Archive for the 'Bankruptcy' Category

U.S. Government Plans to Forgive Around $108 Billion in Student Loans

In the coming years, the federal government is going to forgive at least $108 billion in student debt through the student loan repayment programs that students have been enrolled in. Enrollment in these income-driven repayment plans have been increasing at an alarming rate and so is the cost. The government is estimating that there is not enough budget to keep up with the pace of borrowers enrolling in these programs and it has become very expensive for the
government.

The numbers come from a soon-to-be release Government Accountability Report that is trying to estimate how much student loans will be repaid through these income-driven repayment plans.

How Do the Income-Driven Plans Work?

Under the Obama Administration, a student debt repayment program was created to help borrowers, who are knee deep in student loan debt, be able to manage the size of their monthly payments. The income-driven student loan forgivenessrepayment plans are designed to prevent borrowers from defaulting on their loans. Borrowers of federal student loan programs are qualified to enroll in income-driven repayment programs that place a cap a borrower’s student loan payment at a percentage of their monthly income. Additionally, borrowers who make their payments under income-driven plans can have their remaining balance of the debt forgiven after a minimum of 20 years of payments.

What Is at Issue with the Income-Driven Plans?

Congress approved the plans and President Barack Obama has used executive arrangements to give out the most-generous terms to millions of borrowers.

Enrollment in the plans has more than tripled in the past three years and the students jointly owe $355 billion. The GAO believes that $137 billion of the total amount owed by borrowers would not be repaid and most of it, around $108 billion will be forgiven because of borrowers will be satisfying their commitments under income-driven repayment plans. The $108 billion only covers loans made through the current school year, and total sum could continue to grow together with enrollment increase.

How Can this Student Debt Problem Be Solved?

It’s uncertain how President-elect Donald Trump will treat President Obama’s income-based repayment plan. Trump has already said that he wants to set student loan payments to 12.5 percent of income while also suggesting he might remove the federal government’s role in
lending to students and make everything private loans. Another solution to this problem would be to start requiring colleges to cut costs and reduce administrative staff to lower the cost of college admission at public colleges. If colleges were at a lower expense, students would be able to take out lesser loans and be able to pay it back once the amount is owed.

IRS Audits Colorado Marijuana Companies

State legalization of both medicinal and recreational marijuana has created tension between states and the federal government. Marijuana remains an illegal substance under federal law and state-legalized marijuana businesses are encountering problems with federal banking regulations and aggressive IRS audits.

Are IRS Audits of Legalized Marijuana Businesses a Violation of Federalism?

Proponents of marijuana legalization argue that IRS audits are targeting the marijuana industry and are an abuse of power in violation of federalism principles. Federalism is the balance of power between federal and state governments. The Founding Fathers enumerated certain powers for the federal government in the Constitution, but also included the 10th Amendment to reserve unenumerated powers for the states. The theory was that states should govern themselves without interference from the federal government and the federal government should only regulate areas that states could not, such as foreign affairs and interstate commerce.

IRS audits targeting marijuana businesses could be an abuse of federal power because they interfere with an industry Colorado has legalized. Because of federal banking regulations, many banks refuse to work with marijuana businesses making it difficult for growers and retailers to open bank accounts. Marijuana 2Since it is difficult for marijuana businesses to open accounts, most operate as cash businesses. Although the IRS has not admitted it is targeting the industry, cash-operated businesses are vulnerable to audits. Moreover, at least 30 marijuana companies in Colorado are currently being audited for the 2013 and 2014 tax years.

The Constitution grants the federal government broad powers to tax, but it is also a widely accepted principal that the federal government has the power to regulate banks under its enumerated power to regulate interstate commerce. Thus, marijuana businesses would have a hard time challenging these banking regulations and IRS practices.

Tax Compliance for Marijuana Businesses

Until the federal government amends banking regulations, marijuana businesses will continue to run a high risk of IRS audits. Thus, it is imperative that marijuana businesses comply with federal tax laws.

