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4 September 2010

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California Leaving the Union?

Dec 15 at 11:11pm by Kristine Doluche

Cited: DailyNews

SecessionAccording to an editorial in the Daily News, California is in a state of denial right now.  Mainly because a high-ranking government official made the suggestion they drop out of the union.  The reason that it was suggested is because of their unmanageable financial disaster.  And it seems that flag companies may be working double time to make new flags with 49 states instead of 50.

In that editorial, you were told how the catastrophic state budget crisis has been a boon for one-way truck rentals as taxpayers and businesses move to greener pastures. Well, now the editor discovered another industry poised for a huge pay day courtesy of years of California’s reckless mismanagement. So, cash in your savings bonds, dig up those gold bars you buried under the compost heap and buy, buy, buy stock in the flag industry!

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This isn’t 1959 nostalgia. Dropping a state from the union is an actual idea considered by a high ranking government official. Twenty guesses which state we’re talking about? Have the Carolinas finally gotten together? Have the Virginias kissed and made up after that silly Civil War spat? Perhaps somebody figured out we don’t really need two Dakotas? Of course not. The endangered star on the flag is the home of the stars. California is considering voting itself off the island.

Michael Genest, director of the California Department of Finance, told The Wall Street Journal he, “Literally looked at the federal Constitution to see if there was a way for states to return to territory status.”

This isn’t a story from The Onion. This really happened! The top financial advisor to Gov. Schwarzenegger actually thumbed through the U.S. Constitution to see if California could revert to territorial status! His scheme would make our budget mess the federal government’s budget mess, as if they need any help. Let me repeat, one of the top financial policymakers in California is so despondent of a fix he considered giving up statehood! Sorry for all the exclamation points, but seriously, a Hollywood Boulevard crazy with tinfoil on his head couldn’t come up with something this desperate.

On the other hand, with a budget hole of $21 billion – a staggering 49.3% of the general revenue fund – and a political system bereft of leadership or common sense, maybe Mike Genest isn’t so crazy. He who lives in Los Angeles shouldn’t be so quick to point at other people’s tinfoil hats.

As long as we’re talking about flags, its time someone yanks that bear off the state banner and sticks an ostrich up there, since it’s obvious no one in California wants to deal with fiscal reality. Our debt is so massive it’s created its own gravity, morphing into a fiscal black hole that’s sucking up everything in its path. For nearly a decade we’ve blown past every red light, every warning, and legislated as if bubbles never burst. At the polls we OK’d hugely expensive ballot measures with zero concern for how we’d pay for them, “Yippee! High speed trains for everyone!” We’ve chased schemes and dreams as irresponsible and greedy as the most avaricious Wall Street robber baron.

The shock and outrage of the college students protesting the recent huge tuition and fee hikes at the UC system is understandable. Waking up one morning to find your tuition bills are a third higher is a real kick in the wallet. However, the chanting protesters at UCLA and other campuses revealed a sad ignorance; the solution, so many protesters insist, is higher taxes on businesses and the rich. What do they think California’s been doing? How do you think we got into this mess?

There’s nothing less ideological than a spreadsheet. Yet, our universities are producing highly educated people who believe they are entitled to other people’s money. We’ve also elected assemblyman after assemblyman, senator after senator, city councilman after city councilman who thinks job creators and taxpayers are ATM machines. Yet, all those beautiful buildings on the UCLA campus have some rich person’s name attached. The protesting students apparently ducked class the day their economics professors taught a simple truth: The government doesn’t have any money, not a single penny. All “government” money comes from the people. It comes out of their parents’ paychecks.

The fiscal maturity of Californians is low.  Californians need to realize that if they want safe streets they need to pay cops, courts and jails.  They need to realize that more green from their wallets will make for a Green planet.  They need to realize that they want low tuition as well as multimillion dollar science centers; they need a better state economy that allows industry to create jobs instead of a punitive business environment that repels them.  They also need to realize that a few more rich people need to want their names on buildings in campuses and cities.

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My Take: I do believe that it is against the law to secede from the union.  After the US Civil War, Congress made it even legal to do so.  I cannot even imagine why any state government official would even consider it!  I remember when Ronald Reagan was governor of California; he put them in the black.  He left that state with a balanced budget.

Maybe some of those government officials need to sweat a little more by doing a Pilates workout.  It seemed to be sweating over everything else including the state budget.  Arizona State budget is ingested bad condition, but you do not hear Arizona wanting to leave the union.  That is because our politicians are not stupid.  They are probably in a Pilates exercise program to sweat out all their frustrations.

I bet there is one thing about those politicians over there in California that smoke, they must be going crazy because they cannot smoke in a government building.  Of course, if they have the Njoy they do not need to worry too much.  If they got their Njoy starter kit, it included battery charger and an extra battery so they would not run out of smoke.

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Other Resources

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Goldman Sachs Partially Blamed for Recession

Dec 15 at 11:11pm by Kristine Doluche

Cited: Reuters

Goldman Sachs 1A New York Times editor strongly suggested that Goldman Sachs make a multibillion-dollar gift to the government instead of paying executives big bonuses to help reduce the US national debt because of its role in the financial crisis.  That editorial was dated November 21 on the Times’ website and then published the 22nd in print.  It attacked Goldman for everything from its top executive’s failure to apologize properly for his part in creating the crisis as well as Goldman’s giving bonuses related to profits that were boosted by the government bailout.

The Times sniffed at Goldman CEO Lloyd Blankfein’s acknowledgment last week that his bank “participated in things that were clearly wrong,” saying that he was not specific about what the company had done wrong and his remarks did not “come close to an apology.”

It cited the company’s ability to set aside $16.7 billion for bonuses this year as it was able to post “blowout profits” after receiving a $10 billion government bailout and $12.9 billion in payments and collateral in relation to the government bailout of American International Group.

The paper described Goldman’s pledge earlier this week of $500 million over five years to help small businesses as “crumbs from its table,” saying it should do much more.

“The money will be welcomed by recipients, but if Goldman wants to make a meaningful contribution, it would have to be in the billions and aimed more directly at taxpayers,” the Times said.

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A contribution could also help Goldman ward off “serious calls for a windfall tax on bonuses, which would be justified since the profits they are based on are in a large part the result of government efforts,” the editorial said.

