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The Dirty Secrets About Debt Consolidation

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The idea of consolidating your debts and paying them off for less or sooner is a great idea in a bubble.  The reality is that it rarely seems to work and can cost you more money than merely making higher payments than the minimum payments on your existing credit card debts.  The question is does it work?  Well, as bankruptcy attorneys, we meet with clients every day that debt consolidation has not worked.  As bankruptcy attorneys everything we do is by Court order and it is black and white.  Bankruptcy is either right for you based upon your income, expenses or assets or it is not.  Bankruptcy also is usually less expensive than trying to get out of debt with a debt consolidation company.  Bankruptcy does not have to be the answer though.  Yes, even though we are bankruptcy attorneys, you can get out from under your debts yourself.

1.  You Can Consolidate and Negotiate Away Your Debts Yourself

Why do you need to pay a company to negotiate lower interest rates or negotiate a settlement of your debts?  Do these companies have some secret that allows them to obtain a better deal for you than you can obtain yourself?  The answer is no, they do not.  The typical debt consolidation company will tell you that they can take over the payment of your debts and negotiate with your credit card companies and lenders to obtain lower interest rates and reduce the amount of debt you owe.  You can do this yourself.  Just take a few minutes and call your credit card company and let them know you are having trouble making the payments.  You will be surprised at the results you can achieve by being persistent.  There are also not for profit organizations that you can seek help from for free.  You do not have to pay a company to reduce your debt.

2.  Pay Off Your Credit Cards With Smaller Balances First

The easiest way to pay off your credit cards is to get rid of the smaller balances first and then apply the money you would be paying to the smaller balances to the larger balance credit cards.  You will then hopefully be making significantly higher payments than the minimum payment on the larger balance credit cards.  This is not easy to do and takes a lot of discipline.  This approach is also assuming you have steady income, which unfortunately is not the reality for many given our economy.  If you can stay disciplined, over time you will reduce your debt and eventually pay off your credit card debt without a debt consolidation company or having to file for bankruptcy protection.

3.  Save Up Some Money and Settle Your Debts With Lump Sum Payments

Another approach is to save up a few thousand dollars and offer your credit card company a lump sum payment to settle the debts for less than what you owe.  This approach is again assuming you are able to save a few thousand dollars, which is not easy to do for many.  Many credit card companies will accept one-time lump sum payments for far less than what you owe them.  This is one way a debt consolidation company will assist you too, for a fee of course.  The debt consolidation company will request monthly payments from you until they have a lump sum to pay your credit card company and settle the debt.  Again, you can do this yourself.

4. What Does a Typical Debt Consolidation Company Actually Do For You Then

The answer is they make money at your expense and usually do not obtain the debt relief you originally thought you were going to get.  You may get some peace of mind for a little while, but ultimately if you did not have the money to make your credit card payments debt consolidation will not work.  The debt consolidation will show you how much money you will save over a few years by allowing them to pay your bills for you with lower interest rates.  These figures do not usually exist in reality.  These are marketing gimmicks that show results that they never achieve.  They will charge a fee, sometimes a flat monthly fee or a percentage of the monthly payment they request you pay to them.  The problem is not all of your credit card companies will do business with these companies, so you will have four of your credit cards being paid by a debt consolidation company and then you will continue to pay your other debts.  Time and time again we have clients that get sued by one or more of their credit card companies even though they are using a debt consolidation company.  It is usually the credit card company that will not participate in the debt consolidation company plan.  Once the lawsuit is filed, there is nothing a debt consolidation company can do for you and this is when most people seek the counsel of a bankruptcy attorney to finally obtain debt relief by Court order.  New laws have been passed to limit the business practices of debt consolidation companies.  The reality is that these companies are marketing machines.  It sounds great, but does not seem to work.

If you believe bankruptcy may be the best choice for you though, please contact our Bankruptcy Lawyer or Bankruptcy Lawyer today to schedule a free consultation (877-963-9543).

Business Taxes: Are They Dischargeable in Bankruptcy?

