LaBre on Law

Short Stories on Michigan and Indiana Law

Month: February, 2013

Debt and Taxes


Taxes (Photo credit: Tax Credits)

“Mr. LaBre, I’ve got myself into a world of financial trouble.”

“What kind of trouble?”

“Well, I’ve got credit card debt of $50,000. I’ve got a mortgage on my home for $200,000, but the house is only worth $150,000. I’ve got a cabin on aprivate lake up North; that’s got a $100,000 mortgage, but now, after the crash, it’sonly worth $60,000.”

“How much are you earning?”

“About $65,000 a year.”

“How much of your income is going to pay off those debts?”

“By the time I’ve paid on the two mortgages and the credit cards, and paidthe utilities, we hardly have enough money to eat and feed our four kids.”

“How did you get into this mess?”

“Well, like a lot of folks ten years ago, I thought that prices on real estatewould always keep going up. So my wife and I thought that the houses wouldmake good investments. We didn’t worry about the credit cards; we thought we’d sell the lake property for a profit and just pay them off. Then came the crash. After that, the values went down, and, to live, we used the credit cards rather than cash.”

“Have you thought of bankruptcy?”

“Yes.  My wife and I have thought about it. But what we’d really like to do is to see if you can get the banks holding the mortgages and the credit card companies to write down the amount of the debt we owe.”

“You could do that in a Chapter 13 Bankruptcy, or you would probably qualify for a Chapter 7 Bankruptcy and eliminate all of your debts”.

“We really don’t want to file bankruptcy. We want you to get our creditorsto write down and forgive a part of the debt. We want the mortgages to be written down to the current value of the properties, and we want the credit card companies to forgive all of the interest we’ve had to pay.”

“Well, I’m not sure whether your creditors would do that, but, let’s assume that they would. That then causes a lot more problems. Specifically, tax problems.”

“Tax problems? We pay our taxes every year. We even get a small refund. What ‘tax problems’ are you talking about?”

“I’m talking about Section 108 of the Internal Revenue Code. Congress laid down a general rule that forgiveness of debt is income.”

“I don’t understand.”

“Not understanding Congress seems to affect most Americans. So let me explain the tax rule to you.

“Congress decided that, if a person negotiates with a creditor for forgiveness of debt, the amount which was forgiven must be included as income in your income tax return. For example, if the bank wrote off $40,000 on your lake property, then you’d include an additional $40,000 on your income tax return. In your situation, your income would increase from $65,000 to $105,000. Your income tax bracket would rise, and you’d pay taxes on that increased amount.”

“That’s nuts!”

“That’s Congress.”

“Are there any exceptions?”

“There are a few. For example, if the bank would reduce your mortgage balance on your home, then any forgiveness of debt is not included in your income. However, that exception is only valid until December 31, 2013. And, if you file for relief in bankruptcy, then the discharge of the debts is not income.”

“Let me see if I understand this. Except for my principal residence, I have to pay taxes on forgiveness of any part of a debt. But, if I file for bankruptcy, and get rid of all of my debt, then I don’t have to pay any additional taxes when all of the debts are discharged in bankruptcy.”

“You’ve got it. It’s goofy, but it’s the law.”



Family Presumptions

Broken bonds, but mended hearts

Broken bonds, but mended hearts (Photo credit: EraPhernalia Vintage . . . (playin’ hook-y ;o))

She sat across my desk, looking both nervous and depressed.  Her daughter’s three children were taken by DHS on an emergency petition, and placed into foster care.

The petition suggested domestic violence in the home, along with substance abuse and financial instability.  It’s a Michigan case, none of the children have Indian heritage, and the father, who also lived in the home, signed an affidavit of paternity.

“What is it you want me to do?”  I asked.

“My grandchildren are in foster care; I want them placed with me instead,” she said.

“Do you live in Michigan?”  I asked.

“Yes,” she said.

“Have you talked with the caseworker about this issue?”  I asked.

“She said that she didn’t think the children would be placed with me.  I don’t understand. I’ve been around those children all their lives, babysitting and caring for them regularly!”

“What did the caseworker say?”

“She told me it’s because I didn’t report the problems,” she said.

“Failure to report known child abuse or neglect to the DHS is a form of neglect in itself.  That suggests the problems in the home were blatantly affecting the children.”

“That’s preposterous!” she exclaimed.  “Those two may have argued, but I never saw any drugs in the house or bruising on my daughter or the children!  Otherwise I would have done something.”

Though she spoke persuasively, her facial expressions and body language were limp; I couldn’t read her veracity with any comfort.

“Look, the law creates a presumption favoring placement of the children with family members who are willing and fit to care for them.  The key word in that statement, however, is ‘fit’.  And the presumption in your favor is easily rebutted, especially in situations like this, where uncertainty looms around every corner.”

“Well, I want to hire you to represent me,” she said.  “I want my grandchildren!”

“I’m sorry, but that’s not possible,” I replied.  “As a relative of the children, not the parent, you have no standing to make an appearance in this case.”

“Are you telling me that there’s nothing I can do!?”  she cried.

“Not exactly.  First, you need to wait for a definite reply from DHS.  Sometimes it takes DHS as long as 30 days before they make a decision regarding placement.  But if they decide to place the children in foster care, then I’m telling you that the only people who can argue to have the children placed with you, or any other relative, are the parents or the guardian ad litem.

“Let me ask you this: Are there any other family members who can take care of the children?”

“Yes, we have a large family,” she said.  “Why?”

“Having the children placed with a family member makes a tremendous impact on the case.  Let’s assume that instead of going to trial your daughter pleads no contest to the allegations against her, and she’s required to undergo services.  If she’s determined to have inadequately complied with the required service plan and the children are in foster care, her parental rights will typically be terminated.

“Termination of parental rights is no small affair.  The parental bond is legally severed, and the children are put up for adoption.  That means you would no longer have the ability to see them as a grandparent.  And if parental rights are terminated with one child, DHS can move to take other children out of the home under the theory of anticipatory neglect.  That means if your daughter gives birth to another child in the future, even after this case is closed, DHS could still come and take that newborn.  In addition, unless the court says otherwise, a parent’s obligation to pay child support isn’t vitiated simply because parental rights have been terminated, support must still be paid.

“But assume the same scenario except the children are placed with a family member at the time DHS moves for termination.  Now, the Court is almost required to set up a guardianship instead, with the family member who has the children as the guardian.  This allows the parents to potentially get their act together at some point in the future.  Visitation is still intact for all parties involved.  DHS would be prevented from bringing an anticipatory neglect theory against your daughter if she has anymore children.  And finally, through my eyes, the children involved will have the benefit of being raised by blood, not water.”

“Let’s start making some phone calls,” she said.