In another story published in the Times on Saturday, Gretchen Morgenson quotes Janet Tavakoli, an expert in derivatives at consulting firm Tavakoli Structured Finance, who urged Goldman to repay money from the AIG bailout, saying Goldman should be forced to take back toxic collateralized debt obligations, or CDOs, which had been insured with AIG.

“The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening freefall, and the cost of replacing AIG’s protection would have been sky-high,” she said. “Goldman must have known this, because it underwrote some of those value-destroying CDOs.”

“Goldman should do this before it gives bonuses to “taxpayer-protected employees,” Tavakoli said in the Times report.

Again the article suggested that Goldman Sachs return the favor to help small businesses and taxpayers to help it out in its time of need.  It also suggested that the Federal Bureau of Public Debt begin accepting tax-deductible donations that can help reduce the national debt and urged Goldman Sachs to donate. The paper said that a multibillion-dollar donation from Goldman could be made in such a way that it does not harm shareholders, noting that the related tax savings could help finance the company’s small-business initiative.

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My Take: I agree!  If they can afford to pay outrageous bonuses for profits that were received after their bailout, they should help pay the national debt too.  As a taxpayer, I am not willing to pay bonuses to executives who earn too much as it is.

Get real that would be like hiring a NC social security disability attorney for a broken leg.  That is nothing but a waste of money.  That is like buying Scentsy candles and not buying the Scentsy candle warmer to go with it.  You cannot light these candles without a wick, you need Scentsy warmer to melt the candle and smell it.  Even North Carolina bankruptcy attorneys can see the stupidity in this action.

If the company will not make the donations, then the executives should donate their bonuses.  It may not be a multibillion-dollar donation, but it sure would help.  According to the news, the recession is really getting bad and there are more people becoming unemployed.  They could use a little help!

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Other Resources

Relaxation under Pressure

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The Frustration of Bad Debt Part 4

Dec 15 at 11:11pm by Kristine Doluche

Continued from “The Frustration of Bad Debt Part 3”

Bad Debt 3Cited: ABA Journal

Consequences for Creditors

Bad-Debt Deduction

An ordinary bad debt deduction under IRC section 166 entitlements may be allowed a creditor cancels the debt either by reducing the principal or accepting property worth less than the debt amount in full satisfaction of the debt.  The roles governing deductibility depend on whether the bad debt is business related or non-business related except for C corporations.

The creditor may deduct a non-business bad debt as a short-term capital loss, while a business bad debt is entitled to an ordinary deduction from income. The difference matters. Although an ordinary deduction may be taken in full, a short-term capital loss may only offset capital gains, plus, in the case of individual taxpayers, $3,000 of other income.

To claim the deduction for a business bad debt, the creditor must establish that the debt became worthless during the taxable year in which it is being claimed—in other words, there is, in the creditor’s sound business judgment, no reasonable hope for recovery. That shouldn’t be too difficult to establish in the case of many debts during the current economic woes.

If, however, a creditor claims a bad-debt deduction and later recovers all or a portion of the bad debt, part of the recovered amount may be includable in the creditor’s income for the year in which it was recovered.

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Sale or Exchange

To the extent that the creditor receives something in exchange for the debt—such as the underlying collateral, a modified debt instrument or an equity interest—the creditor will recognize gain or loss under IRC section 1001 equal to the difference between the value of what was re­ceived and the creditor’s adjusted basis in the debt.

The character of the gain or loss is determined by the character of the debt instrument in the creditor’s hands. If the creditor repossesses the underlying property, it takes a basis in the property equal to the amount of the debt satisfied plus any gain recognized.

Special rules (described in IRC section 1038) gov­ern repossession of seller-financed real property, which can occur directly or through purchase in a foreclosure sale. In such cases, the seller does not recognize loss, nor is it entitled to a bad-debt deduction. But any gain is limited to the amount of cash (or the fair market value of other property) received prior to the repossession with respect to the sale of the property, less the amount of gain on the sale of the property already included in income, and any repossession costs.

If, after applying the value of the property to the unpaid debt, there still remains unsatisfied debt, the creditor may deduct that amount as bad debt.

The creditor must be sure to file the appropriate tax forms when it cancels debt or acquires an interest in property in a foreclosure or repossession. The creditor must send copies of any required informational forms to the debtor.

For a couple facing foreclosure or the owner of a small business struggling to make ends meet, the need to take tax consequences into account when trying to restructure debt might seem like adding insult to injury. But the reality is that there are few, if any, financial transactions that do not have tax consequences.

Ignoring them is not an appropriate strategy.

Understanding the applicable tax rules is the best approach so that debt reconstruction minimizes the debtor’s tax liabilities.  Ignoring debt only makes the problem worse.

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My Take: I definitely agree with the last part of this article.  You cannot ignore debt!  Besides ruining your credit, you will probably end up in the poor house for the rest of your life.  And credit cards are usually the one thing in the financial world that causes a lot of debt.

The financial wizard, who came up with the idea of credit cards, definitely came up with a better mousetrap.  When businesses started credit card processing, the debt in our country grew.  Today, if you do not find a business that uses a merchant account, it is an unusual event.

Do not get me wrong, credit cards and cells are not the problem.  It is the people who use them and how they use them.  Businesses utilize various forms of advertising and promotional bags to entice customers to purchase products.  People will sometimes take advantage of these things just to get the offered custom plastic bags instead of buying just a tote.  This is the kind of activity that causes debt and credit cards.

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Enough Is Enough!

Debt is a burden as everybody knows and nobody wants to be harassed or threatened because of a debt.  So when a collector or lawyer tells you something that just does not make sense, you should contact FCRA lawyers.  It makes no difference if you owe the debt for some portion of the debt and have fallen behind, it does not give anybody the right to harass you.  If you have had enough, contact collection harassment lawyers who can explain the “Fair Debt Collection Practices Act of 1977″ to you and the fact that you can sue the collector for harassment.

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The Frustration of Bad Debt Part 3

Dec 15 at 11:11pm by Kristine Doluche

Continued from “The Frustration of Bad Debt Part 2”

Cited: ABA Journal

Bad Debt 2Attribute Reduction:

It was mentioned in the previous part that the price for excluding CD income that the debtor must reduce certain specified tax attributes when reducing a debt.  That means a debtor who declares bankruptcy, insolvency or qualified farm indebtedness that excludes COD income must reduce their tax attributes in the following order:

  • net operating losses
  • general business credits
  • alternative minimum tax credits
  • capital loss carryovers
  • basis of assets
  • passive activity loss and credit carryovers
  • foreign tax credit carryovers.

