This is about as big as it gets in the world of a bankruptcy lawyer! This story in The New York Times talks about the controversy that will ensue if President Obama should nominate Harvard Law Professor Elizabeth Warren to the newly created Consumer Protection Czar position, a Presidential cabinet level position. Those of you who have met with me perhaps recall me speaking of Elizabeth Warren as a voice for the consumer during the frenzy leading up the passage of the 2005 Bankruptcy Reform Act. I do have some mixed feelings about Professor Warren’s candidacy. Having her become part of the “establishment” as a cabinet member does cause me to worry that her shrill acuity and advocacy may be muted and at worst, silenced. As an outspoken voice of superlative credibility, if she fails at the position because she will not “tow the line”, then I fear that her credibility and standing might be tarnished or compromised. However, in this reform-minded era I can also flip over and say, “Go get’em Elizabeth!” I am torn…and still in shock to learn of the pending appointment.
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10 Worst American Real Estate Markets – SUPRISE! Not all of them are in Michigan!
Now folks, this link was just too darn interesting to pass up, so here it is for a quick read. You may have to wait a moment for the iritating “pop up screen with shade over the article” to pass, but after it passes in about 20 seconds,you will be able to read a fascinating (and shocking) article with eye-popping statistics on the current state of real estate markets in America. Who would have thought Santa Cruz, CA would make the list…read on….
Consumer Alert: Judges suspicious of the rising tide of lawsuits and garnishments
Unscrupulous collection lawyers are being “called on the carpet” by consumers and some judges to show proof that the amounts alleged in collection lawsuits and garnishments can be verified through extrinsic evidence. This was reported on Tuesday, July 13, 2010 in the New York Times ( link).
The article explains that “debt buyers” purchase old debts from other collection agencies and credit card companies after the preceding collector/creditor has given up on trying to collect. The new “debt buyer” then often proceeds to file suit with scant evidence supporting the allegations in the lawsuit. Many Judges are dismissing these suits for lack of reasonable extrinsic (outside) evidence of the origin and the composition of the debt. If a consumer will both (1) respond in writing to a collection lawsuit demanding verification of the origin and composition of the debt and (2) show up for Court, the Judge in the case might dismiss the suit if the suing “debt buyer” cannot produce at least copies of billing statements which verify the underlying transaction in which credit was extended or wherein goods and services were purchased with the credit. The NY Times article linked above is very interesting; one small law firm in New York files over 80,000 lawsuits per year, frequently without securing any paperwork to verify that there exists a valid underlying debt of which enforcement is sought. Each lawyer in the firm was filing 5,700 lawsuits per year utilizing computerized and automated software. Very intriguing.
25.5% of Americans now suffer with poor credit scores of 599 and below
“The credit scores of millions more Americans are sinking to new lows. Figures provided by FICO, Inc., show that 25.5% of consumers – nearly 43.4 million people – now have a credit score of 599 or below, marking them as poor risks for lenders. It is unlikely that they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.” reports Eileen AJ Connelly of the Associated Press (See Tacoma News Tribune, 7/12/10, page A8). Ms. Connelly further reports: (a) 2.4 million more people are now in the poor credit 599 and below category than were there in 2008. (b) Only about 17.9% of Americans now enjoy a top credit score of 800 or above, while as recently as April 2008, 18.7% of Americans enjoyed top credit scores of 800 and above. (c) Mid-range credit score individuals who make up about 11.9% of people (FICOs of 650-699) are likely the most affected by the “credit crunch” in that prior to the late 2008-2009 financial meltdown, they readily obtained credit at reasonable rates, but now are often forced to pay much higher rates than they would have paid in early 2008.
AARP: When Bankruptcy is Smarter.
Recently, I read an article published in the American Association of Retired Persons AARP MAGAZINE in the May/June 2009 issue entitled “When Bankruptcy is Smarter!” by Walecia Konrad. The article discusses that when people are in trouble, they often wait too long before seeking assistance. The AARP article referenced above advises against draining retirement and savings accounts to pay debts, but rather to first consult with an experienced bankruptcy attorney.
For longer-term Washington state residence, one can usually have in excess of $120,000 home equity…and still file to extinguish debts through bankruptcy. The amount of funds one can retain in IRAs and 401k plans is also very, very liberal–particularly if a person is of middle or later age.