In general, profits from illegal activities are considered taxable income under federal tax law. The federal government taxes state-legalized marijuana, even though it is still an illegal substance under the Controlled Substances Act. It appears that the current IRS audits of Colorado marijuana businesses are related to compliance with section 280E of the Internal Revenue Code and Form 8300. Accordingly, marijuana businesses should have a basic understanding of section 280E and Form 8300.

Since marijuana is an illegal substance under federal law, business deductions are disallowed under section 280E. There is one exception to this rule. Marijuana businesses can deduct the cost of goods sold. For instance, a dispensary can deduct what it paid for marijuana products purchased from a grower. However, most business expenses, such as employee salaries, advertising costs, or rents, are not deductible.

Filing Form 8300 is also required for many marijuana businesses, since most deal with large amounts of cash. Form 8300 is a document that must be filed if the business has cash payments over $10,000.

What Should Marijuana Companies Do in Response to an Audit?

Marijuana businesses, and any business for that matter, can make the audit process less stressful by adhering to the following recommendations:

  1. Organize Business Records: Taxpayers subject to audits should review returns for the years subject to audit to ensure they have documentation for their claimed deductions i.e. credit cards statements and receipts.
  2. Hire a Tax Professional: Businesses are advised to hire a tax professional to ensure responses to IRS inquiries are timely and the appropriate documents are sent to the IRS.
  3. Understand the Law: Is it also important for taxpayers to know their rights during audits. For instance, taxpayers generally have 30 days to file an appeal if the taxpayer disagrees with the audit decision.

Assuming the business complied with federal tax laws, an audit is usually nothing more than a mere inconvenience. But, if the IRS discovers the taxpayer has not complied with tax laws, the taxpayer may be subject to fines for civil audits and prison time in the case of criminal audits. Since it appears that the marijuana industry is a target for audits, it is essential they comply with federal tax laws.

Did Donald Trump’s Campaign Rip Off A Florida Girl Group?

A Florida man is expected to file a lawsuit against Republican presidential candidate Donald J. Trump’s campaign over what he considers broken promises to his preteen girl group U.S.A. Freedom Kids. Jeff Popick, manager of the group and father to one Freedom Kid, claims that his group was promised two performances at Trump campaign events. However, the Freedom Kids were not compensated for their first performance at a campaign rally and had their second performance cancelled, never to be rescheduled.

Did the Freedom Kids Have a Valid Contract With the Trump Campaign?

Although Popick admits that none of the promises Trump’s campaign made to the Freedom Kids are in writing,  this does not mean that a valid contract doesn’t exist.

One of the essential components in the formation of written as well as oral contracts is that an offer is made by one party (called the offerer) to another (called the offeree). The offerer must spell out the essential terms of the agreement—including the price and subject matter of the contract. According to Jeff Popick, the offer presented to the Freedom Kids was that the group would perform two shows for Trump events in Florida. Although the first Florida event did not pan out, the Trump campaign offered to allow the Freedom Kids to perform at a Pensacola rally.

Popick accepted the terms of the contract when he agreed to have the Freedom Kids perform at the rally in Pensacola. In exchange, the Trump campaign would set up a table at the event where the group could sell their albums. This exchange of the Freedom Kids performance for the table at the rally represents what is known as consideration. Put another way, consideration is the benefit that each party gets in a contract—in this case, the Trump campaign received the Freedom Kids performance in exchange for the exposure and monetary benefit the Freedom Kids were supposed to receive from their table at the rally.

Broken Promises

Although the Freedom Kids did perform at Trump’s Pensacola rally as promised, they were not provided with any table. Popick’s attempts to reach the campaign afterward for some other form of compensation met with no success. As a result, Popick was forced to eat the cost of the promotional materials he purchased for the table. Freedom Kids

When a Trump representative reached out to Popick again, asking if the Freedom Kids could perform at an event for veterans in Des Moines the following day, he agreed. However, just as the Freedom Kids and their families arrived in Iowa, they learned that there had been a change of plans and the group would not be performing after all. Although the performers were still invited to attend the rally—which they did, in their outfits—they were instructed to not speak with the press.

Popick was never compensated for what he spent on the Iowa trip, including the costs of hotel rooms, a rental car and airfare. His subsequent calls and e-mails to the campaign, demanding a second performance at the Republican National Convention, went unanswered. According to Popick, “We are owed compensation, or as the agreement is, a performance. That’s what the agreement was.”