The credits are reduced at the rate of 331⁄3 cents for each dollar of excluded COD income. The other attributes are reduced on a dollar-for-dollar basis.

The reduction in attributes is made after the determination of taxes for the taxable year of the debt discharge. That means attributes arising in or carried to the year of the discharge may be used to reduce income or tax for the year of the discharge, and the remaining attributes themselves are reduced for the following year.

Flexibility in the rules for reducing attributes allows a debtor, with careful planning, to apply the rules to best advantage. Instead of reducing attributes in the order prescribed above, the debtor may elect, pursuant to IRC section 1017, to first reduce the basis of its depreciable property. In that way, the debtor may choose to preserve net operating losses for future years.

The exclusions from COD income for qualified principal residence debt and qualified real property business debt specifically provide for a reduction in the basis of the property securing the debt instead of following the ordering rules for attribute reductions.

Temporary Deferral of COD Income:

Congress provided additional—albeit temporary—relief to beleaguered debtors when it included a tem­porary deferral rule in the American Recovery and Reinvest­ment Act that became law earlier this year.

A couple of definitions will help explain the temporary deferral rule: An applicable debt instrument is one issued by an individual, corporation or other entity in connection with the conduct of a trade or business. This is broadly defined to include any bond, debenture note, certificate, or other instrument or contractual arrangement constituting indebtedness within the meaning of IRC section 1275.

A reacquisition of an applicable debt instrument may be made by the issuing debtor in one of the following ways: (1) acquisition for cash or other property; (2) exchange of the debt instrument for another debt instrument (including an exchange that results in a signifi­cant modification); (3) exchange of the debt instrument for corporate stock or a partnership interest; (4) contribution of a debt instrument to capital; or (5) complete forgiveness of a debt instrument by the holder.

Now, the rule: An eligible debtor may elect to defer COD income arising from its reacquisition of an applicable debt instrument during calendar years 2009 or 2010, in accordance with IRC section 108(i). The debtor may include the income ratably over a five-year period beginning in the fifth tax year following a reacquisition that occurs in 2009 and the fourth tax year for a reacquisition occurring in 2010. (See IRS Revenue Procedure 2009-37 for additional guidance.)

The debtor may make a deferral election separately for each applicable debt instrument that is reacquired. The election may apply to all or only a portion of the COD income that results from each instrument. Once made, a deferral election is irrevocable. Debtors who are not sure whether they will be deemed to have realized COD income in 2009 or 2010 may file protective elections under section 108(i).

If the debtor elects to defer, then the other exclusions from COD income are not applicable. But because the deferral election may apply to only a portion of COD income, the debtor has the flexibility to exclude some of it and defer other COD income. An insolvent debtor, for example, might elect to exclude COD income and reduce tax attributes to the extent of the debtor’s insolvency, but defer any COD income in excess of its insolvency.

If the taxpayer dies, liquid dates, or cells substantially all assets or ceases to do business, any COD income that is deferred under section 108(i) will be accelerated and added to income for that catch your.

Continued in “The Frustration of Bad Debt Part 4”

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My Take: I think after this humongous article, I would rather hire an accountant to take care of it.  Because if I tried to take care of it my family would be hunting for a burial urn, I would probably have a stroke trying to figure it all out.

I wonder if you would be going through prison metal detectors if you missed all this up.  Of course, hopefully you would be going through a walk through metal detector to visit someone in prison instead of being there yourself.  Of course, nobody wants to go to prison over debt or taxes so would be a good idea to get professional assistance.

You just need to make sure you know what can be deducted or excluded.  I doubt pet keepsake urns would fit either of these criteria.  Now, you might be able to take off Virginia cleaning services if they are used for your business.  Now if it is for medical reasons, you might be able to take Washington DC maid service off your taxes.

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Other Resources

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Is Below-Market Secured Valuable?

Dec 9 at 8:08pm by Kristine Doluche

Cited: Law.com

charterheadqsI bring you an old story with a new twist that is as old as borrowers, lenders and the bankruptcy code itself.  It seems that one judge wants to help a company get reorganized to alleviate its debt.

On Oct. 15, Southern District of New York Bankruptcy Judge James Peck stated that he would confirm the joint plan of reorganization of Charter Communications Inc. over the hard-fought objection of a group of its secured lenders lead by JP Morgan Chase Bank as administrative agent. Charter holds itself out as the fourth largest cable operator in the United States, providing high-speed Internet, telephone and video service to approximately 5.5 million customers maintaining a 27-state footprint and employing more than 16,000 people.

More impressive than the size of its operations was Charter’s ability to lose money. Even one of the wealthiest people on earth found Charter’s losses unsustainable. “After investing and losing more than $8 billion in the Charter enterprise,” Paul Allen said “enough.”

What Charter lost in equity, however, it more than held onto in debt. Charter’s secured creditors were owed an aggregate of approximately $11.8 billion in the case. Even worse, from their perspective, the interest rate on those billions of dollars of debt was substantially below the current market rate. As a result, rather than seek to modify its loans through a cram down and thereby reset the lenders’ interest rates at a higher market rate, Charter sought to “reinstate” the loans and retain the benefit of below-market rates. To reinstate the loans, Charter would have to convince the court that the lenders’ legal and equitable rights would be unaffected after the bankruptcy case and that all defaults would be cured by the plan’s effective date, i.e., the lenders would have the full benefit of their prepetition bargain notwithstanding the intervening bankruptcy.

Reinstatement is specifically contemplated by the Bankruptcy Code. It has been recognized by courts as a viable treatment of secured creditors for purposes of confirmation for more than 25 years.  During a 16-day trial, Charter and its lenders did battle the way most debtors and secured creditors do: Charter argued economic substance and what results are “right,” while the lenders responded with technical arguments under the loan documents and process rights under the Bankruptcy Code. Charter, for example, in framing the arguments that it anticipated at confirmation, spoke of lenders receiving “the complete benefit of their bargain with Charter.”

It also stated that reinstatement is “globally intended” to put debt “back on track and effect a reorganization “and that lenders should not be allowed to “extract improper windfalls at the expense of the debtors’ estates.”

