Archives for January 2013

Senate proposes new law to make some student loans dischargeable in bankruptcy

Student loans total about $1 trillion nationally. For many people they are the largest single debt obligation. There was a time when student loans could be discharged after 7 years. That was eliminated for student loans under federal or state loan programs. In 2005, Congress made even private student loans which were “tax qualified” non-dischargeable as well. As we have said before, this is an enormous burden for families, and it probably explains the explosive growth of tuition costs in the past decade.

Now, three Senators have introduced the Fairness for Struggling Students Act of 2013, which if passed would make only student loans made, insured, funded or guaranteed under a government program non-dischargeable. The accompanying statement points out that the private loans are a different animal, with different terms and few protections.

Whether this will pass is uncertain, but there is widespread recognition of the problem. Government programs do have “escape hatch” programs to reduce payments or even discharge loan obligations for those unable to pay them, or for those who meet certain government service requirements.

While laudable, this is not the entire solution. We support a program that would give student loans preferred status in Chapter 13, with a discharge upon meeting certain benchmarks, such as length of plan payment, or payment of a specified percentage.

Surely we should encourage and support people who seek advanced training or degrees. Such people are the key to future global competitiveness and economic security for all.

Anyone who is facing unmanageable student loan debt should explore their options. For many, this is not their only debt, and discharging other debt frees up income to pay these loans. Some loans have extended or income based repayment plans, or even non-bankruptcy hardship discharges. Our office has helped many such persons.

Joint bank accounts can create traps and legal headaches when financial problems arise.

Commonly we have clients who have added their name to a bank account belonging to an elderly parent or an adult child.  Even more common are clients facing collection suits who have a joint account with a working spouse who is not facing financial problems. While these arrangements are entirely understandable in normal situations, when you are facing a lawsuit or other  financial problems arise they can and often do create serious headaches.

Bank Levies-“my money is frozen!”  Once creditors obtain a judgment against you, they will commonly try a “bank levy” to have a Sheriff seize the money in the joint account. If you are the defendenat and your name is on a joint account with someone else, this can result in the other account holder’s money being frozen without notice.

Fortunately, under New Jersey law (and the law in many other states) ownership of a joint account belongs to the person who put the money there, unless there is clear and convincing evidence of an intent by the other person to make a gift of the money deposited. That is the good news. The bad news is that faced with a levy on a joint account, the “non-debtor” whose money is in the joint account  will have to go to court to get the bank levy released. At best, this is an unwanted  expense (which can run into thousands of dollars in legal fees), and the frozen funds may not be released for weeks until a court rules.

Bankruptcy- whose money is it anyway? If a client files a personal bankruptcy, his ownership interest in the account becomes property of a bankruptcy estate which a bankruptcy trustee will look at as a potential asset. In the bankruptcy, the joint account must be listed as an asset, and it will be necessary to convince the bankruptcy Trustee that the money does not belong to the debtor in bankruptcy. With proper documentation and citation to the proper state and federal statutes, most– but not all–trustees will readlily agree. Meanwhile, there is uncertainty and the possibility of having to go to court, before the money is free for use.

With proper planning and guidance many of these problems can be avoided. We commonly recommend that if the purpose is for a child to be able to access funds to pay an elderly parent’s bills, the better course of action is to go to the bank and get signature authority or file a power of attorney that the bank will recognize. In every case, keeping good documentation about the source of funds is a very good idea.

Otherwise, in the spousal joint account, it is better in these situations for the non-debtor spouse to set up a separate individual account and keep her funds separate. Again, this requires good documentation. Merely transferring the debtor’s money into a spouse’s account will create other problems.

Note that these concerns will usually not apply to a bona-fide “Minor’s Account” where the parent is named on the account merely as a custodian for a minor child, AND where the account contains the child’s own money from normal gifts or the child’s own earnings. But again, transferring your money into a child’s account to hide it or protect it from creditors is unwise and can create “fraudulent transfer” claims.