By Kitty J. Lin, Attorney at Law

If you own your own business, your worst nightmare is the situation when your business fails.  To add further salt to the wound, not only did your business fail, but you realize you still owe the taxing authorities for sales taxes and payroll taxes, and you are still personally responsible for those, even if you are no longer in business.  Filing for bankruptcy may help, depending on your situation.  There are several categories of taxes, and they are treated differently in bankruptcy, depending on what category they are in.

Personal Income Tax

First, as previously discussed in our article about dischargeability of personal taxes, Can Taxes be Discharged When Filing Bankruptcy?, taxes that you personally owe are dischargeable if they are more than three years old, filed more than two years ago, assessed more than 240 days ago, not filed fraudulently, and the taxpayer is not guilty of willful tax evasion are dischargeable in a Chapter 7 or Chapter 13 bankruptcy.  Taxes that do fall under this category (meaning the taxes are less than three years old, or filed less than two years ago, or assessed less than 240 days ago, was filed fraudulently, or the taxpayer was found to be guilty of willful tax evasion), are considered “priority taxes” which are not dischargeable in bankruptcy.  Any debt that is considered non-dischargeable in bankruptcy means that you are still responsible for paying this debt whether you file for bankruptcy or not.  If you have any non-dischargeable debt, see Non-Dischargeable Taxes: What Happens if I Cannot Afford to Pay My Tax Liability?

Sales Tax

If you owe the state sales tax, whether or not they are dischargeable will depend on whether the sales taxes are considered an “excise tax” or “trust fund tax.”  How the sales taxes are categorized depends on your state.  Sales tax is considered a trust fund tax if the tax is assessed on the customer at the time of the sale and the responsibility to collect the tax is on the business owner.  The business owner is supposed to collect the tax to turn over to the taxing authority.  Trust fund taxes are not dischargeable in bankruptcy.

Sales tax that is the responsibility of the owner for the privilege of doing business in the state is considered an excise tax.  California is an “excise tax” state, so that means that the business owners are responsible for the sales tax, not the customer.  It may be a little confusing, since almost all the business owners pass on the sales tax to their customers, but the ultimate liability of the sales tax is still on the business owner.  Excise taxes are dischargeable in bankruptcy, so that is good news for failed business owners in the state of California.

Payroll Tax

Payroll taxes are broken out into two parts: those taxes that are taken out of an employee’s paycheck, and those taxes that are paid by the employer.  The taxes that are taken out of an employee’s paycheck (such as federal income tax, state income tax, social security, and medicare) are considered “trust fund taxes.” It is the business owner’s responsibility to turn over those funds taken out of the employee’s paycheck to their taxing authority.  The funds taken out of the employee’s paychecks are “held in trust” by the business owner to be turned over to the taxing authority.  If the business failed (or even if the business is still continuing), and the funds were used to pay off other debt or expenses other than to turn over to the taxing authority, the taxing authority will not be sympathetic.  They only care that the business owner withheld these funds, but used it for other purposes than which it was held for.  As with the sales taxes that are considered to be “trust fund taxes” payroll taxes withheld from an employee’s paycheck are considered non-dischargeable in bankruptcy.

The payroll taxes that are paid by the employer are “non-trust fund taxes.”  These taxes are dischargeable in bankruptcy.

The dischargeability of taxes in bankruptcy is a complicated issue that should be discussed with an attorney prior to filing.  If you need to consult with an experienced bankruptcy lawyer or bankruptcy attorney, please call us at 877-9NEW-LIFE (877-963-9543) for a free consultation today.

How are Incentive Stock Options Treated in Bankruptcy?

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Many companies that are publicly held companies and privately held give employees incentive stock options each year.  These shares usually vest at a predetermined percentage each year the employee stays employed by the company.  The company allows the stock to vest over a period of time to ensure the employee to make continued efforts on behalf of the company to receive the full grant of stock options.  The language of incentive plans may differ significantly.  This article discusses how purely incentive stock programs are treated if the stock incentive plan is not a qualified retirement account.  The specific language of a plan may make this article not applicable.  To determine the treatment of your incentive stock options when filing bankruptcy you should seek the counsel of an experienced attorney in your jurisdiction.

