Housing Crisis Caused By 2005 Bankruptcy Law

The 2005 bankruptcy “reform” law was really about abuse of consumers and protection of banks.  Its lofty name “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” was no vehicle for consumer protection.  I have long felt that this effort to make consumers more “responsible” financially has contributed to the dramatic economic downturn we have experienced.  The negative publicity surrounding passage of the bill in April of 2005 caused a rush to the courthouse for many consumers.  The abrupt dropoff in filings after the effective date in October 2005, made it clear this legislation had a significant impact on the economy.

If scaring consumers by taking away some of the protection afforded by the bankruptcy laws makes them more responsible, it also seems to have contributed significantly to home loan defaults.  It makes sense.  Consumers have limited resources.  When they must dedicate more to payment of credit card debt, they have less money to pay their home loans.  Now, there is a study that documents that result.

A new paper written by three economists, Wenli Li of the Federal Reserve Bank of Philadelphia, Michelle White of the University of California San Diego, and Ning Zhu of the University of California, Davis, takes the position the 2005 bankruptcy legislation is a significant factor in the mortgage crisis and the recession it caused.  The abstract of this article is published by the National Bureau of Economic Research under the title Did Bankruptcy Reform Cause Mortgage Default to Rise?  It promotes the paper as arguing that “an unintended consequence of the reform was to cause mortgage default rates to rise.”

After looking at a large number of individual mortgages, the authors conclude that default rates increased by 14% in prime mortgages and 16% in subprime mortgages after enactment of the new law.  They find that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 caused an increase in home loan defaults of approximately 200,000 per year.

You can thank those corrupt senators and congressmen who took millions in campaign contributions from banks, credit unions and other consumer lenders for bringing on the recession we struggle with today.  However, in all honesty, it is the live for today attitude of most first world consumers that is the root of our problems.  The voters elect politicians who promise to lower taxes and increase spending.  These same voters expect public benefits to increase but are unwilling to pay the price for this largess.

By |May 11, 2010|Categories: Bankruptcy|Tags: , , , , |

Is Income Tax Dischargeable In Bankruptcy?

Income tax as well as some other types of tax can be discharged in bankruptcy if certain conditions are met.  This applies in consumer bankruptcy cases, both Chapter 7 and Chapter 13, and covers Federal, State and local income tax liability.  However, all requirements must be met before the bankruptcy is filed or the debt will remain collectible after the case is closed.  To be dischargeable in bankruptcy, income tax must meet the following requirements:

  1. The income tax return must have last been due more than three years before the bankruptcy;
  2. The tax return must have been filed at least two years prior to the bankruptcy (in some circuits it must have been timely);
  3. The tax must have been assessed by the government;
  4. The tax returns must not have been fraudulent; and,
  5. There must not have been a willful attempt to evade or defeat the tax.

When each of these conditions are met, and no exceptions to the rules apply, the tax can be discharged in the bankruptcy proceeding.

By |Apr 24, 2010|Categories: Bankruptcy, Tax Law|Tags: , |

What Is A Homestead Exemption?

Debtors often ask us what will happen to their home if they file for bankruptcy protection.  Fortunately, federal bankruptcy law and most states provide for what is often called a “homestead exemption”.  A homestead exemption acts as a shield against the claims of certain creditors.  It does this by protecting up to a specific dollar amount in real property.  Homestead exemptions are particularly important for debtors with equity in their home.  On the other hand, where a consensual lien on real property, such as a mortgage, exceeds the home’s value, the homestead exemption does not apply since there is usually no equity in the home to protect.

There are certain requirements for the homestead exemption to apply.  For instance, the real property typically must be kept as the debtor’s residence.   And depending on the state where the debtor resides, the debtor may elect to apply the federal homestead exemption over their state’s homestead exemption.  As of April 2010, the federal homestead exemption was $21,625.  Federal exemptions are not generally available to Oregon residents.  However, Oregon has protected much more home equity for its residents.

By |Apr 24, 2010|Categories: Bankruptcy, Uncategorized|Tags: , , , |

Nine Things The IRS Says about Penalties

Many of my clients come to see me about penalties assessed against them by the IRS.  For example, if you don’t file your return on time or if you do not pay your tax by the due date you may be assessed a penalty. The following is a list of nine things the IRS wants you to know about the two different penalties you may face if you do not pay or file on time.

By |Mar 15, 2010|Categories: Tax Law, Uncategorized|Tags: , |

How do I get my Tax Refund FAST?

RefundThe quickest way to get your refund is to e-file your tax return and have your refund directly deposited to your checking and/or savings account.

The IRS has certain dates on which they send direct deposits and when they mail paper checks. There is a seven day delay between the two dates which means that your direct deposit will be sent to your account(s) seven days before a paper check is even put in the mail.

The sending of your direct deposit refund could take as few as six days or as many as 15 days from the date that you filed your tax return. The reason for this is that returns are batched in groups by the IRS. Each group has a specific date span. For instance all returns e-filed between February 18th and February 25th will have their direct deposit refunds sent on March 5th or a paper check mailed on March 12th. The IRS has printed a convenient chart showing all 2010 dates through 10/21/2010.

By |Feb 8, 2010|Categories: Tax Law|Tags: , , |

Education Credits, The New American Opportunity Credit

dreamstime_5315071For tax years 2009 and 2010 undergraduate students may qualify for the Hope Credit (now called the American Opportunity Credit) for four years instead of two and be eligible for a refund of this credit up to 40% of the credit. Also what qualifies as education expenses for the Hope Credit has been expanded. This is great news since the Hope Credit offers the largest amount of credit – up to $2,500.00 per student.

Previous to tax year 2009, this credit was only available for the first two years of undergraduate education, was not refundable, and was limited to $1,800.00 per student. Also previous to 2009 books and supplies for school did not count as part of qualified education expenses. Now for a student’s first four years at a qualified educational institution, the credit has been expanded to include both tuition expenses as well as books and supplies.

By |Feb 8, 2010|Categories: Tax Law|Tags: , , , |