief. If on the other hand you are going into bankruptcy, your debts are not forgivable in most cases. That does not mean that you’ll lose your home, but mortgage debt isn’t part of Chapter 7 bankruptcy. If you are earnest in wanting to keep your home, Chapter 13 bankruptcy can buy you time to pay back the loan. If you on the other hand are considering foreclosure, you may consider the Mortgage Act of 2007 as a means of relieving debt.

Credit counseling services include:
-Money management education for debtors
-Budget and debt counseling
-House counseling
-Referrals

The Debt Management Plan
A DMP  is where the credit counseling agency negotiates with your credit card companies and other creditors. Typically, the credit counseling agencies goal is to negotiate for lower interest rates and monthly payments to your creditors. You will make a large payment to the agency, and they’ll send separate payments to all your creditors.

The Price
While some credit counseling agencies come at no cost, some do charge a fee (usually small). Also, you should be weary of using a credit repair clinic, who sometimes trick individuals into their services. In essence, credit repair clinics only do what you could easily do for yourself. They offer to fix your credit with services available to everyone. It’s best to avoid any company offering to repair your credit for free; most are scams.

Choosing A Credit Counseling Agency
There are a variety of ways to make sure you get the right services for your situation. Just as you shouldn’t hire the first bankruptcy attorney you find, you should research credit counseling agencies and compare them. Here are some notes on what you should look for.

-They must me a registered nonprofit (accredited nonprofit)
-Are a member of the NFCC or AICCCA
-Employ certified, professional counselors
-Provide counseling and education
-Offer more than one debt management option
-Are upfront about all fees
-Have a clean business record
Let’s go over some of these in more detail.

Certified Counselors
Credit counselor should have not only completed a training program within the company, but also passed a certification exam; the certification exam tests for understanding in counseling, budgeting, credit and consumer law, debt management, and bankruptcy law. You want this exam for your counselors to be done by an outside, independent agency such as Financial Counseling and Planning Education.

Counseling and Education
You want to go over all the details on your current economic status in person, by phone, or on  the web. It usually takes about an hour and you’ll go over income, expenses, debt, why you’re in a tough situation, and your future goals. After this session, you should get a budget plan, a list of steps and to begin, and notes on your options.

Fees
You should never pay more than $50 to establish your work with the the credit counseling agency, and future monthly payments should never exceed $50. Also, the agency must be made aware if you cannot afford these fees, and should waive them.

When Filing Bankruptcy
In some cases, you might want to actually file bankruptcy, whether it’s Chapter 7 or Chapter 13 bankruptcy. Sometimes you simply cannot pay back all these fees. In any case, you have nothing to lose and a lot to gain when working with debt counseling agencies.

So what’s the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy in New York?

-Chapter 7 bankruptcy is a liquidation of debt and assets, while Chapter 13 buys you time
-Chapter 13 bankruptcy can save your home from foreclosure
-With Chapter 13 bankruptcy, you can extend payment schedule and lower payment fees
-With Chapter 7 bankruptcy, certain property is exempt from being repossessed
-Chapter 7 costs $299 to file with the court while Chapter 13 costs $274

That may be speaking more positive of Chapter 13 bankruptcy. The big difference is you can be cleared of debts with Chapter 7 (often preferred), while Chapter 13 bankruptcy allows you more time to pay back debt, typically over a 3-5 year period.

There are alternatives to Chapter 7 bankruptcy in New York beyond just Chapter 13 bankruptcy. Though Chapter 13 is now the second most common, Chapter 11 is wise for individuals actively engaged in business. For example, if you run a corporation, you can avoid liquidation and seek an adjustment of debts with Chapter 11 of the Bankruptcy Code.

Chapter 13 Bankruptcy in New York
You can also seek an adjustment to your debts via Chapter 13 bankruptcy in New York. If you owe money on a home and cannot pay it back immediately because of other circumstances such as medical bills, you can save your home from foreclosure. This is done by giving you the opportunity to catch up with past due payments through a new payment plan. This is good news for New York home owners facing foreclosure, as you can get immediate and extended help by filing with the courts for Chapter 13 bankruptcy.

Other Alternatives to Filing Chapter 7 Bankruptcy
While Chapter 11 bankruptcy in New York is not very common, for people running businesses it can be very beneficial, namely by saving your assets. You should also be open to “out of court” agreements with creditors or debt counseling services. You might be able to pay back debts in installments outside of a bankruptcy hearing–there is no reason you can’t–and many individuals choose this route instead of officially filing. And if the out of court agreement does not work, you still have the right to file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy.

