Monday, June 1, 2009

Some Relief for the Borrowers

With the current state of global economy, there seems to be some good news for the borrowers. Here are a few examples.

Banks are Cash Strapped
The government has been conducting "stress tests" on banks, and telling some they need more liquidity. This apparently prompted some banks to send letters to borrowers with offers to discount the principal amount of their mortgage debts, if they can currently payoff their loan balances. Some borrowers have been able to approach lenders and negotiate nearly 30% off their principal balances to payoff the loan in cash. These scenarios are limited to large commercial mortgage loans, and only for those borrowers who can afford to pay them off in cash. But for those who have this ability, it is an amazing opportunity to make a good deal of money as the market will recover in the next few years.

Qualified Principal Residence Indebtedness
Section 108 of the Internal Revenue Code treats a discharge of a debt as ordinary income, taxed at ordinary income tax levels. For example, if a homeowner owes $500,000 to a bank and bank agrees forgive this debt, this like the homeowner had income of $500,000 and used it to payoff the debt. However, in light of the current "mortgage meltdown", Congress has created an exception. The Mortgage Debt Relief Act of 2007 allows a homeowner to exclude income from the discharge of debt on their principal residence in calendar years 2007 through 2012, based on mortgage restructuring, or forgiveness of mortgage debt in connection with a foreclosure. The Act allows up to $2,000,000 of forgiven debt to be excluded from income for married couples filing jointly, and up to $1,000,000 for married couples filing separately.

Deferred Discharge of Debt Income
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. This Act added a new Subsection 108(i) to the Internal Revenue Code, which permits a debtor to defer the recognition of discharge of debt income from the purchase, exchange, or forgiveness of a debtor’s debt instruments during calendar years 2009 and 2010. When this election is properly made, the taxpayer must include the discharge of debt in taxpayer's income ratably over the five taxable years starting with the fifth taxable year after the taxable year in which the reacquisition event took place.

Protection for Credit Card Borrowers
On May 22, 2009, President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure ("CARD") Act of 2009. This new regulations will become effective February 2010, and are intended to protect the consumers from deceptive practices by the credit card companies, and include the following features: Cardholders must be given 45 days' notice prior to significant term changes including interest rate increases; credit card company cannot raise interest based on cardholder's record with other creditors; no more double-cycle billing; and payments on each statement will be due at least 21 days after the statement is mailed out.

Robin Mashal is a partner at the law firm of Hong & Mashal, LLP, and can be reached at (310) 286-2000. His practice focuses on business law, real estate law and civil litigation. Hong & Mashal LLP is a California business law firm.

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