When You Can Avoid Paying Income Tax on a Forgiven Mortgage


As discussed in “Strategies for Avoiding Foreclosure”, if you sell your home in a short sale or return it to your lender by providing a deed in lieu of foreclosure, you still could be responsible to pay income tax on the forgiven mortgage.

Historically, forgiven debt (also known as cancellation of debt income or “COD”) had to be included in a taxpayer’s gross income for tax reporting purposes unless it (1) occurred in a Title 11 bankruptcy case, (2) occurred when the taxpayer was insolvent, (3) was a discharge of qualified farm indebtedness, or (4) was a discharge of qualified real property business indebtedness.

During the Subprime Mortgage Crisis of the past two years, more and more taxpayers have faced the realization of COD income on a variety of loans, including credit cards, student loans, car loans, and home loans. In order to offer some relief to taxpayers, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007. The Act amended provisions of 26 USC § 108 of the Internal Revenue Code (Income from Discharge of Indebtedness).

A key feature of the Act is that taxpayers do not have to pay federal income tax on up to $2 million ($1 million for married individuals filing separately) of debt forgiven for a loan secured by their principal residence if the forgiven debt meets certain criteria. The criteria to qualify for this principal residence exclusion are as follows:

The Criteria

1. This exclusion only applies to debts discharged from January 1, 2007 to December 31, 2009.

2. The exclusion applies to qualified principal residence indebtedness, which is the original purchase price, plus improvements, of the taxpayer’s principal residence. It doesn’t apply to discharges of second mortgages or home equity loans, unless the loan proceeds were used to acquire, construct, or substantially improve the taxpayer’s principal residence.

3. If the amount of the original mortgage is more than the cost of any substantial improvements, only the debt that is not more than the cost of the principal residence plus improvements qualifies for the exclusion.

4. Refinanced indebtedness qualifies to the extent it doesn’t exceed the amount of indebtedness being refinanced (i.e. cash-outs don’t qualify for the exclusion).

5. The exclusion only applies to forgiven debt on a taxpayers’ principal residences not second homes, vacation homes, business property, or investment property. A taxpayer can only have one principal residence. It is the place where the taxpayer ordinarily lives most of the time.

Final Thoughts

This principle residence exclusion can be a tremendous benefit. However, if you are eligible, keep in mind the following:

1. Taxpayers report COD income, including whether it is subject to a exclusion, on IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), which is filed with the Taxpayer’s federal income tax return.

2. When the exclusion applies, the basis of the taxpayer’s principal residence exemption is reduced by the amount excluded from income. The discharged indebtedness is subject to taxation when the taxpayer sells or exchanges the principal residence. However, in many cases the reduction will not result in additional tax, because any gain on that sale or exchange will qualify for the $250,000 ($500,000 for married couples filing jointly) home-sale exclusion.

3. If only a part of discharged debt qualifies for the principal residence exclusion, the remainder of the discharged debt may qualify for another exclusion under 26 USC § 108 of the Internal Revenue Code (Income from Discharge of Indebtedness).


Lenders Should Take Careful Note of Potential Vulnerabilities Exposed in TOUSA Decision


The United States Court of Appeals for the Eleventh Circuit issued its much anticipated decision in the TOUSA, Inc. bankruptcy cases on May 15, 2012.  The decision provides an ominous reminder to Lenders to carefully assess the value of accepting asset pledges or guarantees from borrowers’ subsidiaries, sometimes referred to as upstream guarantees.  TOUSA should also give creditors pause in accepting payments for existing obligations from the proceeds of transactions that may later be avoided as fraudulent transfers in violation of the bankruptcy code.

On July 31, 2007, TOUSA, Inc. reached an agreement to settle existing obligations to various lenders (“Previous Lenders”) with financing from new lenders (“New Lenders”).  The New Lenders secured the new loans with liens on the assets of TOUSA’s subsidiaries (“Conveying Subsidiaries”).  The loan agreement with the New Lenders required that the funds be used to pay the Previous Lenders.  Six months after this payment, however, TOUSA and its subsidiaries filed for bankruptcy.  The Committee of Unsecured Creditors of TOUSA filed proceedings against the New Lenders to avoid the liens as fraudulent transfers and against the Previous Lenders to recover the value of the loans.

