Banks and consumer advocates recently requested changes that would permit forgiveness of as much as 40% of debt for borrowers who do not qualify for existing programs. The proposed changes would also have permitted borrowers to defer taxes on forgiveness of indebtedness until after the end of any repayment plan. Current law requires borrowers to recognize and pay taxes on the forgiveness of debt immediately. The plan would have benefited lenders by allowing them to recognize losses associated with charge offs of unpaid debt at the end – rather than the beginning – of repayment plans.
The change would have also helped borrowers – particularly those in Orange County and Riverside County where qualification for Chapter 7 may be difficult – and who are attempting to avoid bankruptcy by negotiating credit card payoffs.
The Financial Services Roundtable and the Consumer Federation of America, who made the request, hoped such a pilot program would become permanent and that as many as 50,000 people struggling with credit card debt would be involved.
It is unfortunate that the Treasury Department rejected this proposal, as it would have helped residents from Orange County get back on their feet, and possibly avoid needing a bankruptcy attorney. Until these and other measures are adopted, however, more and more Chapter 7 bankruptcies will be filed in Orange County, from Santa Ana to Irvine to Rancho Santa Margarita.
