What are common mistakes people make when they consider filing for bankruptcy?

Divorce and Bankruptcy: Should I File For Both at the Same Time?

It’s no secret that money problems are one of the leading causes of divorce.  In fact, financial woes are often what couples state as the reason their differences became irreconcilable.  Therefore, the situation often arises that divorce and bankruptcy are considered simultaneously.  While it’s possible to file for both at the same time, it’s important to keep in mind that divorce and bankruptcy are two completely separate legal processes, and each must be handled separately. 

In fact, if you file for a bankruptcy while you are in the middle of the filing process for divorce, the divorce proceedings can actually slow down your bankruptcy.  And while the court handling the divorce will be able to make decisions regarding custody, child support, and alimony while the bankruptcy process is happening, it will have no jurisdiction over the couple’s mutual property – only the federal bankruptcy court will have control over that. 

Also, bankruptcy and divorce can be tricky when it comes to jointly owned debt.  If you are required to pay off certain debts as part of your divorce decree and your bankruptcy discharges these debts, your creditors could still go after your spouse if his or her name was on the debt.  Your spouse can then take you back to divorce court to recover the debt, which will likely be granted since it was in the original divorce decree.  Chapter 7 and Chapter 13 bankruptcy also does not discharge child support or alimony that is owed to your spouse as part of the divorce decree. 

The best thing to do is to wait until the divorce is finalized before you begin your bankruptcy process.  When you do it this way, the bankruptcy court will look at your required alimony and child support expenses, and consider these when determining your required monthly expenses.   

Can I file for divorce and bankruptcy at the same time?

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

According to IRS regulations, when debt is canceled or forgiven by a lender, the amount that has been canceled is considered income for the debtor during tax time and must be reported as income.  In light of the recent housing and foreclosure crisis, this regulation would be especially frightening for the thousands of Americans who are going through loan restructuring and modification processes, or having their mortgages canceled due to foreclosure. 

However, when the economy took a turn for the worst, and right before the housing bubble burst, Congress passed the Mortgage ForgivenessDebt Relief Act of 2007, which allowed homeowners who were already having financial trouble to avoid having to pay taxes on their forgiven or foreclosed mortgages.  In fact, according to that Act, if part or all of your mortgage debt is forgiven in any tax year from 2007 to 2012, you might be able to exclude a substantial amount of that forgiven debt from your taxable income when tax time rolls around. 

The debt that qualifies for this must have been incurred for your principle place of residence (not a vacation home), and can include debt that has been canceled through foreclosure or debt from mortgages that were reduced through restructuring or modifying the loan.

From the IRS website, here are a few additional facts about Mortgage Debt Forgiveness.

   1.  The limit is $1 million for a married person filing a separate return.

   2.  To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

   3.  Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

   4.  Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

Should I take out a loan against my 401k to avoid bankruptcy?

Should 401k Loans Be Used to Avoid Bankruptcy?

People will do just about anything to avoid bankruptcy.  However, taking out a loan against your 401k is not advisable, for multiple reasons.  First, in most chapter 7 bankruptcies that we do, our clients have their debts discharged while keeping their 401k intact.  Avoiding this legal and popular form of protection against your creditors will, in many cases, only push you further into the hole of debt. Add to that putting your retirement at risk, and you’ve compounded the problem exponentially.

Let’s say you use the 401k loan to pay off your creditors.  While you’ve managed to get the collections agencies and threats of wage garnishment off of your back, you’re still responsible for paying yourself back and restoring the funds in your 401k.  While it can certainly be argued that the interest rates of 401k loans is significantly lower than the rates on most credit cards, you should keep in mind that 401k loans must be paid back within a shorter amount of time than many other types of loans or lines of credit.  This means that your monthly payment to your 401k will likely be high. 

If for some reason you are unable to make this monthly payment, the money will be treated as income and you will likely have to pay a 10% early withdrawal penalty since it would be considered a distribution from a tax-deferred plan.  What this means is that in addition to the penalty, you’ll have to pay income taxes on the money you took out as a loan.  Also, if you are unable to continue working or change employers, you will be required to pay back the loan in full, immediately. 

Now weigh all of that against this fact: if a debtor files bankruptcy, most states’ exemptions will keep your 401k protected. This means that you’ll have some of your debt discharged while keeping your retirement money intact.  The benefits of doing this definitely outweigh the benefits of taking out a loan on your 401k to avoid bankruptcy.  

Florida Foreclosures – What Happened and How Can I Protect My Home in Florida?

Let’s get one thing straight: the reason that you need professional legal assistance when you are facing the potential foreclosure of your Florida home is because the bank or mortgage company who owns your mortgage will not look out for your best interest.  The global financial crisis that resulted, in part, from fraudulent business practices on Wall Street created a situation in which your home mortgage – and the rights to it – has likely been sold as bonds to multiple stakeholders.  What this means is that there is no one at your bank or mortgage company who will lend a sympathetic ear to your financial hardships, regardless of how devastating they might be, because there are multiple corporate interests involved. 

In fact, many of these companies have moved your mortgage around between themselves that they are unable to provide original documents proving that they, indeed, hold the loan.  This has created a situation in which companies are using falsified documents to take your home from you—and these documents are passing through the courts unnoticed because of the wave of foreclosures that are happening around the state.  The same companies who participated in throwing Floridians in a tailspin with sub-prime mortgages and unethical business practices are now welding their power to take residents’ homes away from them. 

This is why a foreclosure defense attorney is a valuable asset to have on your side if you are facing the threat of foreclosure of your Florida home.  With the right defense in place, you will have a much greater chance of delaying, or even winning, the foreclosure claim that has been placed against you.  Foreclosure defense attorneys know what to look for to make sure that your bank or mortgage company is playing by the rules (because so many of them don’t!) and know all of the legal processes to keep you in your home for as long as possible, even if you have missed a payment on your mortgage.