Los Angeles Bankruptcy Blog

This is one of those bankruptcy FAQs: people are confused about bankruptcy reporting, and think it’s like all other credit reporting (seven years).

Question: how long does a bankruptcy stay on your credit report?
Answer: Ten (10) years. Source: FTC

In today’s housing market, many people are upside down with their mortgages. Not to mention, many homeowners have an adjustable rate mortgage (ARM) that has the payment skyrocketing. As a result, there are people who approach me with this basic of questions:

Should I do a short sale or let the house go in foreclosure?

The question is not easy to answer. In a short sale (also sometimes called a quick sale), you are agreeing to sell your house back to the bank at a reduced price. Now, banks are not crazy about owning homes; they’re in the making-money-from-interest-and-loans business. They don’t want to own homes. Especially if your entire neighborhood is faltering. Will they own your entire block? What about half your block? Is this really what Bank of America, Countrywide, HomEq and Chase Mortgage are in business for?

In addition, with a shortsale, you may have to pay taxes on the amount you were forgiven, the write-off. Talk to your CPA about the tax consequences of this. A 1099c for the cancelation of
debt might be sent to you, and then you have to pay taxes. (not to mention property taxes) Check with your tax advisor.

A foreclosure, on the other hand, is where the bank takes possession of the house again. In some ways, it’s like a car repossession. However, unlike a car repo, there are many statutory requirements about notice and such that the mortgage servicer has to abide by which are beyond the scope of this article.

The thing to get out of a foreclosure is that, unlike a quicksale, you won’t owe additional income taxes if a foreclosure happens on your residence, thanks to the Mortgage Forgiveness Act that President Bush signed into law last year.

Also unlike a short sale, there is no aggressive and extremely hungry real estate agent seeking a commission off your transaction. Are they looking out for you?

Summary

Short sale: Realtor gets commission, possible tax bill to IRS, no leftover debt, roller-coaster ride.
Foreclosure: No realtor, no tax assessment or 1099, credit hit, possible collection for unpaid mortgage

And it’s this last point where a bankruptcy could swoop in, remove any lingering debt owed to a mortgage company that didn’t have thier lien paid, eliminate the other debt you have, and get you a fresh start, tieing this all up in a neat little bow. (call to set up a consultation for more info)

No easy answers, both are imperfect solutions. As of today, no bankruptcy attorney or judge can change your mortgage payment or balance or payout. It is what it is. However, if you want a fresh start, no property tax debt, no Internal Revenue Service bill, and just to move on, a bankruptcy after a foreclosure might be the way to go.

A new term has crept into today’s vocabulary: “MySpace bankruptcy” (also “Facebook bankruptcy”). The first time I read these, I figured the companies had somehow filed some sort of business bankruptcy or Chapter 11 bankruptcy. But no, they’re quite robust and healthy with their annoying flash ads and heavily sponsored web pages.

What Myspace bankruptcy means, apparently, is that the user has a page on My Space (or Face book), which are both popular social networking web sites. And realizing that these are addictive and major time sucks, finally deciding to delete and end their account.

O! How dramatic! That something so simple (”I’m deleting my account”) is somehow tied to something so major (”I am filing bankruptcy”). But scale aside, is this an apt analogy, or does this new slang somehow perpetuate a myth about bankruptcy?

True, people become attached to a myspace customized page, complete with modified templates, songs, videos, flash animation and a sordid collection of “friends” and messages and blogs and movie reviews. Usually this takes some time. And then the user checks on their messages daily, giving updates about their mood, their status, and so yawn. So, making the decision to end the timesuck and just delete the account and do Myspace Bankruptcy is the destruction of something (presumably good) that was accumulated.

But is that right? Filing Bankruptcy (the normal kind) is not the destruction of something good. It’s the elimination or reduction of something bad (debt). And before you say that it destroys your credit, most people have messed up credit already before they file bankruptcy. Is the negative impact really that great for most people who have been in collection creditor harassment for 2 years with 9 accounts and being sued by yet another credit card collection agency? Filing bankruptcy gives most people a new start, a chance to wipe out something negative. And removing a negative is a good thing.

Myspace bankruptcy is removing a positive, which is a bad thing. So, this terminology is really the opposite. Bankruptcy can be a good outcome, giving people a new opportunity for a new beginning.

So, what to do about this new misleading jargon? There needs to be a better phrase. The more appropriate analogy, then, seems to be something else for the concept of destroys your identity (in the online sense). The first thing that pops into my mind would be Myspace suicide or Facebook suicide.

But that would be too dramatic.

I know! How about just telling your not-really-your-friends that “I’m deleting my account” and getting on with your life and doing something meaningful with your time?

Like, oh, I don’t know: creating a budget?

But that’s a column for another day.

Some interesting findings from a recent study about the increased number of applications people get before a bankruptcy as opposed to credit after bankruptcy.

Can you guess?

3 to 1 .

This is a fairly good summary of some of the things we think we know, but probably don’t.

Of them, the main one I disagree with is: Debt is Bad (myth). Actually, it *is* bad. Sure, you need it to build credit, as I’ve discussed in my Credit After Bankruptcy article. But if you’re on this site reading up, just figure that debt is bad, savings is good, and you can live off of your paycheck and savings. If you can’t, you don’t need it.

The best invention ever was the debit card, where you use your own money.