In a stunning decision, the United States Bankruptcy Court for the Southern District of Florida, Fort Lauderdale Division, granted both requests.  The court ruled that the granting of the liens by the Conveying Subsidiaries to the New Lenders were fraudulent transfers under Section 548(a)(1) of the bankruptcy code, finding that the Conveying Subsidiaries did not receive value “reasonably equivalent” to the liens.  It therefore avoided the liens held by the New Lenders.  Because the loan agreements required the loans be used to pay the Previous Lenders, the court further held that the Previous Lenders were the entities “for whose benefit” the transfer was made, and ordered them to disgorge the loan proceeds to the bankruptcy estate under Section 550(a)(1) of the bankruptcy code.

Both groups of lenders appealed the decision to the United States District Court for the Southern District of Florida.  The court overturned the bankruptcy court’s decision and held that the intangible value the Conveying Subsidiaries received in the form of “opportunity to avoid bankruptcy, continue as going concerns, and make further payments to their creditors” was not disproportionate to the value of the liens held by the New Lenders.  It also ruled that because Previous Lenders were “subsequent transferees” and not “immediate beneficiaries” of the new loan agreements, the Previous Lenders could not have been the entities “for whose benefit” the transfer was made and did not have to return the proceeds.

The Eleventh Circuit reversed the district court and reinstated the bankruptcy court’s decision.  It noted that the bankruptcy court previously conducted a detailed factual analysis of the purported intangible benefits of the transaction and found that in total, the tangible and intangible benefits of the new loans did not confer a ‘reasonably equivalent value’ to the value of the liens held by the New Lenders.  Additionally and perhaps further alarming to creditors, although the court acknowledged that “immediate beneficiaries” are the “paradigmatic case” of “entities for whose benefit” a transfer was made, it held that “when a debtor transfers a lien to a lender who proceeds to transfer funds to the creditor,” the creditor can be liable.

 The court therefore regarded the Previous Lenders’ status as a subsequent transferee to be merely a “formality” because the new loan agreements required the debtors (TOUSA and the Conveying Subsidiaries) to wire the funds to the Previous Lenders immediately upon receipt of the proceeds from the New Lenders.

The TOUSA ruling provides at least two cautionary notes to lenders.  First, it shows that lenders must be especially diligent when relying on upstream pledges or guarantees.  They must ensure that subsidiary corporations are either solvent or are receiving value that is no doubt “reasonably equivalent” to the value of the loan, because bankruptcy courts have wide discretion to make those determinations.

 Also, creditors should be wary when debtors satisfy their obligations with proceeds from new transactions.  If the new transaction is avoided in bankruptcy and found to be made for the benefit of the new creditor, the paid off creditor could be forced to disgorge proceeds.


What Is Collaborative Divorce West Springfield

Family Law Attorney

The divorce process known as “collaborative divorce” is a variation on the concept of attorney-assisted mediation. Before I explain how the collaborative divorce process works, a few words about the genesis of this process will be helpful.Why did the process of collaborative divorce develop?

The concept of collaborative divorce is generally credited to Minneapolis family lawyer Stuart Web, who came up with the concept in the early 1990s.  Today, it is estimated that there are over 20,000 attorneys in nearly every state and a number of foreign countries involved in the collaborative practice.

The appeal of the collaborative process stems from the fact that the traditional American system of justice is not particularly well equipped to deal with the emotional nature of a divorce case.  Marital dissolution cases tend to be like square pegs trying to fit into the round hole of civil litigation.

Although legal rules and trends have attempted to recognize the unique nature of divorce cases and the issues they bring to the court, the fact is that in our Anglo-American system of jurisprudence, there must be a defined outcome – a winner and loser – but that type of finality does not often arise in the break-up of a family. 