Most stock incentive plans have a section which defines the purpose of the plan.  When determining how the stock is treated the purpose section will most likely control.  Many plans will have language that provides the stock incentive plans is to motivate key employees to produce a superior return to the stockholders of the company and promote recruiting and retention of talented key positions.  This means that the plan is most likely not meant for retirement purposes or designed and used for retirement purposes.  The fact that these same companies usually have a 401k plan, or other retirement plan for the employee to participate in, is further evidence that their stock incentive plan is not for retirement purposes.  If the plan is not for retirement purposes or designed and used for retirement purposes the plan cannot be protected or exempted in bankruptcy as a qualified retirement account.

At the same time the stock incentive plan may not have to be solely used for retirement purposes though.  The stock incentive plan may have dual purposes such as supplementing income and to provide for retirement too.  The purpose of the plan must be scrutinized closely to determine if the company has designed for a dual purpose.

The Court will also look to see how the employee has used the stock incentive plan.  If the employee has exercised stock options prior to the filing of the bankruptcy case, the use of the funds received will be a factor as to how the plan is being used.  If the funds are used to improve a home or buy a car, theses uses of the funds are clearly not for retirement purposes.

In addition, a stock incentive plan may still be protected if the plan is subject to ERISA (Employee Retirement Income Security Act).  Whether the plan is subject to ERISA is again a fact based analysis as to how the plan is administered and the purpose and nature of use of the funds.  Factors include if payments under the plan are made after retirement, or skewed towards retirement, communications regarding the plan indicate the plan is maintained for purpose of maintaining retirement, or if the surrounding circumstances provide a reasonable person can ascertain the intended benefits are for retirement purposes.

The bottom line is if you have a stock incentive plan in which you have received stock options a close examination of the stated purpose of the plan, how the plan is administered, and how the funds can be used and when must be reviewed in detail to determine whether the plan can be protected in bankruptcy.

For more information regarding stock incentive plans and bankruptcy please contact our Oakland bankruptcy lawyer or bankruptcy attorney to determine your rights when filing for bankruptcy protection under Chapter 7 or Chapter 13 of the Bankruptcy Code.

Non-Dischargeable Taxes: What Happens if I Cannot Afford to Pay My Tax Liability?

By Kitty J. Lin, Attorney at Law

With taxes soon to be due this year on April 18, 2011, a lot of consumers are faced with this question:  I know I owe a lot of money to the Internal Revenue Service and/or California’s Franchise Tax Board, and I know that it is non-dischargeable.  How do I take care of it when I don’t have any money to pay for it?

As discussed previously (See Discharging Taxes in Bankruptcy), older taxes are generally dischargeable in bankruptcy.  However, this doesn’t help you if you owe money for the 2008, 2009, or 2010 tax years to the IRS or FTB.  There are several options available to you if you owe money for these tax years.

Installment Payments

If you owe money to the IRS or FTB, but you do not have enough money to pay the entire amount at one time, one of the options available is to set up installment payments with the taxing authority.  Be aware, this does not stop the penalties and interest from accruing on the amount of taxes owed.  This just means that the taxing authority is allowing you to make installment payments.  Both taxing authorities provide a maximum of 60 months (5 years) to pay off your tax liability.  You can find the links to apply for an installment agreement here:

IRS – if you owe less than $25,000:  http://www.irs.gov/individuals/article/0,,id=149373,00.html

IRS – if you owe more than $25,000: http://www.irs.gov/pub/irs-pdf/f433f.pdf

FTB – if you owe less than $25,000:  http://www.ftb.ca.gov/online/eIA/Apply_Online.asp

Offer-in-Compromise (OIC)

If you are currently unable to pay your tax liability, and you know you won’t be able to pay in the near future, you may be eligible for an Offer in Compromise from the IRS and/or FTB.  An OIC Program allows you to pay less than what you owe if you can prove that the offer is the best that you can do based on your circumstances.  Everyone’s situation is different, so the evaluation of whether you qualify for an OIC differs from person to person.  Both the IRS and the FTB require the taxpayer to complete forms and return to them in order to be considered for the OIC Program.  You can find them here:

