Author: tancincowp

Our office received the following email:  

“What is the best action to take with an upside-down house? My wife and I bought a house in Vegas and plan on retiring there early. We are in our mid 50s. It is a second home or vacation house for us. We own a house in the Southern California area. We are seriously considering letting go of our second house in Vegas due to our low interest only payment will expire in June of 1010 and the house is almost 60% less than the original price.

What if we decide to stop payment on the house and just let it go? What will be the consequences for this action? Can we be sued by the lender? What other options do we have?     

If the homeowner abandons the house and the lender then sells the property in a foreclosure sale for less than the loan amount, there arises the possibility of a “deficiency” judgment against the homeowner. Rules regarding deficiency judgments differ from State to State; hence, individuals in the same situation may have different options or consequences depending on which State their property is located. In.  For the State of Nevada, however, lenders do have the right to a deficiency judgment. Thus, abandoning you house may not necessarily clear you of all liability.

The good news for this homeowner, however, is that not all lenders may decide to sue the homeowner for a deficiency judgment. Some lenders do. Some lenders don’t.  Some lenders may decide not to come after you with a deficiency judgment as they may decide that additional expense of collecting the deficiency from a homeowner would not be justified by what, if any, they would be able to collect from the homeowner.

The bad news, however, is that even when the lender decides not to enforce a deficiency judgment the homeowner may still not be completely free from liability. In these deficiency cases, the lender may instead issue the homeowner an IRS form 1099 for the deficiency.  This means that the deficiency was considered as a “loss” by the lender but is to be considered as an “income” to the homeowner. The net result is that you will now have a taxable income that you will owe Uncle Sam. This may not sound fair as you got nothing out of the transaction, but that is indeed a taxable income under IRS rules.    

To be completely relieved of liability, the filing of a bankruptcy petition may or may not be an option depending on the equity the homeowner has on his primary home in Southern California, the homeowner’s family income, his other assets (if any) and other financial factors.  Other than that, the homeowner may be stuck with a deficiency judgment or a tax bill. Neither one sounds like a nice result.  

Readers should, however, be aware that deficiency judgment rules differ from State to State. In California, for example, extra judicial foreclosure of properties (which is the faster and preferred way to foreclose by most lenders) does not give rise to a deficiency judgment.  Likewise, the facts given by our homeowner refers to a second home (and, not a primary home).  Taxation rules may differ when a primary home is involved as the Mortgage Forgiveness Debt Relief Act (valid until 2012) makes foreclosure deficiency non-taxable as regards purchase money loans on primary homes.  

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)

You have probably come across ads by companies offering to settle your credit card bills for pennies on the dollar claiming that their services will cut your bills and save you thousands of dollars. If you have already maxed out your credit card balances and are already drowning in credit card debts, these offers would sound like the very solution you need. Do these offers sound like a scam? Or, can debt settlement firms really help you reduce your debts?

How does a debt settlement firm work? The debt settlement firms operate by collecting money from you every month. In the meantime, they do not pay your creditors. They merely put the money they collect from you in a trust fund. When you have already built up enough funds, they then negotiate with the creditors for a reduced payment and pay-off your bills in full. In theory, this is the way it is supposed to work 

The reality, however, may be different.

Before you sign up, you need to consider a few things. First, you need to consider the fees being charged. The fees charged differ for each company. There is no industry standard. Typically, however, there is an initial set-up fee and a monthly fee that a client is supposed to pay month after month.  This being an unregulated business, it is not unusual for clients to learn later on, that these firms together with the client’s money have vanished.

Clients make monthly payments to these firms thinking that these firms are already taking care of their debts. This is not so.  You need to know that during all the months that the debt-settlement company is collecting from you and trying to build up enough funds to pay off the creditors, it does not settle anything at the beginning. In the meantime, all your credit card obligations remain unpaid, the unpaid bills are still affecting your credit scores and you may still continue to get collection calls from your creditors.   

There are also usually high dropout rates from clients before the company reaches a settlement with their creditors. Let’s say, for example: that a client owes $20,000 in credit card debts. Assuming that a debt settlement firm intends to settle that  $20,000 debt at 50% off or at $10,000; and, assuming also that a debtor pays $500 a month into the trust fund of the debt settlement firm, it will take 20 months for that $500 monthly contribution to reach $10,000.  During those 20 months when the firm is not doing anything on your debt, the debtor still pays a monthly fee to the firm in addition to the $500 a month payment accumulated in the trust fund.  Note that while your fund is accumulating for the next 20 months the debt settlement firm does nothing to reduce or cancel your debt. After 20 months, the firm may indeed be able to settle the debt for $10,000 but chances are the lender will not even wait for 20 months without doing anything. Chances are, the lender will initiate a collection suit in court long before 20 months. At this time, the debt settlement firms cannot do anything, as they are not authorized to practice law in a collection lawsuit. Thus, clients end up in exactly the same place they were before …… with unpaid debts and a collection lawsuit to boot.

You should also consider that debt-settlement has tax consequences. The amount forgiven by a creditor may be a taxable income. This is money that you now owe to the IRS. The problem with this is that if a client ultimately has to file for bankruptcy, it may put some clients in a worse situation. This is because tax debts may not be dischargeable in bankruptcy while the credit card debt was a dischargeable debt.

So, when is debt-settlement right for you?  
 
Debt settlement would probably be a good solution for only a small portion of the population.  You would probably be a good candidate for debt-settlement if you are ready to file for bankruptcy but do not qualify for a Chapter 7 filing (If a client qualifies for Chapter 7, most people would just file Chapter 7 and get a discharge on all the debts instead of only a portion of it in a debt-settlement).  On the other hand, in a Chapter 13 filing a client will be obligated to schedule a payment of debts with creditors over a 3 to 5 year period. Hence, in these kinds of cases, debt-settlement may be a viable alternative instead of filing for Chapter 13. 

Debt settlement companies do provide a service. However, it is in your interest to do the legwork first and find out if it is the right solution for you for the specific situation that you are in.    

(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old.  Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)