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In response, the lenders identified numerous “incurable” defaults that Charter had tripped (e.g., change of control, breaches of past and future representations and Charter’s inability to reinstate due to acceleration) thereby making reinstatement impossible. Further, the lenders pointed out that Charter had the burden of proving the elements of reinstatement, and, they argued, Charter’s proof fell short.

At the end of the day, however, the Court sided with Charter, concluding that the lenders’ $11.8 billion of debt could be reinstated by Charter, resulting in an interest savings to Charter of more than $500 million per year. The actual ruling and order have not yet been issued, but the court indicated it would enter a written ruling in the near future.

So if reinstatement has been available to debtors for over a quarter century, what is the new twist? The twist is current-day economics. Although reinstatement as a theory has been around for years, the economic incentive to utilize the practice has not been as compelling as it is today. In the frothy liquidity days earlier in this decade, capital was readily available. Banks, private equity funds, CMBS facilities and others were pumping hundreds of billions of dollars of fresh cash into the economy annually. Companies were expanding, revenues were increasing year after year and everyone in the capital markets wanted to be a part of it. Both competition and broad-based access to funds pushed debt pricing down. Debtors even utilized the Chapter 11 process to take advantage of these lower market rates.

That has changed. In the current economic climate, debt is more expensive, if it is even available. New debt pricing at the market rate would have cost Charter approximately $500 million per year in increased interest costs. That created a powerful incentive for Charter to seek reinstatement of its existing indebtedness. While debtors historically have utilized bankruptcy to get a better deal, Charter utilized the process to hold onto what it had.

Will the same economic incentives drive additional bankruptcy filings, or at least cause companies to file sooner?

More than ever before, debtors in the current capital-constrained market have a powerful incentive to place their debt-strapped companies in bankruptcy before there is a default on secured indebtedness and lenders can effectively accelerate their debt. The interest rate pricing differential, as in the case of Charter, may be a significant corporate asset that boards of directors will have to carefully evaluate in determining whether and when to file bankruptcy cases.

Only time will tell whether there are enough other debt-strapped debtors living in the perfect storm of:

  1. Huge amounts of secured indebtedness (enough to justify the transactional costs and market risks of a significant Chapter 11 war)
  2. borrowed at significantly below current market rates,
  3. whose boards and advisers can see far enough ahead to know that a “sooner than normal” bankruptcy filing is essential.

It is hard to tell how often these three elements will converge, or whether companies realistically can be expected to assess when all the reasons for a pre-default filing are aligned. A decision to file before a secured debt facility is even in default would be counterintuitive to most directors. One thing is certain, however, sophisticated boards and management of large companies will now have to consider the “Charter Reinstatement Scenario” should their companies approach the zone of insolvency.

A partner in Bankruptcy & Workouts practice group at Perkins Coie, Stephen M. Hedberg, has more than two decades of experience working with clients.  It is his job to help them solve complex commercial and economic issues related to insolvent companies.  At present, he is a member of the firm’s Management and Executive Committees and is based in the Portland office.

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My Take: If the average person can do it, so can a corporation.  Besides, a corporation is considered an entity like a person.  That is why corporations can get away with so much.  You never hear about a corporation needing a criminal lawyer Denver CO or a New Jersey child molestation law firm, do you?  You do your about them getting Beaverton OR bankruptcy attorney though!

It would be a big joke to hear about a corporation who hired divorce lawyers Denver CO or Freehold reckless driving attorneys.  It would be absolutely hilarious to hear about a corporation hiring a Portland OR personal injury attorney because somebody drove their car into their lobby.

Fact is, a corporation can get away with so much more than a person can is ridiculous.  The only person that could actually be held responsible and corporation might be the CEO.  Then again, he may not have known anything about what had.

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Related Resources

Provincial Offences Advocacy

A Toronto provincial offence is commenced in one of two ways. Either you receive a ticket. This ticket will have a dollar value amount on the front of it and the officer’s name appears at the top just below a 4 digit number and an 8 digit number. Or you may receive a summons. This document looks like a ticket only it does not have a dollar value. Instead, it has a date, time and place where you are “commanded by Her Majesty” to appear in Court.  A criminal charge begins when you are summoned or to Court by the police. You will often receive a document called a “Promise to Appear”, “Summons to defendant”, “recognizance entered into before an officer in charge or another peace officer”, or other similar document. In some cases, you may be physically detained in custody and kept there until you appear in bail court.  It which time you may need in Toronto assault lawyer.

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The Frustration of Bad Debt Part 2

Dec 9 at 8:08pm by Kristine Doluche

Continued from “The Frustration of Bad Debt Part 1”

Cited: ABA Journal

Bad Debt 5Modification of Debt

By reducing the interest rate or extending the maturity date a creditor may agree to modify the terms of a loan or other debt.  If this is defined as “significant” under the Treasury regulation section 1.1001-3 will determine the tax consequences of such a modification.

Generally, a modification is significant under the regulation only if, based on all the facts and circumstances, the legal rights or obligations are altered in an economic manner and to a degree that changes the character of the debt in a major way.

A modification that changes the timing of payments, for instance, is significant if it results in the “material” deferral of scheduled payments. A deferral will be material if it extends a payment period more than five years or more than half of the original term of the loan, whichever is less. Other significant modifications in a debt may be indicated by changes in its yield to the creditor; the substitution of a new obligor replacing the original debtor on a recourse debt; a change in the collateral or guarantee on a nonrecourse debt; or changing the debt instrument from recourse to nonrecourse, or vice versa.

If the debt modification is not significant under the definition of the Treasury regulations, or if it was contemplated or provided for in the original debt instrument, then it generally has no tax effect.

If the modification is significant, however, the debt is deemed to be exchanged for new debt in a taxable exchange under IRC section 1001. In that case, the debtor will generally be treated as having satisfied the old debt with an amount of money equal to the issue price of the new debt.

Exclusions from COD Income

As discussed above, the general rule is that cancellation-of-debt income is treated for federal tax purposes as ordinary income to the debtor.

But COD income may be excluded if the debtor falls within certain exceptions enumerated in Internal Revenue Code section 108. (In the case of debtors that are partnerships, the exclusions are applied at the partner level; for S corporations, the exclusions are applied at the corporate level.)

The two most important exclusions are for bankruptcy and insolvency.