IRS:  http://www.irs.gov/pub/irs-pdf/f656b.pdf

FTB: http://www.ftb.ca.gov/forms/misc/4905PIT.pdf

Chapter 13 Bankruptcy

If you are unable to pay the taxing authorities the full amount of your tax liability, another option to consider is filing a Chapter 13 bankruptcy to pay off your debt through a Chapter 13 plan.  Chapter 13s can last either 3 years (36 months) or 5 years (60 months).  The bankruptcy option is a great idea especially if you owe other debt, such as unsecured debts like credit cards, medical bills and personal loans.  You would need to pay 100% of the non-dischargeable portion of the tax liability because the taxing authorities are considered unsecured priority creditors, but unsecured creditors receive from 0% to 100% of their debt depending on your circumstances.  One of the benefits of filing a Chapter 13 plan to pay your tax liability is the fact that only the actual tax liability is priority.  Penalties and interest are not accrued on your account as you are paying off the debt in your Chapter 13 plan.  This could potentially save you a lot of money!  The penalties and interest are dischargeable and treated the same as all other unsecured creditors.

To determine if filing a Chapter 13 bankruptcy is the best option for you in your circumstances, it is advisable that you seek the advice of an experienced bankruptcy attorney.  Please contact one of our bankruptcy lawyers or bankruptcy attorneys today for a free consultation.  You can also contact us  toll free at 877-9NEW-LIFE or 877-963-9543 or go to our website submission for to request an appointment today.  We have offices in Redwood City, Oakland, San Jose, and San Francisco for your convenience.

Is HAMP a Colossal Failure? What is Next for Homeowners Seeking Loan Modification?

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The Home Affordable Modification Program began in March 2009 and it could not be clear that HAMP is a colossal failure.  The Obama administration set a goal to help 3 to 4 million American homeowners.  HAMP has only helped a tiny portion of that goal and has not reached the vast majority of American homeowners feeling the effects of the mortgage crisis.  The Congressional Budget Office estimated $72 billion in Troubled Asset Relief Program money would be available to fund HAMP.  Recently the Congressional Budget Office provided that HAMP would end up costing taxpayers $22 billion.  It would seem that servicers are collecting fees from the HAMP program without providing permanent loan modifications to distressed homeowners at the expense of all taxpayers.

To top it all off, on Tuesday March 29, 2011, Congress voted 252 to 170 in favor of ending HAMP altogether.  President Obama has provided he will veto any attempt to end HAMP and whether the Senate will agree with Congress to end HAMP still remains to be seen.  Most likely HAMP will continue as a program that gives hope to distressed homeowners but does little to actually successfully modify their loans permanently.

Has HAMP Helped Direct Loan Modifications From Servicers?

According to statistics released by services and the Treasury Department the number of loan modifications services issued on their own and not according to HAMP number 4 to 1.  One positive of HAMP is that it arguably increased the number of loan modifications than prior to the implementation of HAMP.  The argument is that servicers had very little incentive to modify loans.  But why are there so many more loan modifications if you seek modification directly from the servicer instead of applying for a HAMP loan modification?  One reason seems to be that services offer less favorable terms of modification, higher fees that are prohibited by HAMP and the servicer loan modification has a higher rate of repeated default.

So What is Next?

The HAMP program should be revised to make the loan modification process more transparent and implement mandatory structured procedures for mortgage companies and servicers to follow.  Simply asking for documents and then continually asking for more information gives homeowners false hope.

If you are having trouble making your mortgage payment, or are behind on your mortgage payments bankruptcy can help.  A free consultation with one of our Bankruptcy Lawyers or Bankruptcy Lawyers usually lasts 30 to 40 minutes depending upon the complexity of your case.  Call today toll free 877-963-9543 to start your new life debt free today.

Bankruptcy Petition Preparers: What Do They Do, and How Much Can They Charge?

By Kitty J. Lin, Attorney at Law

If you have to file for bankruptcy, you probably do not have much money to spend after paying for rent/mortgage, food, utilities, and other necessities.  You may not even have enough money to pay for those necessities.  That is why when people need to file bankruptcy, they try to find the cheapest method.  A lot of people turn to bankruptcy petition preparers to prepare their bankruptcy petition, because they believe that is the lowest cost.  However, bankruptcy petition preparers may end up costing you way more than bankruptcy attorneys may charge if they incorrectly prepare your petition and your assets are not adequately protected.  The Bankruptcy Code tries to protect your rights when it comes to bankruptcy petition preparers.

