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Cancellation of indebtedness income and insolvency

Most people in Rockland County are unlikely to be familiar with IRS Form 1099C or the term "cancellation of indebtedness income." A Form 1099C is one of the many methods of reporting income that does not appear on a Form W-2 or a Form 1099MISC. The arrival of a Form 1099C can cause unexpected income tax headaches, but both bankruptcy and insolvency offer an escape.

When a creditor cancels a debt and sends a Form 1099C to the borrower and the IRS, the amount of the cancelled debt is considered ordinary income by the IRS. The reasoning is straightforward: Under ordinary circumstances, the borrower would be required to repay the debt, most often with after-tax income. If the lender cancels the debt, the borrower is relieved from the obligation to pay off the loan, and the amount of the cancelled debt thus becomes income to the borrower. The borrower must report the income shown on the Form 1099G to the IRS on Form 1040 and pay tax on the amount of the cancelled debt.

Landlord attempting to use bankruptcy code to evict tenants

This blog has frequently considered the power given to companies who have filed a Chapter 11 bankruptcy petition to revoke real estate leases that still have many months left on the original term. Now a New York City landlord is attempting to reverse the process by using this provision of the code in an attempt to evict tenants from a rent-controlled apartment building to facilitate a sale of the building.

The building is located at 444 East 13th Street and has 16 rent-controlled apartments. Eight tenants in rent-controlled apartments have been withholding rent for several months to protest a range of problems in the building, including lack of heat, failure to make necessary repairs and the presence of rodents. The building also has 68 outstanding violations according to the website maintained by the city's Department of Housing Preservation and Development; the violations include lead-paint hazards, rat droppings and defective floors.

What is reaffirmation of debt?

For many people in Rockland County, bankruptcy looks like an expert ski hill - once you start down, you have almost no way to stop. In the process, creditors will seize assets that provide security for a loan that will be discharged, and valuable assets, such as a car or a house, will be lost forever. The reality is a bit different. The careful use of debt reaffirmation can prevent the loss of some assets that have special value.

A debtor can prevent a debt from being discharged by entering into a reaffirmation agreement with the creditor. A reaffirmation agreement is a new contract that replaces the original loan agreement. The creditor agrees to cease collection activities and the debtor agrees to repay the loan according to a newly negotiated payment schedule. If the debtor is able to make payments under the new repayment schedule, the creditor will forego all collection actions.

What happens to employees' claims for wages in a bankruptcy?

When a business files a petition in bankruptcy, it may have a number of employees who are owed payment for work performed prior to the filing of the petition. One of the most pressing questions for Rockland County individuals who work for firms entering into bankruptcy is the fate of their earned but unpaid wages, health care benefits and retirement plan contributions. The answer to this question depends in part on whether the employer has filed a Chapter 7 petition and intends to cease operations or whether the employer has filed a Chapter 11 petition and intends to remain in business.

In either case, employees should immediately file claims with the bankruptcy court. These employees become creditors of the bankrupt business upon the filing of the bankruptcy petition. In a Chapter 7 proceeding, employees with claims for unpaid wages have priority over general unsecured claims, but they generally have a lower priority than secured claims, administration expenses and priority unsecured claims. Unpaid wage claims are usually included in the class of priority unsecured wage claims. The priority of unpaid wage claims is more or less the same in a Chapter 11 proceeding.

Scandal-plagued restaurant on Hudson files for bankruptcy

Many factors can force a business into bankruptcy. The most common reasons for a business to seek bankruptcy protection is too many debts and insufficient revenue. Shoddy business practices can also be an underlying cause. A popular restaurant on the Hudson River, La Marina, recently filed a Chapter 11 bankruptcy petition amid a blizzard of unpaid claims and allegations that its manager was involved in a city hall scandal involving Mayor Bill DeBlasio.

La Marina's liquor license was suspended last fall, and one of its managers was arrested on drug-related charges. The restaurant is located on city parkland in Inwood, and a number of critics have been calling attention to the fact that the restaurant's owner made several sizable donations to de Blasio's recent campaign.

Saving your house in bankruptcy

Many people in Rockland County view bankruptcy as, among other things, as a sure-fire way to lose their home to the bank that holds the mortgage. The reality is exactly the opposite. If a person is seriously delinquent on mortgage payments, a bankruptcy proceeding maybe the only way to prevent the mortgage holder from foreclosing on the mortgage and reclaiming the house.