The Trump Campaigns Failure to Perform

The contract law term “performance” refers to the act of doing what is required by the terms of a contract. One element of performance has to do with mutual intent, or the state of mind of both of the parties entering into the contract. In contract law, the intent of the parties is usually ascertained by the language of the contract. In the case of the Freedom kids, the lack of a written contract makes it more difficult to prove the mutual intent of the parties.

However, courts asked to intervene in contract disputes can derive mutual intent from the circumstances, including the parties’ conduct.  In other words, how the parties’ act following the creation of a contract may later prove to be just as effective as an indicator of their intent as the words in a contract. If a mutual agreement can be inferred between two parties due to circumstances, then an “implied contract” is created. It appears that the Freedom Kids’s performance in Pensacola along with their travel to the Iowa rally bolster the existence of an “implied contract” with the Trump campaign.

Contracts are often evaluated by what is known as the standard of substantial performance. Under substantial performance, parties to a contract are allowed a partial or substantially similar performance to substitute for the performance specified in the contract. In other words, you don’t have to perform your contractual duties perfectly to have completed them. However, the standard of substantial performance is not met if there is a material breach by either one of the parties. In a material breach, one of the parties fails to perform the contract in a way that makes the agreement “irreparably broken.” A material breach defeats the purpose of even making the contract in the first place.

The Trump campaign’s decision not to provide the Freedom Kids with a table at their rally or allow them a second performance are material breaches that completely ignore their previously formed contract.

How Can Your Foreclosure Affect You?

No one wants to foreclose, but it happens if you fall behind on your mortgage payments and have no way of catching up. While you want to move on from the whole experience, your credit score won’t let you.

A foreclosure can hit your credit up to 300 points, and if you’ve missed several mortgage payments before filing for foreclosure, it can negatively impact your credit score even more. A foreclosure appears on your credit report as of the date you file, not the date of sale. It stays on your credit report for seven years.

Besides carrying around the foreclosure on your credit report for years, what other affects can foreclosures have on your life?

Foreclosures and Family

After the housing bubble burst in 2008, foreclosure rates increased substantially. Many families lost their homes to foreclosure. Foreclosure Sign

Studies demonstrate that families who faced foreclosure saw their earnings fall more than families who did not experience foreclosure. After one earner lost his or her job, foreclosure was nearly inevitable. Moreover, families who lost homes to foreclosure were more likely to seek government assistance programs for support. They also tend to double up or share their home after filing for foreclosure, but before the house is sold.

Bankruptcy and Foreclosure

If you are contemplating bankruptcy, you may also be facing foreclosure. If you fall three months behind on your mortgage payments, it may be beneficial to think about filing for bankruptcy to avoid foreclosure. Although financially, bankruptcy is considered a “last-resort” option, it can hold off creditors, including your mortgage company, while you’re sorting out your financial troubles.

Bankruptcy only prevents foreclosure in some cases. If you file for Chapter 7 bankruptcy, it means you don’t have the financial means to pay any of your bills. In that regard, the bankruptcy releases you from your obligation to pay your debts. However, Chapter 7 bankruptcy does not prevent foreclosures. While your obligation to repay is released, the lien on the house isn’t canceled because it serves as collateral if you cannot repay. With Chapter 7 bankruptcy, the homeowner often surrenders his or her home.

Chapter 13 bankruptcy gives the debtor an opportunity to work out a new agreement with the lender. Lenders can come to an agreement with the debtor consisting of paying off the late payments and late interest for up to 5 years as part of a new loan agreement. If you can pay the new loan payment and make all your payments on time, after the five years are completed, you can keep your home.

It is important to note that while bankruptcy and foreclosure have a negative impact on your credit, foreclosures remain on your credit report for seven years, whereas bankruptcies remain for ten years. Nevertheless, creditors look at foreclosures more seriously than bankruptcy that don’t include a house.