First, according to 11 U.S.C. §110, bankruptcy petition preparers can not offer you legal advice.  That means they cannot tell you whether you should file for bankruptcy at all, what chapter of bankruptcy to file under, when to file, whether your debts will be discharged, whether you can keep your assets, and other bankruptcy procedures and rights.  All they can do is prepare your petition.

Second, if they do prepare your petition, they have to provide you with notice that they are bankruptcy petition preparer and that they are not allowed to give legal advice, and they need you to sign the document and file it with the court.  They need to provide you with full disclosure.  They also need to provide their information in your bankruptcy filing, such as their name, ID number, address, and other identifying information.  They need to tell the court that they have taken your money to prepare your bankruptcy petition.

Finally, in the Northern District of California, bankruptcy petition preparers cannot charge you more than $150.00 total to prepare your petition.  This includes preparing, photocopying, and forwarding your bankruptcy papers to the bankruptcy court. Bankruptcy petition preparers are not bankruptcy attorneys and cannot provide any legal advice.

So, in summary, if you’ve paid more than $150 to a bankruptcy petition preparer, you have paid too much.  That’s because they cannot do anything for you other than actually preparing your schedules and forms.  If anything goes wrong, you are the one that is left holding the bag.  It is highly advisable that if you need to file for bankruptcy, please consult with an experienced attorney.  Although they cost more than a bankruptcy preparer, they can save you thousands of dollars if something goes wrong, protect your assets, relieve the stress of the process, and save you time.  Peace of mind is sometimes worth more than saving a couple dollars, and as the old saying goes, “You get what you pay for.”

You need to consult our bankruptcy lawyer regarding your financial situation if you are thinking about filing bankruptcy.  Please call us at 877-9NEW-LIFE (877-963-9543) today to schedule a free consultation.  You may also go to our website at www.WestCoastBK.com for more information about the bankruptcy process.

Bankruptcy Statistics for the United States Bankruptcy Court Northern District of California for 2007 and 2008

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After the passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act and the rush to file bankruptcy before the law change, many attorneys believed bankruptcy filings would decrease.  Well, the mortgage crisis and bad economy changed all of that.  The following is a comparison of bankruptcy filings under Chapter 7, Chapter 13 and Chapter 11 for the United States Bankruptcy Court Northern District of California.

In 2007 there were a total of 127,359 bankruptcy cases filed in the Northern District of California.  Each month and each quarter of the year filings increased month after month.  2007 really was the start of increases in bankruptcy filings.  The 2nd quarter of 2007 realized a 16% increase in bankruptcy filings, the 3rd quarter of 2007 increased 7% more and the 4th quarter of 2007 increased another 14% for a total of 21,758 filings for the last three months of 2007.  2008 realized an even larger increase in cases filed.  The 1st Quarter increased 18% from the last quarter of 2007, the 2nd quarter of 2008 increased 26%, the 3rd quarter of 2008 increased 14% and the 4th quarter increased by 3% for a total of 38,011 filings for the last three months of 2008.

Increase in Filings For the United States Bankruptcy Court Northern District of California from 2007 – 2008

Quarter. . . . . . .Year . . Cases Filed . . Quarter . . . . . . .Year . . . Cases Filed . . . . 2007 – 2008 Increase

1st Quarter        2007    15,041            1st Quarter        2008      25,727              71% more than 2007

2nd Quarter       2007    17,505            2nd Quarter       2008      32,387              85% more than 2007

3rd Quarter       2007    18,778            3rd Quarter        2008      37,083              97% more than 2007

4th Quarter       2007    21,758            4th Quarter        2008      38,011              75% more than 2007

Increase in Bankruptcy Filings For the Whole 9th Circuit from 2007 – 2008

Quarter . . . . . . Year . . .Cases Filed . . . . Quarter . . . . . .Year . . Cases Filed . . . 2007 – 2008 Increase

1st Quarter       2007     26,960              1st Quarter       2008    42,165                56% more than 2007

2nd Quarter      2007     31,124              2nd Quarter      2008    52,874                69% more than 2007

3rd Quarter       2007     32,808              3rd Quarter      2008     60,026               82% more than 2007

4th Quarter       2007     36,467              4th Quarter      2008     61,395               68% more than 2007

As shown above, bankruptcy filings increased by approximately 70% from 2007 to 2008.  The number of foreclosures and adjusting interest only or negative amortization mortgages contributed significantly to the increase in bankruptcy cases.  Also layoffs and the general sluggishness of the economy contributed as well.  As 2009 approached the number of filings continued to increase at an even larger percentage.  Bookmark Bay Area Bankruptcy Buzz for more information about the increase in bankruptcy filings during 2009.  We will also be providing comparisons of the increase and number of filings in various states throughout the United States.

