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Shenwick & Associates is happy to announce that we have just settled another taxi medallion debt with a favorable result for the client. In resolving this case, IRC (Internal Revenue Code) § 108was raised in the settlement negotiations, and the purpose of this blog post is to discuss IRC § 108, the structure of the settlement agreement and the impact of IRC § 108 on the settlement.IRC § 108 provides that if an individual or an entity is relieved of indebtedness, then that indebtedness is deemed to be ordinary income to the debtor or taxpayer, and they must report that income on their tax return. There are two exceptions to this rule; first, if the taxpayer/debtor files for bankruptcy protection, then the relief of indebtedness income is not picked up; and second, on a balance sheet basis, if the individual’s liabilities exceed their assets and they are insolvent, then they do not have to pick up the income.In many of our taxi medallion workouts, we engage in the workout to avoid a personal bankruptcy filing by the taxi medallion owner, so the bankruptcy filing exception to IRC § 108 does not apply.An example of the application of IRC § 108 will help to explain the above. Let’s assume that an individual owes a financial institution $1,000,000.  The individual is unable to pay the $1,000,000, so the parties enter into a workout (an out of court settlement) in which the individual repays the financial institution $500,000. According to IRC § 108, the taxpayer must pick up the $500,000 differential between what he or she owed and paid as ordinary income. Many clients assume that the $500,000 of differential would be deemed to be capital gains, but it is ordinary income.The second question raised by clients is how does the IRS find out about this relief of indebtedness income? The answer is that the institution is required to file a Form 1099-C with the IRS reporting the relief of indebtedness income for more than $600 of forgiven debt.So now let’s look at our recent taxi medallion settlement and how IRC § 108 impacted the settlement. The facts of the case were as follows: a bank was owed $650,000 for a taxi medallion owned by a mini fleet and the loan was guaranteed by an individual. The owner of the mini fleet and guarantor of the taxi medallion loan was not earning enough money from driving or leasing out the medallion to repay the $650,000 and she didn’t want to file for personal bankruptcy. We negotiated with the bank, and the settlement that was ultimately reached was as follows: (1). the mini fleet would surrender the medallion to the bank; (2) the guarantor would pay the bank $150,000 as part of the settlement; and (3) the parties would enter into a settlement agreement with mutual releases to document the settlement.The bank drafted the settlement agreement, which provided that the bank would file a 1099-C in an amount to be determined for relief of indebtedness income to the guarantor. We raised this issue with the guarantor, who sought advice from her CPA.  Her CPA indicated that they could not give her clear guidance and that this area of the tax law was murky, but that if the 1099-C was issued to the guarantor, she would pick up a significant amount of taxable ordinary income.

1. We indicated that the settlement agreement should be revised to indicate the amount of the release of indebtedness income. The formula is the amount of the medallion loan, less the amount of money paid by the guarantor, less the value of the taxi medallion; in this case, $650,000-$150,000-$200,000=$300,000.
2. The wild card issue here was what was the value of the medallion when it was surrendered? We track the TLC’s monthly medallion transfer reports, and we advised the guarantor as to what we believed the value of the medallion was. We've also noted that many clients have imputed value for medallions for their internal books and records of $200,000 to $225,000.
3. We also advised the client that it would be better to have the relief of indebtedness income reported the corporation instead of the individual guarantor, and that if the corporation elected to convert from a S corporation to a C corporation, the income would be reported as payable by the corporation instead of the individual guarantor.
4. We’re not tax lawyers, but we are familiar with the IRC and James Shenwick has an LLM in Taxation from the NYU School of Law. We will raise potential tax issues in these workouts for clients, which need to be addressed by their tax advisers or CPAs.

The client acknowledged the tax risk and moved ahead with the settlement agreement, but she indicated that she had losses from other assets which she could offset against the taxi medallion relief of indebtedness income and was thrilled to surrender the taxi medallion and compromise the related loan. We were thrilled to be part of another successful taxi medallion workout!  Clients who own “under water” taxi medallions are encouraged to consult with James Shenwick to discuss their optimal strategy with respect to their taxi medallion loans. Jim

Consumer Financial Protection Bureau Releases Report on First-Time Military Home Buyers

The Consumer Financial Protection Bureau (CFPB) released a report focusing on mortgages made to first-time homebuyers who are serving in the armed forces or are veterans. The Bureau’s report is the first time researchers have been able to provide a description and analysis of servicemembers’ mortgage choices and mortgage performance, both during and after the housing crisis of the last decade. (reprint from CFPB announcement – 3/1/19)
When buying a house, servicemembers — defined here to include both those on active duty and veterans — have the option of taking out a home loan that is partially guaranteed by the U.S. Department of Veterans Affairs (VA). VA-guaranteed home loans differ from other mortgages in several ways including allowing a purchase with no down payment and without mortgage insurance. Servicemembers may also choose other mortgage products, including conventional loans or loans by a different government agency.
Today’s report spans the years leading up to and after the housing crisis. Among the key findings:

