Consumer Bankruptcy Filings Rising in Southern California
From Curtis Law Group’s blog:
“As reported in the Los Angeles Times yesterday, southern California has seen a dramatic increase in the number of consumer bankruptcy filings of late. The article referenced the mortgage crisis as the culprit, while also highlighting the fact that changes to the Bankruptcy Code in the Bankruptcy Bill of 2005 have seemingly failed to reduce the number of bankruptcies these last few years.
Although the article emphasizes the increase in the greater Los Angeles area, bankruptcies in Orange County, Riverside County, and San Bernardino County have also risen dramatically in the past year, flooding bankruptcy attorneys in southern California with inquiries from debtors about whether they qualify for Chapter 7 bankruptcy, or whether they must resort to Chapter 13 of the Bankruptcy Code for relief.”
Some Relief For Those Repaying Student Loans
From Yahoo news:
“Repaying a student loan could soon be a little less painful.
Starting this week, anyone with a federal student loan can apply for a program, run by the Department of Education, that caps monthly payments based on income, and forgives remaining balances after 25 years. Those choosing to work in public service could have their loans forgiven after just 10 years.
Eligibility for income-based repayment (IBR) is determined by a person’s income and loan size. A calculator at http://www.ibrinfo.org can help borrowers determine their eligibility for the plan, which becomes available Wednesday.
‘It’s a way to borrow for college without going to the poor house,’ said Lauren Asher, president of the Institute for College Access & Success, a California-based nonprofit that runs the Project on Student Debt.
The program stems from the Education Department’s College Cost Reduction and Access Act, signed in 2007, which authorized the creation of a new income-based repayment plan for both Federal Family Education Loan (FFEL) and Direct Loan borrowers on all Stafford and graduate PLUS loans.
Monthly payments would amount to less than 10 percent of income for most of the estimated 1 million people expected to enroll, experts say. Payments would never exceed 15 percent of any income above about $16,000 a year (or 150 percent of the poverty level).
Those who earn less than $16,000 would not have to make any monthly payments.”
Debtors in Orange County often seek out a bankruptcy attorney to discharge student loans, only to find that many do not qualify to have their student loans discharged in a Chapter 7 bankruptcy.
Chapter 11 Bankruptcy for Eddie Bauer Holdings, Inc.
From CNN.com:
“Eddie Bauer Holdings Inc. filed for Chapter 11 bankruptcy protection Wednesday, citing an inability to pay back debt.
Eddie Bauer (EBHI) emerged from Chapter 11 bankruptcy in 2005 after being spun off from former owner Spiegel Catalog, which itself sought bankruptcy protection in 2003.
Costs from the 2005 reorganization, combined with pressure from the current recession, left the company ‘with no choice but to use this process to reduce the debt load,/ said chief executive Neil Fiske in a prepared statement.’”
Eddie Bauer has 371 stores nationwide, including in Orange County (notably, in Costa Mesa’s South Coast Plaza), and plans to keep most of the stores open during the bankruptcy process. If a new buyer takes over, however, it’s unclear what effect that would have on store closings.
For more bankruptcy information, click here
Bankruptcy Filed by Orange County Hotel Managment Company
From the OC Register online:
“Debt-laden Extended Stay Inc. — which controls hotel brands that have 10 Orange County locations — has filed for bankruptcy protection.
HVM, a company that manages 684 hotels for Extended Stay — including the Extended Stay and Homestead Studio brands — says in a press release that, for hotel guests, the story is the same: the same great service, the same convenient locations, same comfortable, value-priced hotel rooms. All hotels are open and welcoming guests as usual.’
The company — primarily servicing a value-oriented customer seeking longer-term hotel stays — adds that there are no plans to close or sell any of the hotels.
The companies operate Extended Stays in Anaheim, Anaheim Hills, Huntington Beach, Newport Beach, Lake Forest, Orange and Yorba Linda plus Homestead Studio Suites in Brea, Cypress and Irvine.”
Bankruptcy attorneys in Orange County have seen many such companies file for bankruptcy protection during this economic crisis.
One Reason Why Debt Reduction Plans Aren’t As Good As They Sound
Like most people, when I drive to work in Irvine every morning I surf the various local radio stations. I’ve noticed a lot more advertisers for debt reduction plans, sometimes called debt elimination or debt negotiation, lately. The fact that they advertise on the radio tells me that the current financial stress is impacting everyone – whether living in Rancho Santa Margarita, Santa Ana or Newport Beach.
But debt reduction plans are not always as helpful as they might sound. Why? Debt forgiveness doesn’t eliminate as much debt as you might think. The reason: Borrowers must often pay high fees and pay income tax on the forgiveness of debt.
You see, debt forgiveness is usually considered to be a taxable event, because a taxpayer is deemed to have gained something (income) by not having to pay back the debt. So, our U.S. and California tax laws impose a tax on forgiveness of debt “income.”
The taxes are often waived if the forgiveness of debt occurs while the borrower is insolvent or bankrupt (filing a bankruptcy is not required), so it doesn’t always impact every debtor, but here’s an example of how it might affect a typical borrower:
Net Benefit of Debt Reduction Plan
$100,000 Total Debt
$40,000 Reduced Debt (expected payoff)
$15,000 Debt Reduction Fees (attorney/debt consultant fees)
$16,200 Forgiveness of Indebtedness Tax (see below)
$71,200 Total Payments After Debt Reduction
$28,800 Net Benefit After Debt Reduction
Forgiveness of Indebtedness Tax Calculation
$45,000 Taxable Forgiveness of Indebtedness (forgiveness of debt less fees)
$12,600 Federal Tax for Forgiveness of Indebtedness (assumes 28% tax bracket)
$3,600 State Tax for Forgiveness of Indebtedness (assumes CA 8% tax bracket)
In this greatly simplified example, a borrower paying a 15% fee on a $100,000 debt reduction plan and who must pay typical income tax rates on the anticipated 60% forgiveness of indebtedness “income” would only benefit by approximately $28,800. Although it is a benefit, it’s far less than the “60%” reduction amount that most people expect when they hear a radio add promising a reduction of “up to 60%.”
Something to think about before deciding to sign up for a debt reduction plan…
For more info on debt elimination, debt negotiation, or debt consolidation services, or to find out about how these services compare to bankruptcy, visit Curtis Law Group
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