COD income is not recognized for tax purposes if the discharge of the debt occurs in a federal bankruptcy proceeding pursuant to a plan approved by the court—whether filed under chapters 7, 11 or 13. Under the bankruptcy exclusion, there is no limit on the amount of COD income that may be excluded.

The insolvency exclusion, however, applies only when, and to the extent, a debtor’s liabilities exceed the fair market value of assets determined immediately before the discharge, and income may only be excluded to the extent of the insolvency.

Assets exempt from the claims of creditors must be counted in determining whether the debtor qualifies for the insolvency exclusion. This could be a factor as to whether the debtor seeks to use the insolvency exclusion or, instead, restructure in a formal bankruptcy proceeding.Bad Debt 4

Contingent liability is another factor in the insolvency computation. In 1999, the 9th U.S. Circuit Court of Appeals based in San Francisco ruled in Merkel v. Commissioner that a contingent liability should be counted toward insolvency only if the debtor proves by a preponderance of the evidence that he or she will be called upon to pay that liability. This is an all-or-nothing test that makes it more difficult for debtors to establish that contingent liabilities should be taken into account to establish insolvency.

There are other exclusions from cancellation of debt income that may be available to debtors under IRC section 108:

  • Qualified Farm Indebtedness.  A debtor may exclude COD income resulting from the cancellation of “qualified farm indebtedness,” which is debt incurred directly in connection with farming operations, if 50 percent or more of the debtor’s aggregate gross receipts for the three taxable years preceding the taxable year in which the discharge occurs is attributable to the trade or business of farming. The excluded amount may not exceed the sum of the adjusted tax attributes of the debtor and the aggregate adjusted bases of property held or used in a trade or business, or for production of income.
  • Student Loans. This exclusion applies to certain student loans, but the discharge of the loan must be pursuant to a provision of the loan under which all or part of the indebtedness is discharged if the individual works for a certain period of time in certain professions for any of a broad class of employers.
  • Qualified Real Property Business Indebtedness. This is debt incurred or assumed to acquire, construct or substantially improve real property used in trade or business, and that is secured by the property. But this exclusion, which is available only to noncorporate debtors, may not be used if the cancellation of debt occurs in the course of a bankruptcy proceeding or if the debtor is insolvent. The amount excluded generally may not exceed the amount by which the principal amount of the discharged debt exceeds the fair market value of the property securing the debt.
  • Qualified Principal Residence Indebt­edness. Under the Mortgage Forgiveness Debt Relief Act of 2007, this exclusion applies only to the discharge of this kind of debt if it occurs on or after Jan. 1, 2006, and before Jan. 1, 2013. The indebtedness must be incurred to acquire, construct or substantially improve any qualified principal residence, and be secured by that property. The exclusion is limited to $2 million of COD income for a married couple filing jointly ($1 million for single filers and married persons filing separately), and it must be used to reduce the basis of the principal residence.

Those portions of the indebtedness can be considered to have been canceled first and therefore be treated as COD income if the indebtedness exceeds a certain monetary limit or a portion of it is used for a nonqualified purpose.

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My Take: Again, you need to be an accountant to understand this article.  When people think of bad debt they think of all the phone calls they are going to get from the company they own money to.  I think those companies actually use a call center to make those calls.  Of course, with all the bad debt that is going around right now, it does mean that somebody is getting the job, which is a good thing.

A contact center can provide customers a way to contact the business if they have a problem with a product or service.  But the bright spot is the employment, people getting a job because of somebody’s bad debt.  I just hope that the company utilizes good payroll services.  If they have good custom payroll program, they should not have any problems with employees not doing their job.

There is also a way to help your bad debt if you happen to have an old car sitting in your yard that does not work.  There are junk car removal services that will come and remove that old car from your yard for free when they purchase it.  There is a service that will buy junk cars online.  If it does not help with your debt, at least it’ll put groceries in the house.

Continued in “The Frustration of Bad DebtPart  3”

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Organizing Finances after the Wedding

Dec 4 at 1:01pm by Kristine Doluche

Cited: Insurance.com

WeddingOne of the most important things in any relationship is communication and this is even true when it concerns your financial relationship with your spouse.  If you do not communicate about your finances, how can you plan for your future or your children’s future?

To organize your finances into one, it is important to have open communication with your significant other and to figure out what your net worth truly is as a married couple. To do this, list your assets in one column, and your liabilities in another. Subtract your liabilities from your assets, and the final product is your total net worth. Your net worth can give you a good look at your overall financial picture, and if in the event your results are low, you and your significant other can then develop a financial plan.

It is also important to discuss your short-term and long-term financial goals. For example, a good thing to do would be to make a list of your short-term goals like planning a family vacation and your long-term financial goals like saving for a new house or retirement. Then prioritize your goals by matter of importance, and then ask yourself these key questions:

  • What can I do to accomplish these goals?
  • How much will we need to save to accomplish these goals?
  • Is one investment better to use towards it, rather than another?
  • Will accomplishing one goal ultimately help us accomplish another?

Number Crunching

Preparing a monthly financial budget is a good idea to keep track of how much money you spend, and to see where it’s exactly going to. Be sure to include your monthly income and expenses so you can see if you’re spending within your means-list your income (salary, wages, alimony, interest and child support) and your expenses (rent, mortgage payments, groceries, student loan payments etc.). Add your expenses and then your incomes and compare the totals. The result should be that you spend less than you make, but if that’s not the case, review your expenses and see if you have anything you can cut out to make it so. Always monitor your budget and make periodic adjustments where you see fit.

Note: It may be a good idea to seek professional advice from a financial planner or research on the internet when it comes to developing financial plans and budgets. For long-term investment goals, it may make more sense to prepare an annual budget rather than a monthly one.

Merging bank accounts when you get married

There are pros/cons to keeping separate accounts and or combining your money into a joint account when you get married. Consolidating your funds into one account makes it easier to apply for a loan, manage funds, organize bookkeeping and reduce maintenance fees. A downside to consolidation is that it’s more difficult to keep track of how much money is spent and available when there are two individuals writing checks. Also, in the event you and your significant other split, you both still have access to the funds, which technically means one person could take all the money and run.

Joint credit cards

There may come a time in your marriage where you want to apply for a joint credit card, but you should note that when you do this, you are both responsible for 100% of the debt you incur. Keep that in mind before you add your name to a spouse’s credit card or before you decide to co-sign an account for your significant other.