In divorce, the winners and losers are not so easily defined, and certainly where children are involved, there is no “finality,” in the classic sense of the word. It is these shortcomings of the traditional mediation/litigation system that make collaborative divorce an attractive alternative to many people.How does the collaborative divorce process work?

The key concepts of collaborative divorce involve the mutual, free and voluntary exchange of information, and a climate of civility and respect for the individuals involved.  Each party hires his or her own independent counsel to provide advice and representation, but the parties’ expressed intention is to negotiate a settlement that treats everyone fairly, not to litigate.

In fact, the attorneys for the parties commit to exercise their best efforts to negotiate and finalize, in a civil, courteous and open fashion, a global settlement, and to withdraw from further representation and not take part in litigation should the collaborative process not be successful. The process can, and frequently does, involve the engagement of professionals who are neutral in their approach to the facts, to provide expertise and recommendations to the parties and their counsel on financial and non-financial issues, such as the division of parenting rights and responsibilities.

The collaborative process begins by putting these key concepts into writing, with the execution of a “Participation Agreement.” The participation agreement contains a general provision that all persons involved will treat each other with civility and courtesy, and more specific provisions for the free, voluntary and mutual exchange of information, so that everyone involved in the process will have complete knowledge and understanding of all salient facts.  The agreement also formalizes the disqualification of the attorneys involved in the event of the failure of the collaborative process.

The participation agreement will also commonly provide that neither party will attempt to take advantage of mistakes by the other party or by counsel; again, the spirit and intent here is to serve the best interests of all involved and eliminate some of the “gotcha” moments prevalent in a contested, litigated divorce. Confidentiality is a hallmark of the collaborative process, and the parties agree not to disclose, or attempt to use in subsequent litigation, anything that is said or done during the process.

From a legal standpoint, this confidentiality provision probably is not necessary, since the rules of evidence would likely bar any attempt to offer an admission made in settlement negotiations against a party’s interest, but the inclusion of this confidentiality provision serves two essential purposes. The first is to encourage the parties to speak freely and candidly, and the second is to achieve a result which will keep the parties’ personal and financial business out of the courtroom and away from the public eye.  Ultimately, this serves the parties’ interests and keeps the children out of the line of fire, thereby minimizing the impact of the divorce process on the children.

As noted above, the participation agreement will also provide for the engagement and compensation of neutral professionals, such as accountants, tax and financial advisers and mental health professionals, who will advise the parties on matters relating to finance and parenting choices. Due to their role as neutral advisers, the “hired gun” mentality, which often is so costly to the parties in contested litigation, is eliminated. Presumably, the parties receive professional advice unfiltered and unfettered by the professional’s usual desire to serve his or her master by shading things to suit the best interests of the person paying his or her fee.  The parties benefit from knowing they are receiving advice based upon the professional’s true feelings and analysis, and can, therefore, comfortably rely upon the professionals’ opinions.


Documents Needed for a Divorce Investigation About Hidden Assets


A divorce lawyer or investigator usually will need the following documentation in order to begin an investigation into hidden assets: Financial disclosures Tax returns Bank statements Check registers Financial disclosures
Typical divorce procedures require that a divorcing couple disclose their assets and liabilities.

 These disclosures serve as the starting point in any financial investigation seeking assets that have been excluded from the marital estate (i.e., hidden assets). The information revealed in these disclosures ranges from the simplistic (e.g., if an asset is listed, it isn’t being hidden) to the basis for more sophisticated analyses and comparisons.

Tax Returns

The tax returns of an individual or a couple may be imperfect representations of the actual economic income of the person(s) filing the return. However, a tax return showing significant income increases the odds that a claim of hidden assets might be valid. A tax return showing little, or no, income should prompt the question, “If assets are being hidden, where did they come from?” Tax returns also provide authoritative documentation concerning sources of income.

For example, interest income is reported from the payer of the amounts to the Internal Revenue Service. This usually means that the taxpayer will report the amounts on his or her tax return. If there is interest income on the tax return and no asset disclosed that would generate interest income, the basis for an inquiry arises.