Several provisions in the Bankruptcy Code must be used to achieve this result. First, the homeowner must decide to proceed under Chapter 13 by commencing what is called a "wage earner bankruptcy." Unlike Chapter 7, sometimes called a "straight bankruptcy," Chapter 13 allows the debtor to prepare a plan of reorganization which, if approved by the court, will provide time for the homeowner to renegotiate the terms of the mortgage. Chapter 13 also gives the homeowner time to bring all delinquent payments current.

Time Hotel nears deadline for submission of reorganization plans

The Time Hotel opened in Nyack in May 2016. The owners saw the property as a boutique hotel that would attract urban tourists and business travelers, but the plan has not succeeded. Several of the Hotel's investors filed an involuntary bankruptcy petition against the Hotel in July 2018 (This blog took note of the filing on July 26, 2018). The business bankruptcy has not been resolved, and the trustee set Friday, February 15, 2019 as the deadline for interested parties to file proposals for resolving the bankruptcy.

The bankruptcy process has been complicated by allegations of fraud and mismanagement on the part of the hotel's managers. Also, many investors have sued each other in the hope of keeping the hotel open and preserving a portion of their investments. The original group of investors is forming a new entity in the hope of being able to purchase the hotel from the bankruptcy estate. A number of other parties are expected to put in bids. Some bids will propose liquidation of the hotel, while others will propose a restructuring of debt and the continued operation of the hotel. Dream Hotel Group, the hotel's original management firm, is expected to put in a bid.

What happens in a Chapter 13 bankruptcy?

A previous post here reviewed Chapter 7 bankruptcy, which usually results in the discharge of most of a debtor's financial obligations, but does not necessarily protect a person's home from foreclosure. Also, many residents of Rockland County earn too much money to qualify for Chapter 7 relief. Chapter 13 of the Bankruptcy Code is the procedure that is most frequently used by persons who cannot pass the means test for Chapter 7 bankruptcy.

Any individual can file for relief under Chapter 13 as long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200. These limits are occasionally adjusted to reflect changes in the consumer price index. Along with the petition, the debtor must file schedules of assets, liabilities, current income and expenses and executory contracts and unexpired leases. A Chapter 13 debtor must also file a statement of financial affairs. The debtor must also file the most recent tax return and any tax returns filed while the case is pending. Married individuals must provide this information for their spouses, even if the spouse is not joining in the filing. As with Chapter 7, the filing of a petition under Chapter 13 automatically invokes a stay of proceedings that halts all collection actions and prevents creditors from attempting to collect the amounts owed to them.

What happens in a Chapter 7 bankruptcy case?

Most residents of Rockland County who have never filed a bankruptcy petition view the process as a long, dark journey during which they will be forced to sell most of their assets in exchange for having many of their debts declared uncollectible by the bankruptcy court. Individuals who are contemplating bankruptcy usually file a petition under either Chapter 7 or Chapter 13. A Chapter 7 petition is a request for the bankruptcy court to discharge and declare uncollectible most of their debts. A Chapter 13 petition asks the court for more limited relief by presenting a plan for reorganization of the debtor's finances that proposes paying those debts over five years. The two proceedings have many differences, and this post will explore Chapter 7.

The filing of the petition invokes a court order called the "automatic stay." The automatic stay freezes all collection actions that have been brought or that could have been brought. Not all debtors are eligible to seek relief under Chapter 7. If a person's net income is greater than the median income for New York residents, the person will not be allowed to file a Chapter 7 petition.

NYC coffee shop chain uses Section 363 sale to find another owner

The coffee shop chain Fika opened in New York City in 2006. The company was known for its sleek modern ambience, and its shops became very popular. 10 years after it opened, Fika had 17 locations in the city, and its owner was telling people that the company intended to expand into more U.S. cities and countries overseas

Two years later, Fika is down to 6 shops and it has filed for Chapter 11 bankruptcy. Unhappily for the original owner, the company has been sold to a third party using the procedures of Sec. 363 of the Bankruptcy Code. The company was brought down by an overly ambitious expansion plan. The company issued a press release stating that each new location incurred significant start-up and operating costs that could not be covered by operating revenue. The company was therefore unable to secure additional investors to fund the expansion costs.

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