In evidence of a worrying trend, American adults age 55 and over experienced the sharpest increase in bankruptcy filings of any age group since 1991, according to a recent study conducted for AARP’s Public Policy Institute, writes AARP’s Jonathan D. Pond on October 14, 2008
AARP’s Mr. Pond notes that not only in Washington state, but across the country, that while the bulk of bankruptcy filers are in their 30s and 40s, Americans age 55 or older have experienced the sharpest increase in bankruptcy filings, accounting for 22 percent of all those in bankruptcy proceedings in 2007. That number is up from only 8 percent in 1991.
A weak economy and increasing health care costs put older Americans, regardless of whether they live in Washington State or not, at greater risk for bankruptcy. Health care expenses can be one of the biggest, if not the biggest, causes of bankruptcy among older Americans. This will affect all senior Americans, not just those residing in Tacoma, Gig Harbor, Bremerton, Puyallup, Chehalis, or Olympia.
Do yourself a favor: Listen to the AARP: Before draining assets or selling property to pay credit cards, medical bills and other debts, first consult with an experienced bankruptcy attorney. You may save yourself much grief, and tens of thousands of dollars.
Underwater in your house? The pros and costs of “walking away,” known as “strategic default,” as a financial planning tool in Washington
A recent New York Times Article, “No Help In Sight, More Homeowners Walk Away”, published February 2, 2010, suggested that more homeowners than any time in recent history are electing to walk away from real estate that has no equity, or more often, negative equity.
The article, suggests that the psychological threshold is often 75%, meaning that when the value of the house falls below 75% of the amount owed on the house, homeowners quickly decide to walk away. At this point, it becomes much easier to overcome any emotional attachment to the home, and much more difficult to rationalize that the home may eventually go up in value.
Homeowners are faced with the difficult decision of continuing to flush money down the toilet for an estimated 10-40 years waiting for the market to recover to the point that the homeowner breaks even, or walking away from the property and renting for much less while they rebuild their credit.
The article, published nationally, did not include the consideration relevant to Washington, that in many cases anti-deficiency laws protect the homeowner as to the first mortgage, which precludes the first position mortgage company from seeking to collect the deficiency. However, the problem is that when there are second and third position mortgages, the anti-deficiency laws in Washington may not protect the homeowner “walking away” from the house for a deficiency claim from the second and/or third mortgage holders after the first mortgage holder forecloses out the interests of the second and third mortgage holders, leaving the second and third mortgage holders unsatisfied and still owed some or all of their debt. Even when the anti-deficiency laws do not apply such as to the second and third position mortgage holders, the homeowner can file for bankruptcy and have any deficiency or potential deficiency discharged along with credit card debt, medical debt, repossessed car deficiency debts, and other unsecured debts.
The article estimated that 4.5 million homeowners had home values that were at or less than 75% of the value of the home, and it was projected to climb to 5.1 million by the middle of this year. In other words, 10 percent of all homeowners would have homes valued at or less than 75% of the amount owed on the mortgage or mortgages.
If you find yourself in a situation where you are under “house arrest” because you are unable to sell your house for what is owed, please contact our office to discuss your options, including bankruptcy, and determine a strategy to get you back on your feet. Special thanks to Phoenix attorney J. Tyler Martin for much of the drafting and analysis used in this post.
Forgiveness of indebtedness – does this create taxable income, or is there an insolvency exception to IRS taxation?
Individuals facing financial difficulties often hear rumors from creditors and other sources that if their debts are “charged off” or otherwise “forgiven” by their creditors, the individual will receive an IRS Form from their creditor at the end of the taxable year that shifts the tax liability for the forgiven debt to the individual. Creditors and debt collectors excitedly cite to the Internal Revenue Code in support of their argument: 26 U.S.C. § 61(a)(12) states: “General definition.–Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: … Income from discharge of indebtedness.” This “discharge of indebtedness” in lay terms simply means the writing off or forgiveness of outstanding debt. Thus, the general rule supports the creditors and may create tax liability.
However, creditors fail to inform you that there are major exceptions to the general rule that debt forgiveness is taxable income. Two major exceptions to this general rule are 1) if the debt is forgiven while the individual is in a bankruptcy case; and 2) if the debt is forgiven when the individual is insolvent. See 26 U.S.C. § 108(a) (1) (A) and (B), (“Exclusion from gross income.–… In general.–Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if– (A) the discharge occurs in a [bankruptcy] case, [or] (B) the discharge occurs when the taxpayer is insolvent.”) As is readily seen from the fact that there is one exception for those in bankruptcy and a separate exception for “insolvency”, an individual does not necessarily have to be in bankruptcy to be insolvent. Bankruptcy is simply a safe-harbor that creates a bright-line rule.
