Our economy is built upon consuming goods and services. We are often encouraged to purchase with credit that for which we cannot afford to pay for with cash. If, because of sickness, a job layoff, or just poor economic and estate planning, you no longer can afford to pay off your consumer debt, you might consider hiring an attorney in order to file for Chapter 7 Bankruptcy in order to obtain a fresh start for your personal finances. In a time when billion-dollar financial bailouts are being extended to prominent banking institutions, giant insurance carriers and well established automobile makers, you deserve to obtain your own personal financial relief. In order to qualify for a Chapter 7 Bankruptcy, a debtor must meet certain eligibility requirements. First, a debtor may file for Chapter 7 Bankruptcy only once every eight years. Second, the debtor must pass the “Means Test” prior to qualifying for a Chapter 7 filing. As a general rule, the debtor’s average monthly income during the six months period preceding the filing should not be higher than California’s median income. If the debtor’s average income is more than the median, he may not be able to file for Chapter 7 Bankruptcy if his disposable income would allow him to pay off his creditors a certain sum of money over a fixed period of time.

Chapter 7 Bankruptcy takes about three months to complete. Prior to petitioning for Bankruptcy, many candidates will consult an attorney and most filers will be required to consult a nonprofit credit counseling agency. The reasoning behind credit counseling is to figure out whether you can utilize other options for debt management. Once credit counseling is complete, your attorney will file the Voluntary Petition with the court requesting a discharge of debts. After this Petition is filed with the court, the court enters an Order for Relief, commonly known as, the Automatic Stay, which obligates all creditors and collection agencies to stop all collection efforts. This means that most creditors must immediately stop any forms of harassment, terminate their demands for repayment of debt, and halt their threats of pursuing legal action against the debtor. Filing for chapter 7 bankruptcy also means that the debtor is placing all his debts and assets, including those assets held in living trust, in the hands of the bankruptcy estate. The bankruptcy court controls these debts and assets by assigning a trustee to manage each chapter 7 bankruptcy case. The trustee’s role is to obtain money from the debtor’s Bankruptcy estate for the benefit of unsecured creditors. However, in most cases, the trustee cannot touch the property which is considered exempt. Exempt property is the property a debtor can retain during and subsequent to Bankruptcy. Your attorney will be able to determine in advance what assets are likely to be exempt.

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The year 2009 was ground shattering for the housing market. The foreclosures in the country continued to increase exponentially and many lenders went out of business. The government tried unsuccessfully to stabilize the crisis by giving money to the lenders (instead to help homeowners). Many taxpayers will be receiving 1099-C tax forms if they went through foreclosure or short sale. The fact that the lender is sending those 1099 forms means that they are not going to pursue a deficiency judgment. This is good news. Usually, the amount of debt cancelled is considered an income. However, there are exceptions.
-If your home has been foreclosed on, box 2 of 1099-C will show the amount of debt forgiven. Usually, at the sheriff’s sale, your lender buys the house back and it becomes an REO (real estate owned). The intention of the Bank is to sell the house as soon as possible, but sometimes it takes many months to get rid of it. The good news is that your amount of debt cancelled is based on the fair market value of the house (box 7 of 1099-C). This is important: the difference between the FMV and the loan amount is what matters to you and shows in box 2. However, if it is a primary residence, according to The Mortgage Debt Relief Act of 2007, the amount of debt cancelled is excluded from the income.
-If you had a short sale, which means that your home has been sold at a discount (with your lender’s approval), you will still receive 1099-C. The only difference in this case is that in order to calculate the debt cancelled the actual purchase price is used. Again, if it is about your primary residence, it is excluded from income (form 982 has to be prepared).
-If the debt cancelled was a business debt (for example rental property), then the loss of the property results in a “sale”. Therefore gain or loss has to be calculated. Make sure you find an experienced tax professional who knows how to handle cancellation of debt.
-Income from the cancellation of debt is excludable for an insolvent buyer to the extend that the liabilities exceed the FMV of their assets. In plain English this means that if you have more debt than assets, you have the right to exclude a certain amount from your income. For example, if you have debt cancelled of $100,000. Your liabilities are $180,000 and your assets are $150,000. Your insolvency is for $30,000. Therefore, instead of reporting $100,000 as an income, you will report $70,000 only.

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