It would make sense to assume that spouses wouldn’t be held accountable for the other’s credit card if they maintained separate cards, but in some states, this is not true. Both spouses may be held accountable for credit card debt incurred by one spouse if the debt is considered a family expense like groceries or child care. In states considered community property states, spouses may be held accountable for the other’s credit card debt if the property that underlies the debt is listed as being both of theirs.

On the road to retirement

Different retirement plans have different features and characteristics, so it is important to evaluate both plans if you each have one. You may find out that one is more beneficial than the other, offering loan provisions, investment options or matching contributions. If in the event a budget limits your ability to take advantage of two plans, review both options and determine which provides the best benefits and focus on an investment strategy towards that particular plan.

Insurances: Which one is better?

When you wed, many different options for insurance are opened up to you as a married couple, so it is important to pay attention to the different choices you may make, and see what is most beneficial to you and your spouse.

For example, your spouse’s health plan may not be as good as your own, in that it offers higher premiums, deductibles or co-payments. If that’s the case, you will need to determine if it is worth it to pick one health insurance plan over another plan, or if it is better to maintain separate health insurance coverage.

When it comes to car insurance, many companies offer discounts if more than one car is insured with them. Also, auto insurance companies may give a bigger discount for having coverage for your home or apartment, as well as car insurance, with them. Check with each of your insurance companies and see what kind of rates you can get for pooling together your policies.  Compare rates before merging your car insurance together.  Comparing multiple rates will ensure that you get the best rate you can afford as well as the best coverage for you and your spouse.

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My Take: This is not only good advice for newlyweds, but for old married couples as well.  When you compare life insurance quotes, if can be a pain in the neck for anyone, but getting them for a family is an important task.  It makes no difference if it is car insurance or whole life insurance quotes that you are looking for.  When it concerns your family, you should take the time.

I also agree that communication is extremely important in a marriage.  It is also extremely important to have understanding and an open mind in a marriage.  After 10 years of marriage, nobody wants to contact a Pittsburgh divorce lawyer or a New Jersey divorce lawyer.  Any Pittsburgh PA divorce attorney will first advise you to try to reconcile by talking to your spouse.

Communication in a marriage is even more important when it concerns children.  A NY visitation lawyer will give you the same advice on talking to your spouse before proceeding to try and reconcile for the sake of the children.  If you do not want a divorce, whether you have children or not, then you may need a NJ contested divorce attorney who will give you the same advice, communicate and understand.  You might want to contact collaborative lawyers who can help you communicate better.

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Hillary Clinton $6 Million in debt

Dec 4 at 1:01pm by Kristine Doluche

Cited: CNN / UPI

Hilary Help 2According to records that were filed with the Federal Election Commission after her unsuccessful 2008 presidential campaign, Secretary of State Hillary Clinton began the year with debts left over from her campaign in the amount of $5.9 million. The $5.9 million in remaining campaign debt is owed to five creditors, down from 16 creditors a month earlier.

The nation’s top diplomat has been steadily chipping away at unpaid campaign bills since suspending her White House bid in June, when her debt peaked at $25.2 million.  That amount included both $12 million owed to vendors and the $13.2 million she loaned her campaign from personal funds.

Clinton’s campaign was unable to repay that personal loan by the time the Democratic National Convention convened in Denver, Colorado, in August, the deadline mandated by the 2002 McCain-Feingold campaign finance law.  The former New York senator has since forgiven the entire loan amount, leaving only the $5.9 million owed to vendors on the campaign’s books.

Clinton and her supporters had been in a race against time to pay off as much of the debt as possible by the time of her confirmation and swearing-in as the nation’s 67th secretary of state on January 21.  As of that date, Clinton became subject to a federal law known as the Hatch Act, which prohibits federal employees from personally soliciting or accepting political contributions.

Clinton’s mother, Dorothy Rodham, sent out the last of a series of e-mail fundraising pitches January 16, specifically asking for donations to help retire the debt before her daughter took her new post.

“Now I have to ask you — for the very last time — to give her your help. This is our last chance to help Hillary pay down the debt from her history-making campaign,” Rodham wrote in a note distributed to Clinton’s campaign distribution list. “I know how much it would mean to her to have your help this one last time. Please take this opportunity to show Hillary your support by making a contribution today.”

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The Hatch Act does allow others to continue raising funds on Clinton’s behalf, though without her direct involvement.  The FEC report did not indicate how much debt the campaign carried as of January 21. That report will not be available for several months.

The bulk of this debt, $5.4 million, is owed to Penn, Schoen & Berland, a political consulting and polling firm that advised Clinton during her presidential bid. The firm’s president, Mark Penn, was Clinton’s senior campaign strategist until he stepped down in April amid revelations that he lobbied on behalf of the Colombian government for a U.S.-Colombia trade deal that Clinton opposed.  Penn did remain involved with the campaign, though

The other creditors are the Washington-based firms of MSHC Partners, which is owed $397,114 for printing costs, and D.H. Lloyd & Associates, which is owed $147,987 for insurance costs; Financial Innovations Inc. of Cranston, Rhode Island, which is owed $31,452 for printing costs; and the Mayfield Strategy Group of Palo Alto, California, Hilary Help 1which is owed $4,552 for consulting and Web site expenses.

Clinton raised $1.3 million in contributions in December 2008 and had an end-of-year cash-on-hand amount of $1.6 million, which can be applied toward the debt

In January, one celebrity, rocker Jon Bon Jovi headlined a fundraiser for the then future U.S. Secretary of State Hillary Clinton to help her reduce her electoral debt, according to the organizers.  The “Destination Anywhere” rocker made an appearance at the Manhattan event in January as well as Mr. Clinton, former US President according to New York Daily News.

The “Thank you, Hillary: A Salute to Hillary Clinton” event was intended to raise money for Clinton, the U.S. Senator from New York who still has $6.4 million in debt she racked up in her unsuccessful campaign for the Democratic presidential nomination and has since brought it down to $5.9 million. Clinton is giving up her Senate seat after being picked by President-elect Barack Obama for the foreign affairs Cabinet post.  This is much less than the $12 million reported by the daily news last June.  Apparently, Vice President-elect Joe Biden also held a fundraiser for Clinton in Philadelphia at least according to the newspaper.