Yet, it is important to know that those desiring to raise the insolvency defense may have a fight on their hands. Insolvency is determined on a case-by-case basis and must be assessed as of the time the debt is forgiven. Therefore, if an individual is considered “solvent” at the time the debt was forgiven and that individual later becomes insolvent, the debt forgiveness is considered taxable income for which the individual will be liable. Unfortunately, any such taxes are probably not dischargeable in a subsequent bankruptcy. Before you attempt to negotiate with creditors or seek debt reduction/forgiveness, it would be well worth your while to seek the advice of a competent attorney. (Special thanks to Phoenix attorney J. Tyler Martin and his Phoenix colleagues for drafting and analysis used in this blog entry.)
Merry tax-free discharging!
Analysis of US Supreme Court Decision of Monday, June 7, 2010 on Chapter 13 Bankruptcy
The following is a complex and lengthy analysis of a major law change affecting higher income Debtors (those above the state median income according to household size) seeking Chapter 13 bankruptcy protection. You are welcome to pick through this, but recognize, please do not make a decision as to whether you qualify for bankruptcy relief until after you have consulted with a very experienced and reputable bankruptcy attorney in an in-person, face-to-face consultation. The Hamilton v. Lanning case is discouraging, but an experienced, conscientious, and cautious bankruptcy attorney should be able to help you successfully navigate through a Chapter 13 bankruptcy filing and ultimate plan approval.
In Hamilton v. Lanning decided Monday (June 7, 2010), the Supreme Court held in an 8-1 decision that “when a bankruptcy court calculates a debtor’s projected disposable income, the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.” In other words, rather than mechanically applying the calculation of “current monthly income” which looks at the Debtor’s income for the 6 calendar months before the filing of the petition, the court can take into consideration changes in income that have occurred or are known or virtually certain to occur at the time of confirmation.
In Lanning, the Debtor had received a buyout from her former employer which, when included in “current monthly income,” dramatically increased her income over what she was really making, and the mechanical approach would have resulted in her having to pay more into the plan than she possibly could afford. Because after the buyout she was making wages well below the state median income, the Supreme Court held that this change in income could be considered in calculating her “projected disposable income.”
However, this “forward looking” approach should not give the Court or the Trustee, or the Debtor, a blank check: as the Supreme Court stated, “a court taking the forward-looking approach should begin by calculating disposable income, and in most cases, nothing more is required. It is only in unusual cases that a court may go further and take into account other known or virtually certain information about the debtor’s future income or expenses.”
While the expense side of “projected disposable income” was not specifically before the Court, the Lanning opinion did state the court may consider changes in income or expenses when calculating projected disposable income. However, it is important to note what was said and not said. The Lanning opinion requires a “change” in income or expenses, not a discrepancy between the expenses allowed on the means test and the Debtor’s actual expenses. For debtors whose “current monthly income” is above the state median, many expenses are determined based on fixed allowances, not on what the Debtor really spends. If the food and related items allowance (set by the IRS) is $1,152 for the Debtor’s household size, but the Debtor only spends $500 on these items, he or she can claim the full allowance in calculating “projected disposable income.” The trustee should not be allowed to recapture that $652 and require that it be paid to creditors. Conversely, if the Debtor spends $1,500, he can still only claim the allowance. Similarly, if the Debtor’s rent is $500 but the IRS allowed mortgage/rental expense is $1,187, the Debtor can claim the full $1,187 deduction. As a result, for many debtors, the fixed “means test” numbers result in a more favorable result than reality as reflected on Schedules I-J (which helps offset the fact that certain other necessary expenses are simply not allowed as deductions on the “means test” calculation). Because this is not a “change,” Lanning should not result in the IRS-allowed expenses being disregarded.
That said, the Lanning opinion could result in disallowance of deductions for secured debt payments where property is being surrendered or perhaps where liens are being stripped down or off, as those could be seen as “changes” in expenses. Otherwise, unless there is a “change” in those expenses (such as secured debt payments) that are allowed as real numbers on the means test, the means test expenses should apply as written. Special thanks to BankruptcyLawNetwork for much of the content of this post. The need for an immediate post mitigated in favor of quoting the qualified experts from the network.