• The share of first-time homebuying servicemembers using VA mortgages increased from 30 percent before 2007 to 63 percent in 2009. Among non-servicemember first-time homebuyers there was a parallel increase in the use of FHA and USDA mortgages. However, whereas non-servicemembers’ reliance on FHA/USDA mortgages declined after 2009, servicemembers’ reliance on VA loans continued to increase. In 2016, 78 percent of servicemember loans were VA loans.
• The greater share of VA loans among servicemembers was part of a larger shift among consumers (both servicemembers and non-servicemembers) away from conventional to government-guaranteed mortgages between 2006 and 2009. Conventional mortgages—that is, non-government-guaranteed mortgages—were about 60 percent of loans among first-time homebuying servicemembers in 2006 and 2007, but this share declined to 13 percent by 2016. By comparison, the conventional loan share among non-servicemembers fell from almost 90 percent before 2008 to 41 percent in 2009, then increased back to 60 percent in 2016. The combined share of FHA and USDA mortgages to these borrowers increased and then decreased accordingly.
• The median loan amount for first-time homebuying servicemembers with a VA loan increased in nominal dollars from $156,000 in 2006 to $212,000 in 2016, closely tracking the median value of conventional home loans taken out by non-servicemembers. By contrast, the median loan amounts in nominal dollars for servicemembers who used conventional or FHA/USDA mortgages during this period were lower in value compared to VA loans and increased at a slower pace, growing from $130,000 in 2006 to $150,000 in 2016.

The Quarterly Consumer Credit Trends report, “Mortgages to First-time Homebuying Servicemembers,” is available at: https://content.consumerfinance.gov/data-research/research-reports/quarterly-consumer-credit-trends-mortgages-first-time-homebuying-servicemembers/

WARNING FROM DIANE DRAIN: Using your VA benefits to buy a home may lead to serious financial problems if you cannot pay your mortgage and the lender forecloses.
PLEASE TALK TO AN EXPERIENCED FORECLOSURE LAWYER ABOUT YOUR RIGHTS.
I did not let my ‘jar head’ HUSBAND use his VA eligibility to buy our home because of this exposure.
Arizona law protects us, but not federal law.

The post Mortgages for First Time Military Home Buyers appeared first on Diane L. Drain - Phoenix Bankruptcy & Foreclosure Attorney.

Saundra Latham writes a good review of the best credit counseling agencies of 2018 in The Simple Dollar website.  She correctly points out that the best credit counseling firms to handle a Debt Management Plan are:

• Cambridge Credit Counseling
• GreenPath
• Incharge Debt Solutions

Generally speaking, if you are signing up for a Debt Management Plan to consolidate your debts into a payment plan managed by a certified credit counselor that provides lower interest rates and financial counseling, you want to go with an agency certified by the National Foundation for Credit Counseling (NFCC).  The NFCC has the toughest certification standards in the credit counseling industry and it is simply unwise to go with an agency not certified by them.
What is lacking in Latham’s review,  however, is any statement of whether these plans actually work. Does credit counseling actually work? Do creditors really accept these plans and what is the success rate?
The one big benefit of credit counseling.
There is basically one major benefit of credit counseling programs–they get credit card companies to reduce the interest rate.  That’s the big trick.  If you can pay back debt at 5% to 10% versus 20% to 30% on credit cards, you pay back the debt faster and with fewer dollars.  Yes, credit counseling agencies go through a dog and pony show of reviewing your monthly budget and making suggestions like using coupons to shop, etc, but that is all for show.  To be honest, there isn’t a whole lot of real counseling in credit counseling agencies.  The name of the credit counseling game is to enroll new customers into a payment plan.  That’s how they make their money.  The counseling is generally lame, but the interest rate reductions are real and powerful.
But do these plans work?  Generally no.  Most credit counseling programs fail.  The success rate is about 25% to 40%. Cambridge Credit Counseling, Green Path and Incharge Debt Solutions are recommend because their success rates tend to be higher, around 40%.  But that still means that 60% to 75% of the plans fail. Would you agree to a surgery if the doctor told you that the survival rate was only 25%?

Credit counseling is a partial solution–it only handles some of the debt. A partial solution is really no solution at all.

Why do credit counseling plans fail?
Credit counseling plans fail for a lot of reasons. First, most folks cannot afford the payment even though the interest rates are lower. Second, there is no flexibility to the payment.  If you miss a single payment the entire program crashes and you must start over. Third, many creditors and most collection agencies refuse to participate in the plan. That means that some of your debts are paid in the plan but others continue to sue and garnish wages thus causing the plans to fail. Credit counseling is a partial solution–it only handles some of the debt. A partial solution is really no solution at all.  So, credit counseling generally works well for folks who mainly have credit card debt and where their basic problem is overspending and lack of budgeting, but credit counseling does not work well for folks whose general problem is that they lack sufficient income and their debts tend to be more collection agency debts instead of mainline credit card debt.  Credit counseling programs just are not equipped to handle garnishments, junk debt buyer lawsuits and local collection agencies.