Anyone with these types of concerns needs to get qualified legal advice to avoid the several pitfalls. As with many other situations, there is a right way and a wrong way to handle these situations, to avoid needless unpleasant surpises and legal expense.

Call us- we can help. If you are a New Jersey or southeastern Pennsylvania resident, we can help. Call us at 856-596-2828 for a free initial consultation. For information about us or about other issues, please feel free to browse our website or our blog.

New Jersey law allowed “fast track” foreclosure of vacant and abandoned property

On December 6, 2012, New Jersey Governor Christie signed a new law that allows a “fast track” of foreclosure of vacant and abandoned residences. For those who have moved out of their homes, only to be faced with continuing liability or expense waiting for a foreclosure sale, this is a major benefit. For lenders who have to maintain and secure these properties waiting for the sale, it is just as beneficial. And since condominium and association fees remain the owner’s responsibility until sale, this could mean major savings for the homeowner.

The law is not automatic. The lender has to request “summary action”, and show by clear and convincing evidence that the property is in fact vacant and abandoned. For these purposes, if the property has been leased after the owner was served with a Notice of Intention to Foreclose, it may still be treated as abandoned.  In addition to proof that the owner has moved out, the lender has to show that  at least two of the following conditions exist:

(1) overgrown or neglected vegetation;(2) the accumulation of newspapers, circulars, flyers or mail on the property; (3) disconnected gas, electric, or water utility services to the property;(4) the accumulation of hazardous, noxious, or unhealthy substances or materials on the property; (5) the accumulation of junk, litter, trash or debris on the property; (6) the absence of window treatments such as blinds, curtains or shutters; (7) the absence of furnishings and personal items; (8) statements of neighbors, delivery persons, or government employees indicating that the residence is vacant and abandoned; (9) windows or entrances to the property that are boarded up or closed off or multiple window panes that are damaged, broken and unrepaired; (10) doors to the property that are smashed through, broken off, unhinged, or continuously unlocked; (11) a risk to the health, safety or welfare of the public, or any adjoining or adjacent property owners, exists due to acts of vandalism, loitering, criminal conduct, or the physical destruction or deterioration of the property; (12) an uncorrected violation of a municipal building, housing, or similar code during the preceding year, or an order by municipal authorities declaring the property to be unfit for occupancy and to remain vacant and unoccupied; (13) the mortgagee or other 1 authorized party has secured or  winterized the property due to the property being deemed vacant and unprotected or in danger of freezing; (14) a written statement issued by any borrower  expressing the clear intent of all borrowers to abandon the property; (15) any other reasonable indicia of abandonment.

Owners who are vacating a property or who intend to do so should encourage the lender to fast track their foreclosure, to avoid unnecessary liability and expense. As always, it is wise to consult with qualified legal counsel.

For more about this and related topics, please visit our website.

Another year of tax relief for short sales and deeds in lieu of foreclosure.

Homeowners who want to negotiate a write off of too-large mortgage debt through a short sale or loan modification have been given some  extra help. The recently passed “fiscal cliff” avoidance law also extends the Mortgage Debt Foregiveness Act, (MDFA) due to expire on December 31, 2012, for another year. This is the law that provides protection to homeowners doing short sales or deeds in lieu of foreclosure, under limited circumstances.

Normally, when a lender cancels part of a debt, (even after a foreclosure sale) the amount cancelled is treated as income, taxed at the same rate as a salary. This can result in a large and  unwelcome tax bill unless the cancellation is due to a bankruptcy discharge or to the extent the borrower can prove
insolvency.

The MDFA created another exception. Those trying to work deals with mortgage lenders have another year before the “tax break” ends.

As always, the devil is in the details. The exception only applies to mortgage debt used to purchase or improve a residence. Additional debt used for other purposes is not protected, and will be counted first. This can result in a substantial tax.

There are several important considerations before embarking on a short sale or deed in lieu of foreclosure. But getting early and qualified tax advice and legal advice is essential to avoid nasty and unpleasant surprises down the orad.  While we are not tax advisers, we can help you understand the issues and alternatives, and are prepared to work closely with your tax advisers.

IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

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