Contact us today for information from our bankruptcy lawyer or bankruptcy attorney to find out if bankruptcy is right for you and your family.  You may reach us toll free at 1-877-963-9543 or submit your information with our on-line submission form.

How Does Receiving a Tax Refund Affect My Bankruptcy?

By Kitty J. Lin, Attorney at Law

With tax season here, many consumers have received or will receive a tax refund.  What happens to your tax refund if you have already filed bankruptcy, or will be filing for bankruptcy in the future?  It would depend on what stage you are at in your bankruptcy case.  Here are some scenarios:

You have received a tax refund and you have not filed for bankruptcy yet

It is very important that you communicate to your bankruptcy lawyers if you have not filed your tax returns yet and if you expect a refund. If you have already received a refund before you file your bankruptcy case, it would be considered an asset in your bankruptcy estate.  However, since you have not filed your bankruptcy case yet, if you require the funds from your tax returns for necessary expenses, such as food, shelter, utilities, property taxes, attorney fees, etc. you are free to spend it on such items.  If, after using your funds from your tax return for all the necessary items, you still have money left over, it will need to be included in your bankruptcy petition.  These funds will need to be exempted.  See Asset Protection in Bankruptcy for more information about California exemptions.

Your bankruptcy case is filed, but you expect or have already received a refund

If you have not received a refund before filing your bankruptcy case, whether you are able to keep your tax refund will depend on how much the exemptions you have available.  First, one of the most important aspects is to be sure that your expected refund (even if you have not received it yet) is listed on your petition.  If you have exemptions available, then it will be protected and you would be able to keep all of the exempted refund.  If you do not have any exemptions available, then the trustee may be able to take a pro-rated portion of your tax refund for the benefit of your creditors in the bankruptcy estate.

You expect to receive a refund, but it was not listed in your bankruptcy petition

If you know you will receive a refund but you intentionally decide to not disclose it in your bankruptcy petition, the bankruptcy trustee may require you to turn over the funds to the bankruptcy estate for the benefit of your creditors.

If you have any questions about the affects of a tax refund in a bankruptcy case, it may be advisable to speak with an experienced bankruptcy lawyer to go over your situation to be sure that all of your funds are protected.  You may contact us toll free at 877-9NEW-LIFE (877-963-9543) to schedule a FREE in person or phone consultation today.

How Long Does a Credit Card Company Have to Enforce an Unpaid Account and Statute of Limitations

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So you are having trouble making your credit card payments and probably wondering what will happen next?  The next few paragraphs will discuss the treatment and removal of unpaid credit card accounts based upon the Fair Credit Reporting Act and the statute of limitations under California law only.  Each state has its own statute of limitations for causes of action like enforcing an unpaid credit card debt.

What is a Statute of Limitations?

The first issue is what is the statute of limitations?  The statute of limitations is the length of time that one has to file a lawsuit to enforce a claim such as an unpaid debt, a personal injury cause of action or a products liability claim.  When you sign up for a credit card, you are entering into a written contract agreeing to pay back the money you charge to the credit card under varying terms.  When payment is not made, the contract is breached.  In California the statute of limitations for breach of contract is four years.

When does the Statute of Limitations start?

Generally the statute of limitations begins to run when the cause of action accrues or begins.  This is a complicated area of the law and this article will only touch on general information and not a case by case analysis your case may require.  When the statute of limitation usually begins is when you breach the contract by not paying, or the cause of action accrues arising from the date of last payment or when demand for full payment is received.  In California, pursuant to California Civil Code Section 337, the statute of limitations for breach of contract resulting from nonpayment is 4 years.  In California, the statute of limitations can be extended only by a new agreement in writing to agree again to repay the credit card debt.  If a credit card company does not file a lawsuit within 4 years from the date of last payment or when demand for full payment was received, and no new agreement in writing has been executed, the debt is then time-barred and is not legally enforceable.  The only way the credit card company can then get a payment from you is if you voluntarily choose to make a payment.  Some credit card agreements have an acceleration clause that must be invoked and once a payment is missed, then the statute of limitations begins to accrue.