“No Docs” Educational Loans
Has such over exuberance ever created a greater “quiet financial crisis” for graduates and their parents? Washington Bankruptcy Attorney James H. MaGee blogs on story of New York University graduate and her mother, who tell a tale of woe in cautioning others against student loan debts. The story appeared in The New York Times on May 24, 2010, on the front page of the Business Section.
In 1977, Congress passed legislation to make student loans very difficult to discharge in bankruptcy. Should you be disabled or perhaps the sole caregiver for a disabled person or present with some other exigent circumstance, you may be a shoe-in for a discharge of your student loans, but for everyone lucky enough not to be permanently disabled, student loans represent an ongoing scourge of unrelenting problems.
I intend to blog more on student loans later, but for now, those considering substantial student lending to “educate” themselves into better economic circumstances should read the Saturday, May 29, 2010, New York Times Business Section article entitled “Placing the Blame as Students Are Buried in Debt” by Ron Lieber in the “Your Money” column. Twenty six year-old Courtney Munna attended one of the best schools money could buy, New York University, and achieved a degree in interdisciplinary religious and womens’ studies. However, since graduating in 2005, Ms. Munna has been unable to make any progress on her student loan debts of $97,000, and in an ironic twist, she cannot leave school. By no choice of her own, she must remain continually enrolled in various night school programs at various colleges and trade schools here and there (other than New York University) so as to qualify for “full time student” status, which keeps her loans in deferment and out of default. After a full day’s work, off to night school Ms. Munna must go, for hours of study in topics in which she has no interest.
Even worse, Ms. Munna’s limited income mother has co-signed for many of these loans, and should Ms. Munna default, her mother will be hounded for payments.
This May 29, 2010 New York Times article is valuable for providing a brief narrative summary of the types of student loans available, and exactly how harsh the repayment terms of some of these loans can be.
Do I discourage education? Well, no, but back in “my day” of college through law school of 1985-1993, some of these “new fangled” aggressive student loans were not available, so it was harder to get screwed over by a student loan.
Student loans have always been somewhat questionable to me. I remember that when I started college in September 1985, the rule was that the interest rate on the first student loan you acquired in the Guaranteed Student Loan program (now I believe called the Stafford Loan program) determined the interest rate of any and all subsequent GSL/Stafford loans, so given that interest rates were still somewhat high in 1985, I ended up with 8.5% (or perhaps it was 8.65%) student loans, which I suppose for the day was not too bad, but was far from generous.
Discouraging education is something I am loathe to do, but if you are going to “take the plunge” and are of limited means, I might suggest that you leave the philosophy major and underwater basket weaving degrees for the rich kids Get a degree in a field in demand, perhaps in conjunction with a double-major in Mandarin Chinese, and settle for a minor in the more enriching (but less employment-ready) areas of study. If you acquire large student loans, you are going to need something that is more or less certain to pay off economically. Happy studies!
Hello, I’m James H MaGee
Hello, I’m James H MaGee, owner and founder of the James H. MaGee Law Firm.
Here is a snapshot of my Curriculum Vitae:
- J.D., University of Puget Sound, 1993
- B.A., Whitworth College, summa cum laude (highest honors), 1989
Mr. MaGee practiced law with the Schafer Law Firm from 1993 until 1996.
Mr. MaGee founded his present law firm in 1996.
Educational Presentations:
- National Association of Credit Managers – “UCC-1 Perfection Issues”
- International Credit Association – “Creditor Claims in Probate Proceedings”
- William J. Factory SBI – “Construction Lien Claims”
- Small Business Administration SCORE – Business Entity Choice, a Comparative Approach”
Associations:
- Member, “Bar Association Debtor/Creditor Section”
- Member, “Bar Association Family Law Section”
- Admitted, Western and Eastern Districts of Washington, Federal Bankruptcy Court
- Admitted to many of the Indian Tribal Courts located throughout Washington
Mr. MaGee is exceptionally fluent in Spanish.
Staff and Assistants:
- Mr. MaGee believes that an attorney is only as good as his office support staff
- Mr. MaGee is ably assisted by his experienced, competent and well trained staff, Lisa, Vicki, Linda, Annette, Brandi, and Ray