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My Take: My mother taught me a simple fact; if you cannot afford to pay the bill, do not create.  Apparently Hillary never learned this.  Right now she reminds me of a woman who is more concerned about her designer perfume than her finances.  She must not be very smart and she had to have so many different strategy outfits working on the campaign.

Politics is the worst subject ever to write or talk about.  You will make half the people mad and the other half will agree with you.  And it is the half that you make bad you need to worry about because they are not thinking about name brand fragrances like Hillary.

It would have been great to see a woman become president.  However, there are still many people who believe that women should still be worrying about wedding and anniversary invitations instead of politics.  However, I am sure that Hillary sent out plenty of party invitations to raise funds for her campaign.  Unfortunately, she apparently didn’t raise enough funds.

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Court Considers Reorganization Plan for CIT

Dec 4 at 1:01pm by Kristine Doluche

Cited: ApparelNews.net

CITOn December 8 the U.S. Bankruptcy Court of Southern District of New York will consider confirmation of CIT Group’s prepackaged organizational plan.  In the meantime, it is business as usual for CIT.

The New York–based company recently filed for bankruptcy protection after several months pursuing other options for improving liquidity. The company has been struggling through much of the year, and on Nov. 1, CIT Group Inc. filed for voluntary bankruptcy after its board approved a prepackaged plan of reorganization.  CIT’s factoring subsidiary, CIT Trade Finance, was not included in the bankruptcy filing, which included CIT Group Inc. and CIT Group Funding Co. of Delaware LLC.

CIT is the largest factor to the apparel industry. The commercial lender reassured its factoring clients that the filing would not affect their businesses.

“We continue to do business as usual,” said John Daly, president of CIT Trade Finance.

“We remain in constant communication with our clients to ensure that their factoring needs are being met and that they are able to continue to access the services they need to run their business—credit is being approved, invoices are being collected and funds are being remitted. The overwhelming support of our debt holders will serve as a strong tailwind as we work to execute our plan of reorganization in an efficient and expeditious manner.”

It’s not uncommon for a parent company’s bankruptcy to have little impact on subsidiary divisions, said Steven T. Gubner, an attorney with Ezra Brutzkus Gubner LLP in Woodland Hills, Calif.

“Parent companies file all the time and their subsidiaries are not affected,” he said. “The costs of putting their operating entities through bankruptcy would be astronomical. You’re talking about every particular loan account making advances. It would be absolutely disastrous—both from an operational standpoint and a cost standpoint.”

Recently, CIT announced it had expanded its senior secured credit facility by $4.5 billion. Provided by “a diverse group of lenders, including many of the company’s bondholders,” the new tranche is secured by the same assets as an existing $3 billion credit facility and “additional collateral that becomes available as a result of the company’s refinancing of certain existing secured credit facilities.”

In addition, the company struck an agreement with financier and CIT bondholder Carl Icahn, whose Icahn Capital LP will provide an additional $1 billion line of credit, upon which CIT will draw if it needs additional funds beyond the $4.5 billion expansion facility.  That $4.5 billion credit facility could help the company’s factoring unit operate as usual during the reorganization—although credit may remain tight or get tighter in the coming months.   Gubner said the possibility remains that CIT will sell off some of its subsidiaries, including the factoring unit.

“In these types of situations, it’s not unusual for them to sell off different business units after the parent files,” he said. “The only concern could be that down the road CIT faces liquidity issues—but those issues always exist. One of the concerns we’re seeing is with a new lender coming in with all this new money, there may be more stringent controls on loans that are either in an over-advanced position or are under-collateralized. Whereas in the past borrowers were able to take funds despite their liquidity, they may not be able to do the same.”

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Proceeding with caution

Gregory N. Weisman, an attorney with Silver & Freedman PLC in Los Angeles, sent an e-mail out shortly after the news broke, advising companies that have concerns about the impact of CIT’s bankruptcy filing to contact their attorney.

But so far, Weisman said, there does not appear to be much panic among apparel makers over the news. This is in contrast to July, when CIT’s financial difficulties began to escalate.

“The hiccup four months ago was they quit lending for a couple of days and everyone panicked,” Weisman said. “This is another announcement that could create apprehension in the minds of factoring clients concerned about CIT’s long-term economic viability. Does it have the money to continue funding over the next 60 days? Will it unsaddle itself from all of this debt?”

CIT’s assurances of continued credit approval and payment on invoices seem to have quelled any remaining fears among its customers.

“People who were skittish largely have already taken off,” Weisman said. “Many businesses have already walked to Wells Fargo Trade Capital and other lenders, but that was a process that started in mid-2008. To CIT’s credit, a lot of its long-term customers have ridden out this turmoil with CIT.”

Weisman warned companies against invoicing directly. “Most contracts provide that CIT owns all the receivables today and tomorrow. Invoices are already assigned. It was done the day they signed [the factoring contract],” he said. Weisman recommended apparel companies factored by CIT contact the commercial lender to find out if there will be any repercussions from the filing. “If they have any apprehension, they should contact their attorney,” he said. “Most CIT contracts are similar, but they are not all the same.”

Commercial Finance Association was kicking off its annual convention in Las Vegas when the news of CIT’s filing became known. The Commercial Finance Association is a trade group that represents factors and asset-based lenders.

“The Commercial Finance Association is hopeful that CIT’s Chapter 11 filing will result in an orderly process, allowing the company to emerge in a position to continue to support the thousands of small- and medium-sized businesses they have served for years,” said Andrej Suskavcevic, chief executive officer of the association. “It is important to note that the commercial financing industry is a mature, stable and vibrant market sector which is crucial to the global economy.  This is evidenced by the steady growth and stability this industry has experienced, even throughout the most recent recession and instability in the credit markets.”

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My Take: Talk about getting rid of debt, bankruptcy definitely will do it.  Of course, bankruptcy does not look too good on your credit report either.  Maybe they should have considered a commercial loan workout instead.  I am sure such a big company could easily locate good commercial loan specialists to help them.

That is one of the nice things about having a small business; you can get a small business loan quickly and easily even in today’s economy if your credit is good.  In fact, some financial services even offer small business funding that can come in very handy when accepting credit cards.  This type of financing comes in handy when you just need office products.  If you want to purchase office furniture workstations, you may want to reconsider this option unless your business is doing very well.