What Happens if a Credit Card Company Does Not File Suit Within the Statute of Limitations and the Debt is Time-Barred?

There is also a statute of limitations regarding credit reports.  The statute of limitations for reporting accounts and credit reports is controlled by the Fair Credit Reporting Act (FCRA).  If a credit card company in California does not sue within 4 years and the debt becomes time-barred, it is still a negative account on a credit report though.  Pursuant to the FCRA negative accounts can remain on a credit report for 7 years and positive accounts can remain for 10 years.  There are some exceptions that are not listed here, so consult a professional in your state for the exceptions.  If a credit card company does not sue to enforce the payment of the debt, the next step is to dispute the negative account with all three credit bureaus.  The credit bureaus, Experian, Equifax and Trans Union are prohibited from continue to list old negative accounts on credit reports and must remove inaccurate item in 30 days.  To dispute a credit account on a credit report you will need a recent copy of your credit report.  There are a number of websites that will provide a free credit report.  Then to dispute an item on a credit report, you may write a letter, file a dispute on-line at the credit bureaus website and even by telephone.  Go to the Federal Trade Commission website at: www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm.

If a credit card company unfortunately seeks to enforce a debt by filing a lawsuit, it is time to consult one of our best bankruptcy lawyers or experienced bankruptcy lawyers for advice.  You may contact us toll free at 1-877-963-9543.

What is Mortgage Forgiveness Debt Relief?

By Kitty J. Lin, Attorney at Law

Normally, the cancellation of debt is a taxable event.  This means that if a creditor forgives a debt, or accepts less than what is owed to them, they issue a 1099 and the Internal Revenue Service and Franchise Tax Board in California will consider the forgiven debt as income.  Forgiven debt is considered income because you owed a certain amount, and now you don’t have to pay it back, so you received a benefit from it.

In the current real estate crisis, more and more consumers have their homes foreclosed on them, or they have to do a short-sale due to their financial situation.  It would add insult to injury if they have to pay taxes on a second mortgage or a home equity line for a home they no longer own.  Because of this, the federal and state governments have enacted laws that protect the homeowner from this situation. As a bankruptcy lawyer in the Bay Area there is only so much filing bankruptcy can help.

For federal taxes, there is the Mortgage Forgiveness Debt Relief Act of 2007.  This law excludes debts forgiven from 2007 to 2012 on a consumer’s primary residence if their principal balance was $2 million or less.  If you are married and filing separately, the exclusion is only up to $1 million.  One limitation of this act is that it only applies to the amount used to buy, build, or substantially improve a primary residence.  If debt was forgiven and it was used to pay off your debts, or buy another car, those amounts are not subject to the exclusion.  If you had refinanced your home, only the amount of the old principal balance is subject to the exclusion, not the new refinanced amount.  Debt forgiven on rental properties, second homes, and other types of property are still subject to taxes if the debt is forgiven, unless other tax relief is available.

California has also followed suit to provide some debt relief for residents of California.  California enacted SB 401, Mortgage Forgiveness Debt Relief, to aid homeowners that had their houses foreclosed, went through a short-sale, or had their loan modified from 2007 to 2012.  It excludes canceled mortgage debt up to $500,000 of the consumer’s principal balance on their primary mortgage.  Married couples or domestic partners filing taxes separately can only exclude up to $250,000.  Similar to the federal Mortgage Forgiveness Debt Relief Act, this only applies to primary residences.  Second homes, rental property, and business property do not receive the same tax exclusions.

If it is a second home, rental property, or business property that was foreclosed or sold short, it is highly advisable that seek the advice of a professional.  To schedule a free consultation with our experienced bankruptcy lawyer, call toll free at 1-877-9NEW-LIFE or 877-963-9543.  You can also visit us online at www.WestCoastBK.com for more information.