Filing Chapter 7 bankruptcy in Long Beach may allow you to discharge a portion or all of your personal debt. Filing Chapter 13 bankruptcy in Long Beach may allow you to develop a more favorable three to five year repayment schedule to repay your debts and stop a home foreclosure, property repossession or wage garnishments. Filing bankruptcy is a serious financial decision which should not be considered without first contacting a Long Beach bankruptcy attorney.

Filing Chapter 7 Bankruptcy in Long Beach

Filing Chapter 7 bankruptcy in Long Beach can be the least expensive, most common and easiest bankruptcy to use. Under Chapter 7 bankruptcy the filer’s assets will be sold and the money from the sale will be used to repay creditors.

A Long Beach bankruptcy lawyer files the bankruptcy petition in the appropriate bankruptcy court. The bankruptcy petition lists all of the exempt and non-exempt assets the filer owns, their creditor’s names and the amount of debt they owe. The bankruptcy court will review the petition to ensure it meets all the bankruptcy codes, if it does a 341 creditor meeting is scheduled. A trustee will be assigned to sell the filer’s non-exempt assets. After the assets are sold and the proceeds are distributed the remaining qualifying debt is discharged. Most Chapter 7 bankruptcy cases can be completed within four to six months from the date the bankruptcy petition is filed.

Filing Chapter 13 Bankruptcy in Long Beach

Filing Chapter 13 bankruptcy in Long Beach differs from filing Chapter 7 bankruptcy because the filer’s assets are not sold or “liquated”, but rather the filer is allowed to “reorganize” their debt with a new three to five year repayment schedule. Many repayment schedules allow for more favorable terms for repayment.

Filing Chapter 13 bankruptcy in Long Beach may not only stop home foreclosure, but may also help the filer avoid wage garnishments and other property repossession actions. Only individuals with a steady income are allowed to file Chapter 13 bankruptcy. Filers also can not have secured debt exceeding $807,750 or unsecured debt exceeding $269,250.

Personal Debts Not Eliminated By Filing Personal Bankruptcy

Filing Chapter 13 bankruptcy or filing Chapter 7 bankruptcy does not eliminate all personal debt. Many types of debt are not discharged by filing bankruptcy. Non-dischargeable debt is outlined under federal bankruptcy laws and is the same for every state. Filing bankruptcy in Long Beach, California, does not eliminate the following debts:

• Most back taxes
• Child support and alimony payments
• Certain student loans
• Purchases of luxury items within ninety days of filing personal bankruptcy in Long Beach
• Fines owed to federal or California government agencies
• Debts generated from fraudulent activity
• Recent cash advances of $825 within 70 days of filing personal bankruptcy

Filing personal bankruptcy in Fresno, California, will eliminate some, but not all personal debt. The following types of debt will not be eliminated by filing bankruptcy in Fresno:

• Most back taxes
• Child support and alimony payments
• Certain student loans
• Purchases of luxury items within ninety days of filing personal bankruptcy in Fresno
• Fines owed to federal or California government agencies
• Debts generated from fraudulent activity
• Recent cash advances of $825 within 70 days of filing personal bankruptcy

The way that Universal Default works is that if you are over 30 days behind on payments to any one of your creditors, your interest rate can be raised on debts unrelated to the balance you are behind on. In other words, lets say you owe bank 1 $10,000 and are up to date on payments, but you also owe bank 2 $500 and have missed a payment and it is 30 days late. Bank 1 can raise the interest rate on your balance simply because of the missed payment showing up on your credit report.

Universal Default provisions are especially hard on debtors when they face financial difficulties and can be devastating to those who have fallen behind on house payments or medical bills and are now penalized by credit cards that they have managed to keep current on.

Understand that the practice is still legal until February 2010 when the law is set to take effect. Many credit card companies and banks are using the provision to squeeze as much out of consumers as possible.

It may be simplistic to say that you should pay your bills on time to avoid the effects of a Universal Default provision.Sometimes bankruptcy can help erase credit card debts that are growing exponentially due to skyrocketing interest rates. Other times the debts can be included in the Chapter 13 payment plan and cleared in 3 to 5 years.

If you are in over your head with credit card debts, you should discuss your situation with a bankruptcy attorney so that you can learn what your options are and face your problems head on.