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The Frustration of Bad Debt Part 1

Dec 4 at 1:01pm by Kristine Doluche

Cited: ABA Journal

Bad Debt 1Every day, debt saps the strength of millions of families and businesses around the country even with rumors that the recession may be easing its grip on the country.  The worst symptom of this is home foreclosures.  According to RealityTrac, foreclosure filings were reported in over 358,000 properties in August alone.  That is one in every 358 homes in the country.  Even though filings were down 1% in July there were 18% more in August 2008, which is not much good news.

Meanwhile, August consumer bankruptcy filings totaled 119,874, an increase of 24% over the number of filings in August 2008, according to the American Bankruptcy Institute, a nonpartisan organization that analyzes issues relating to insolvency. Here, too, there was a little bit of good news: The number of bankruptcy filings in August 2009 fell by 5% from July.

In the face of these numbers—and the very real per­sonal turmoil they represent—more attention is being given to how lenders can cooperate with borrowers to reduce their debt, modify their mortgages and other obligations, and, in some cases, even cancel their indebtedness. For borrowers, such loan workouts represent another chance, while lenders improve their odds of receiving at least some repayment on loans.

A reduction, modification or cancellation of indebtedness can have significant consequences under federal tax law. Too often, however, debtors fail to take tax considerations into account when they restructure debt, especially as many of them try to navigate their way through the process without legal counsel.

This article gives an overview of the federal tax rules that apply to debt workouts, with a primary focus on how individual debtors are affected. (In many cases, additional rules apply to debt workouts for business entities.)

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Restructuring Debt

The essential tax rule that applies to cancel­lation of debt is fairly straightforward. Under section 61(a)(12) of the Internal Revenue Code of 1986, as amended, a taxpayer generally must recognize canceled debt as gross income. In most cases, income from cancellation of debt—called COD in tax shorthand—is taxed as ordinary income. (The creditor, meanwhile, is generally permitted to claim a corresponding bad-debt deduction under IRC section 166.)

There are a number of statutory exclusions for COD income set forth in IRC section 108 (discussed below). But the debtor pays a price for those exclusions in the form of reductions in debtor “tax attributes” (such as basis of assets and specified tax credits). These reductions can offset some benefits of excluding COD income from gross income.

Foreclosures and Repossessions

Most debt workouts, however, don’t involve simple cancellation of debt. A creditor may agree to accept a voluntary conveyance of the loan collateral in complete satisfaction of the debt—say, a house in the case of a mortgage—or the creditor can foreclose on or repossess the collateral.

Either of these actions, in effect, amounts to a sale of the property, so the debtor will have some mix of cancellation of debt income and capital gain under IRC section 1001. The mix of COD income and sale or exchange gain depends on whether the debt is recourse or nonrecourse.

In the case of a recourse debt—which allows the creditor to recover other debtor assets in addition to the original collateral—the conveyance of or foreclosure on the collateral is split between COD income and capital gain.

First, the transaction results in a capital gain or loss, which depends on the difference between the fair market value of the property and the debtor’s adjusted basis (original cost of the property reduced by depreciation and increased by capital improvements). Generally, the tax rate on capital gain is 15 percent.

If the fair market value of the property exceeds the amount of the debt, there is no COD income. If, how­ever, the fair market value is less than the debt, then the debtor may realize COD income in the amount that the canceled debt exceeds the fair market value—in addition to any capital gain or loss. The debtor can avoid COD income if the creditor accepts a deficiency note to cover any shortfall between the value of the property conveyed and the amount of the debt.

If there is an auction or foreclosure proceeding, the bid price is presumed to equal the fair market value of the property in the absence of clear and convincing proof to the contrary. But a debtor should be wary of this presumption if a distressed sale yields very little, and should be prepared to rebut the presumption with an appraisal.

Example: A debtor’s house is subject to a $200,000 recourse mortgage, but the distressed sale yields only $25,000. If the debtor’s basis in the house exceeds $25,000, then the debtor realizes a nondeductible capital loss on the foreclosure, but has $175,000 of ordinary COD income. Any appraisal over $25,000 would reduce the amount of COD income. (Note, however, that the debtor may prefer COD income to sale or exchange gain if the debtor qualifies for one of the COD exclusions, discussed in more detail below.)

In the case of a nonrecourse debt—which bars a creditor from attaching assets of a debtor beyond the original collateral—cancellation of debt income is removed from the tax equation.

A voluntary conveyance or foreclosure of property in satisfaction of a nonrecourse debt is treated as a sale or exchange of the transferred property. The debtor simply realizes a capital gain or loss equal to the difference between the principal amount of the debt and the adjusted basis of the property.

Example: Let’s say a debtor has debt of $1 million secured by a house—a capital asset—with a fair market value of $800,000, and that the debtor’s adjusted basis in the property is $700,000. If the debt is nonrecourse, the foreclosure or voluntary conveyance is treated this way for debtor’s taxes:

  • Amount realized – $1,000,000
  • Taxpayer’s basis – 700,000
  • Capital gain – 300,000

If the debt is recourse, the foreclosure or voluntary conveyance is treated this way for debtor’s taxes:

  • Amount realized – $800,000
  • Taxpayer’s basis – 700,000
  • Capital gain – 100,000
  • COD income – $200,000 (remainder of debt)

Recourse debt might actually be preferable if a debtor can exclude the COD income through a bankruptcy or insolvency exclusions under the IRC section 108 rule.

Continued in “The Frustration of Bad Debt Part 2”

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My Take: You need to be an accountant to understand this!  However, I did work as a payroll accounting clerk so I can get an idea of what is meant.  I just hope I’m able to understand the rest of the parts as I post them.  I do understand that if you have Grandview NY properties, there are certain things you need to do to avoid foreclosure.  The same thing goes for property management companies if they own property; they need to help finance avoid foreclosure.

The process of purchasing Piermont real estate and selling it are two different things when foreclosure is involved.  The seller usually loses money and the buyer gets a good deal.  However, if the seller is economical and makes improvements to the property they could still make a little extra money.  They could easily put bifold interior doors in the home, which would raise the price.  But the one that really brings the price up in a home are the beautiful exterior wood doors that make it look beautiful.

I do know that a property management company Louisville MN with homes for rent Maple Grove MN would be able to help a client if they were having problems with a mortgage.  It is their job to know those kinds of things.  Other kinds of debts can easily be avoided by getting rid of all of your credit cards.  Pay cash for everything!

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