Articles Posted in Bankruptcy

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One of the key provisions of the “Fiscal Cliff” compromise recently signed into law was the one year extension of the Mortgage Forgiveness Debt Relief Act. Congress originally passed this legislation in 2007 which generally allows taxpayers to exclude the forgiveness of mortgage debt from being counted as taxable income by the Internal Revenue Service. Debt on a homeowner’s primary residence that is reduced through a short-sale, foreclosure, or other forms of mortgage restructuring now continue to qualify for this type of relief, at least for another year.

Normally when you borrow money from a commercial lender and the debt is cancelled or forgiven, absent certain exceptions, you may have to include the cancelled amount as income for tax purposes. 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. The Mortgage Forgiveness Debt Relief Act, scheduled to expire at the end of last year, exempts the forgiveness of mortgage debt from being counted as taxable income by the IRS.

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Bankruptcy is a legal proceeding which allows a debtor to repay a portion of their debt either by liquidating their non-exempt assets or entering into a court approved repayment plan. Once the bankruptcy estate is administered or the debtor completes the repayment plan, the debtor is awarded a discharge of their remaining debt. Most loans and debt are dischargeable in bankruptcy, but there are a few exceptions.

11 U.S.C. § 523 of the Bankruptcy code outlines the various types of debts which are non-dischargeable. Some of the most common types of non-dischargeable debt includes, but is not limited to, domestic support obligations, debts incurred by fraud, and student loans. With regards to student loans, the code specifically excepts from discharge debts that are an “obligation to repay funds received as an educational benefit, scholarship or stipend” unless excepting this debt from discharge would impose an undue burden on the debtor or the debtor’s dependants. On the surface this language implies that bankruptcy courts would allow for students loans to be dischargeable if they are a burden on the debtor, however, in reality bankruptcy courts and judges rarely allow for a discharge of student loan debt.

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Section § 522(b)(3) of the Bankruptcy Code allows an individual debtor to fully exempt any interest in property that the debtor owns as tenant by the entirety provided that such interest is exempt under state law. It is well established that under Florida law property held by husband and wife as tenants by the entireties belongs to neither spouse individually. Therefore, it is exempt from process to satisfy debts owed to individual creditors of either spouse. Entireties property is not exempt from process to satisfy joint debts of both spouses. Thus, a Florida debtor filing an individual bankruptcy petition can fully exempt tenancy by the entirety property as long as there is no joint debt with the non-filing spouse.

There are six characteristics that joint property must possess in order to be held as tenancy by the entirety: (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the account must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the property became titled in their joint names). In summary, most joint property acquired during a marriage will be considered tenancy by the entirety property, and fully exempt in bankruptcy, so long as the debtor and non-filing spouse do not have any joint debt.

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Although it’s been a slow recovery, there have been positive signs lately indicating that the housing market has been improving throughout Southwest Florida along with the rest of the country. Builders broke ground on residences at an annual pace of 891,000 in August, up from a low of 478,000 in April 2009. This is still only about two-thirds of the last 20 years’ average rate, however home prices have risen 20 percent since hitting their post recession low in March of 2012.

Many analysts, however, are predicting that the US Government shutdown will immediately begin to delay the approval of thousands of mortgages and mortgage modifications which would have a serious negative impact on housing and the broader economic recovery. One of the main reasons for the delay is that lenders are now blocked from verifying Social Security numbers and accessing Internal Revenue Service tax transcripts. Many lenders rely on Federal agencies such as the IRS in order to verify information they receive from potential applicants. Many lenders also do not approve any loans until they receive necessary tax information from the IRS which is predicted to be delayed due to employee furloughs at the IRS and other Federal agencies.

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As has been previously discussed on this website, 11 U.S.C. § 523 specifically exempts student loan debt from being discharged in bankruptcy unless the debtor can show that the student loan “would impose an undue hardship on the debtor and the debtor’s dependents”. Courts have interpreted this language as creating a very difficult burden for a Debtor to prove, and Bankruptcy Judges and courts are very reluctant to allow student loans to be discharged in bankruptcy.

Student loan debt in the U.S. is approximately $1.2 trillion, and 71 percent of college seniors had debt in 2012, with an average outstanding balance of $29,400 for those who borrowed to get a bachelor’s degree. It is estimated that 40 Million Americans have outstanding student loan debt.

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When an individual files for bankruptcy his or her assets become part of the Bankruptcy Estate. Section 522 of the Bankruptcy Code, however, allows Debtors to exempt certain types of real and personal property from their Bankruptcy filing. Both Florida and Federal exemptions specifically allow for debtors to exempt most types of retirement accounts such as 401(k)s and IRAs. Recently, however, some Chapter 7 trustees have begun to challenge this exemption when it applies to Inherited IRAs. An Inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an Inherited IRA. When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account.

Bankruptcy courts and Judges had been split as to whether or not Inherited IRA’s are exempt under Federal Bankruptcy Exemptions. Recently, however, the United States Supreme Court ruled that Inherited IRAs are not exempt pursuant to the Bankruptcy Code’s exemption for IRA accounts. In a unanimous decision, the Supreme Court held that the bankruptcy law is intended to exempt money that the debtor deferred from his own earnings to pay for future retirement. The court reasoned that an inherited IRA, although called an “IRA”, is more of a windfall inheritance from a third party’s labors and savings, and this money should be made available to pay the debtor’s creditors. The case is Clark v. Rameker, 134 S.Ct. 2242 (2014).

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The Florida Right to Medical Marijuana Initiative, Amendment 2 is on the November 4, 2014 ballot in Florida as an initiated constitutional amendment. The measure, if approved, would legalize medical marijuana in the State of Florida in certain circumstances. More specifically it would provide that the medical use of marijuana by a qualifying patient would not be subject to criminal or civil penalties under state law. The measure needs 60% of the votes to pass.

Since 1996, twenty states along with Washington D.C. have passed laws allowing smoked marijuana to be used for a variety of medical conditions. Two States, Colorado and Washington, have passed laws legalizing the recreational use of marijuana. It is important to recognize that state marijuana laws do not change the fact that marijuana use continues to be an offense under Federal law. The filing of a Bankruptcy petition is governed by Federal Law.

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It is commonly accepted that in Chapter 13 Bankruptcy cases a Debtor can “Strip-Off” a wholly unsecured second mortgage from their real property. That is, if on the date of filing the bankruptcy petition the Debtor owes more on the first mortgage than the property is worth, the second mortgage could be removed from the property upon the completion of the Debtor’s Chapter 13 Plan. This is a routine practice in Chapter 13 Bankruptcy Courts throughout the country.

The Eleventh Circuit Court of Appeals controls the law in Bankruptcy Courts in Florida. The Eleventh Circuit stands alone in that it not only allows for lien-stripping in Chapter 13 cases, but also in Chapter 7 cases as well. Every other United States Circuit Court to tackle the issue has ruled that the Bankruptcy Code does not provide a lien stipping mechanism for Chapter 7 Debtors. As it stands now, however, Chapter 7 “lien stripping” is still allowed in Florida Bankruptcy Courts if the Debtor is underwater on the first mortgage.

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