Bank Statements

The couple’s bank account usually serves as the financial framework of the marriage. The monthly bank statements serve as evidence of what went into the account and what was paid out. Bank statements are useful for their summary information in that they quickly show all income and all expenses which can be used to illustrate missing income, or to illustrate the relationship between the income the couple was generating versus what they were spending.

They are also useful in identifying inter-account transfers and automatic payments, and may describe other unusual transactions. However, while bank statements record deposits and checks written, they do not usually provide the detail necessary to analyze specific transactions. Therefore, obtaining the check registers of the couple is necessary.

Check Registers

“Check register” is an accounting term that refers to the couple’s checkbook and the manner in which the deposits and expenditures related to their account were recorded. Check registers generally come in three forms. The first is totally manual. That is, every deposit and every expenditure is recorded by hand in a register provided at the back of the check book.

The second is a duplicate system. That is, when a person writes a check a copy of it is produced. The copy has a place to keep a running balance and to record deposits. The third is electronic. As information technology becomes the norm, more and more individuals will move toward paperless transactions. For example, automatic withdrawals from checking accounts to make loan payments are paperless transactions.

Regardless of how they are recorded – with or without paper – all transactions give rise to evidence which can be pursued in discovering hidden assets.
Sometimes it is possible to obtain the actual canceled checks related to an account under investigation. This situation may arise in highly contentious divorces or when an investigation evolves from a divorce investigation into a criminal investigation.

However, banks and other financial institutions have stopped, to a considerable degree, returning canceled checks to customers. This is a cost reduction move by the institutions. While it is still possible to obtain the canceled checks, the banks usually charge a considerable fee for their retrieval. Accordingly, you and your divorce lawyer or investigator should weigh carefully the evidentiary value of the actual check in relation to its cost.

Child Custody


When parents divorce, answering the question “Who gets the kids?” is often an emotional and draining one. There are different types of custody, but the court always grants custody based on the best interests of the child. There are also many issues that may arise when deciding custody, such as legitimization in the case of a child born out of wedlock and grandparent visitation. The Branch Law Firm is experienced in all matters relating to child custody, even fathers’ rights. When it comes to child custody issues, you’ll find a knowledgeable and skilled law firm.

Statesboro Child Custody Lawyer

Temporary custody is de facto custody; it refers to the parent who actually has custody of the child at the time of divorce. In order the formalize custody, a motion for Pendent Lite must be filed with the court. There is also a hearing for temporary custody. Attorney Elizabeth Branch can assist you with the process.

Sole custody refers to the parent who has the child living primarily with them, and the child only has one primary residence. Split custody is when there are two children, and each resides with one separate parent. With joint custody, both parents actually share and control the rearing of children, and the child may have one or two primary residences. For example, the child may have one residence but live with the other parent on a rotating basis. Statesboro Fathers’ Rights Lawyer

When couples cannot agree on child custody issues, mediation is an option in Georgia. A mediator is assigned to help couples identify issues, facilitate a series of discussions and reach an agreed resolution. The mediator’s role is neutral. They are not there to take sides, but to bring both sides together. The Law Branch Firm can act as your advisor during the mediation process and even review agreements before you sign them. They are there to protect your rights.

Traditionally, courts did favor the biological mother when it came to custody. However, the courts have now recognized the value of the role fathers play in child upbringing. At a Statesboro fathers’ rights lawyer, attorney Elizabeth Branch is a strong advocate of the rights of dads.

In cases where a mutual agreement cannot be reached, litigation may be the only other alternative. Attorney is both an experienced and powerful litigator. Let her skills work for you. She will gather all the documentation necessary, take depositions from witnesses and work in the best interests of the child and family.


Prenuptial Agreements

          Has there ever been a better time to have a prenuptial agreement?  The divorce rate remains at around 50% (although recent surveys have shown a decline); overall wealth is shrinking; businesses are failing and laying off workers in droves; domestic violence is increasing.  Couples that are faced with divorce in this current climate are at a greater risk of plunging themselves even deeper into crisis as they seek to blame each other for all of their woes.  And the children suffer the most, as they always do.