Foreclosures and Your Estate Plan

If you inherit a house that is behind on its mortgage payments or already in foreclosure, you have a couple options. Assuming the homeowner is behind on mortgage payments, the person to whom the house is left does not have to accept the inheritance or the debt associated with the property. If the beneficiary can’t afford the mortgage payments, insurance or maintenance, the beneficiary may disclaim the property and it would be passed to the next person designated. If no one claims the property, the home would likely go into foreclosure.

If the house is going into foreclosure, you want to make sure the house is not in your name and is still the property of the estate. If it is in your name, the foreclosure will affect your credit. If not, it has no bearing on your credit. In that case, the estate may be responsible for the deficiency judgment.

Foreclosure and Divorce

Financial problems are cited as one of the leading causes of divorce, so it should come as no surprise that foreclosures and divorce often go hand-in-hand. If you’re behind on your mortgage and going through a divorce, you must figure out who is responsible for the mortgage debt.

Many couples take out their mortgage and hold title jointly. In that case, both parties are responsible for the debt. However, if either spouse holds title in his or her name alone, that spouse is solely responsible for the debt and is the only person the bank may pursue for any deficiency judgment after a foreclosure.

Protecting Your Heirs from Foreclosure

It’s an all too familiar story – couple meets, falls in love, and gets married. They buy a house, but only one spouse signs the original loan documents and thus becomes the primary borrower. Then, the primary borrower passes away. The remaining spouse (typically the widow) is unable to pay the mortgage. As a result, the house is foreclosed.

This happens to many couples in the United States, and the spouse who didn’t sign the original loan documents scrambles to keep her home and pay the mortgage.

How can you avoid this scenario from happening to you?

Mortgage Protection Insurance

Mortgage protection insurance covers your mortgage if you lose your job or become disabled. It also pays off your mortgage when you die. Whether you benefit from mortgage protection insurance really depends on your health, financial situation and what you want to happen if the worst befalls you or your partner.

Mortgage protection insurance is life insurance that pays your mortgage after a certain triggering event such as death, disability, or job loss. The cost depends on the amount of your mortgage, your age, and your health. For disability mortgage protection insurance, costs also vary depending on your occupation.

If you purchased mortgage protection insurance that pays off your mortgage after your death, the insurance company sends a check directly to your mortgage company. This leaves your heirs with your home unencumbered by the mortgage. Payments also go directly to your mortgage company if you purchased job loss or disability insurance, but it only happens for a certain time period (about a year or two). Further, there can be a waiting period before payments are finally made.

Life Insurance

While mortgage protection insurance is a type of life insurance where the proceeds can only be used to pay one’s mortgage, many believe a better option is to have regular term life insurance. With life insurance, your heirs can use the money they receive in whatever way they see fit. Moreover, whereas mortgage protection insurance typically has an age limit (around 45 or younger for a 30 year mortgage, or 60 or younger for a 15 year mortgage), no age limits exist for life insurance.  Foreclosure

Further, on direct comparison, term life insurance can be cheaper than mortgage protection insurance. If you’re healthy and have never used tobacco, you pay more for coverage with mortgage protection insurance than you would for life insurance.

Mortgage protection insurance can provide benefits to those who don’t qualify for life insurance. For example, people with poor health or a record of past medical conditions may not be eligible for life insurance. Mortgage protection insurance is less strict and, as a result, more people qualify.

Regardless, financial experts typically do not recommend any insurance that only pays for specific bills such as mortgage protection insurance.

Financing the Home

If your heirs want to keep the home but are having a tough time paying the mortgage, they could refinance the loan. Refinancing the mortgage may help you get a better rate, lengthen the term, and lower the monthly payments. This option allows heirs to stay in the house. However, this may not be an option if you have damaged credit or for some other reason you cannot qualify for a mortgage on your own.

In that case, a reverse mortgage may work. Reverse mortgages do not have credit or income requirements, but you must be at least 62 years old and your mortgage balance must be around half of the home’s value or less. The loan is called a reverse mortgage because instead of making monthly payments to a lender, the lender makes payments to the borrower, and there are no monthly principal or interest payments.

With a reverse mortgage, you are still required to pay real estate taxes, utilities, hazard and flood insurance premiums. When the home is sold or no longer used as the primary residence, the cash and interest must be repaid, and the remaining equity can be transferred to the heirs.



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