Credit counselors need to acknowledge that their signature offering — the debt management plan — doesn’t work for everyone.”  Liz Weston

Even financial guru Liz Weston has written that there is a lack of real counseling going in in the credit counseling industry.  (See Do Debt Management Plans Work?)  According to Weston, too many folks are enrolled in debt management plans without even suggesting that bankruptcy might be a better option. Those credit counselors are suppose to be providing professional counseling advice, but Weston rightfully criticizes the industry as emphasizing profits over people.
The bankruptcy option.
The Bankruptcy Reform Act of 2005 required that every person filing bankruptcy take a credit counseling course before their case could be filed. The idea was that a lot of people would chose not to file bankruptcy if they could just speak with a credit counselor about payment options first. That idea proved to be wrong, terribly wrong. I have not met a single person who decided not to file bankruptcy after taking the required credit counseling  course–not one single person in the thousands of people I have represented since 2005.
But what if those folks deciding to enter credit counseling had to visit with a bankruptcy attorney first? I wonder how many would chose to file bankruptcy instead? What if a people really had ALL their options explained, not just some of them? I would guess that upwards to 40% to 50% of those entering debt management programs (and probably 80% of those entering debt settlement programs) would opt to file bankruptcy if they had the opportunity to compare the programs side by side.

What consumers lack is access to independent debt counseling professionals whose income is not dependent on the type of debt solution they recommend.

People in financial turmoil are lost. It has become impossible for consumers to figure out who is genuinely an an honest credit counselor from those who are wolves in sheep clothing pretending to be nonprofit counselors. Even the real credit counselors are trying to fatten their revenues by enrolling customers into payment plans when it is perfectly obvious that they would be much better off in the long run by declaring bankruptcy.  What consumers lack is access to independent debt counseling professionals whose income is not dependent on the type of debt solution they recommend. And going forward, that is the type of consumer law firm we are trying to become. More on that later.
Image courtesy of Flickr and GotCredit.
 
 
 

Debtor failed to do almost everything the law, rules and court requires of a chapter 13 debtor.
In re Hindra v. Dockery, US Trustee & Deutsche Bank, BAP No. CC-18-1132-KuTaF (9th Circuit, Jan 29, 2019) In 2016  Etta Hindra filed a chapter 13 bankruptcy and everything went downhill from there.  She did not file the proper documents, meet deadlines or pay the amounts necessary in order to cure the arrears owed to her mortgage company, plus much more (this blog is too short to list all the problems).  Ultimately the court dismissed her chapter 13 case for failure to comply with the chapter 13 process.  Ms. Hindra did not like the court’s ruling so she appealed to the Bankruptcy Appellate Panel “BAP”.  Once again, the law and rules governing the legal process were not followed so the BAP supported the bankruptcy court’s decision dismissing her case.  She then appealed to the Ninth Circuit, but once again failed.  So, she decided to go back to the Bankruptcy Court to try to reopen her case (you guessed it – she failed).
What is my point?  Know the law before jumping into the process.
Bankruptcy is like complicated surgery.  You would not give a scalpel to your three year old and say “do your best”, at least not if you want to live.  So why would anyone think they can walk into one of the most complicated legal processes, either not knowing or ignoring the law and rules; and ignoring advice from those within the process (the judge and the trustee).
But, I cannot afford an attorney to help with bankruptcy.

Believe me – I understand.  Having done this work for more than 35 years I have seen people of all walks of life and income levels.  There are lots of resources (free and otherwise) there for the asking.  Most consumer debtor attorneys offer free consultations (like our office).  I started the Self-Help Center at the Arizona Bankruptcy Court in 2005.  We have helped thousands learn what to do, and more importantly what not do.  Some were able to hire our volunteers or referred to other great attorneys, others were shown how to file their own bankruptcies.  Unfortunately, too many visitors to the Center came to us after they filed their own bankruptcy only to find out that they would lose their tax refunds and other non-exempt property.
You cannot help those who won’t listen to good advice
Would a good attorney be able to help Etta Hindra?  Perhaps, but looking over the description of her failures, my guess is that she may not have listened to even the more seasoned and patient bankruptcy lawyer.  Ms. Hindra actually started out with an attorney, but shortly the attorney bailed.  To be honest I don’t know why, the attorney had no idea how a chapter 13 case worked and that is why the whole bankruptcy went sideways.
MORAL: Know the law, please don’t be another debtor who fails to ask for help from an experienced attorney.

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