            Prenuptial agreements are hardly the cure for all of the above, but for those who had the foresight to get a prenuptial agreement and are now facing divorce there is at least some certainty among uncertainty.  For someone in the midst of financial and emotional crisis any bit of certainty can be a blessing.  Prenuptial agreements, when thoughtfully and thoroughly drafted and finalized, can provide a great deal of guidance in a difficult time, and since they are made when the spouses generally have each other’s best interest in mind they can help achieve the most fair result when both spouses are looking out for only themselves.

            Last year the Florida Legislature enacted the Uniform Premarital Agreements Act (the Act), bringing Florida in line with a growing number of states adopting the legislation.  The Act gives more teeth to prenuptial agreements, closing off many of the loopholes that resulted in much litigation over the years.  Prenuptial agreements that are created with the formalities specified in the Act are afforded strong legal presumptions of validity and enforcement.  Specific requirements for financial disclosure are now in place, bringing even more certainty to the process.

            So what can you do with a prenuptial agreement?  The most common uses of a prenuptial agreement include:providing for the preservation of wealth by designating what assets and debts are non-marital in nature;allowing people with children from prior relationships to make provision for those children upon death, free from claim of their new spouse;setting forth the manner in which each spouse will be financially supported, or not, upon the termination of the marriage by divorce.

        But this just scratches the surface of what is available for inclusion in prenuptial agreements.  Less traditional uses of a prenuptial agreement include:establishing how a family business will be formed, capitalized and run during the marriage, and then laying rules for the continuation or dissolution of the business upon the termination of the marriage;setting forth the goals that the family will work together toward achieving and the values that they will maintain in good times and bad;determining in advance and at a time of no rancor how the family will raise their future children (religious upbringing, forms of discipline, etc.)establishing how and under what circumstances the spouses will jointly own and manage property and investments.The items that can be included in a prenuptial agreement are generally limited only by the imagination of the parties and the skill of the drafter. 

       The fact that no consideration except the marriage itself is necessary to formalize a prenuptial agreement makes it attractive to the financial secure, and the fact that it is extremely flexible and forward-looking makes the prenuptial agreement attractive to the rest of us.  In the past, when divorce was rare, prenuptial agreements were seen as only appropriate for the super wealthy.  Now they can be seen as prudent for nearly everyone.

          One thing we should learn from this current economic downturn is that such contractions are inevitable on both a global and personal scale.  It is prudent to take into consideration that things will look bleak at some point in the future and to plan accordingly.  Nobody wants to think about the breakup of the marriage before it has even begun, but the benefits of doing so cannot be overstated.  Setting down during good times what your objectives will be in bad times makes too much sense to be ignored.

          If you know of someone who is going to become married in the near future then advising them to consider a prenuptial agreement may be a better gift than the crystal goblets that you were thinking about.  Direct them to a Marital and Family Law Attorney with experience in drafting and formalizing prenuptial agreements.  Most wedding gifts get used in the early years of the marriage and often it is forgotten what the gifts were and who gave them.  But the gift of advising a prenuptial agreement has the benefit of being inexpensive in the short term and tremendously valuable in the long term.

          Fear not, those of you that are lamenting not having entered into a prenuptial agreement before you became married.  There is a way for you to accomplish what should have been done before the marriage.  A postnuptial agreement can be created and formalized which will allow you to set down the same forward-looking goals as with a prenuptial agreement.  The major difference between a prenuptial agreement and a postnuptial agreement, besides the timing of its entry and the inapplicability of the Act, is that the marriage itself is not consideration for a postnuptial agreement.  With a postnuptial agreement some valuable consideration must be given in order to make the contract valid.  Legal consideration can take many forms, though, and a good attorney can help you to fashion a binding postnuptial agreement that protects like a prenuptial agreement.