e- NEWSLETTER

April/May 2005

Jessica M. Kirsch
Editor-in-Chief

Taxation Law

ALTERNATIVE MINIMUM TAX DEDUCTION FOR HOME MORTGAGE INTEREST
By: Cameron R. Monti
 

    Ahhhh....once again, the dreaded alternative minimum tax (AMT). For most, the three letter acronym brings shivers to one’s spine. For once, however, there is some good news to report with respect to AMT. Qualified housing interest, which generally is deductible for AMT purposes, includes interest paid on a mortgage that has been refinanced more than once, according to the recently rendered Revenue Ruling 2005-11. The IRS stated that interest paid on a loan that is refinanced more than once will retain its status as qualified housing interest, to the extent that the amount of the loan is not increased.

    Revenue Ruling 2005-11 may affect the amount some taxpayers report as a home mortgage interest adjustment on Form 6251, Alternative Minimum Tax-Individuals. The instructions for Form 6251 include a worksheet to help taxpayers determine the correct home mortgage interest adjustment. As clarified by Revenue Ruling 2005-11, a taxpayer should include in the worksheet calculation as interest paid on a mortgage whose proceeds were used to refinance an eligible mortgage, qualified housing interest on a mortgage that previously was refinanced. If you have any questions, please contact Cameron Monti at cmonti@lavellelaw.com.
 

Bankruptcy Law

A SIGNIFICANT CHANGE IN BANKRUPTCY LAW IS ON ITS WAY

By: Timothy M. Hughes

A bankruptcy reform bill is expected to become law soon, will make filing for bankruptcy more difficult. It will severely limit options for debtors and give creditors more recourse in some instances.
   

    Under current law, the majority of consumers who file for bankruptcy do so either under Chapter 7 or under Chapter 13. In 2004, over 1.1 million people filed for Chapter 7. Since many Chapter 7 filers don't have assets that qualify for liquidation, credit card companies and other creditors usually received nothing.
  

     In 2004 there over 445,000 Chapter 13 filings. In a Chapter 13 bankruptcy, you're put on a repayment plan of up to five years. Any debts not addressed by the repayment plan don't have to be paid. If the bill passes into law, fewer people will be allowed to file under Chapter 7; more will be forced to file under Chapter 13.
Here are some of the major changes the bill would implement:
 

    1. Qualifying (means) Test: Currently, it's up to the court to determine if your case qualifies for Chapter 7 bankruptcy.
Under the new bill, your income will be subject to a two-part means test. First, it will be subject to a formula that exempts certain expenses (rent, food, etc.) to determine whether you can afford to pay 25 percent of your "nonpriority unsecured debt" such as your credit card bills. Second, your income will be compared to your state's median income.

    2. Credit Counseling: Before anyone can file bankruptcy under the Bankruptcy Reform Act, they must receive a certificate from an APPROVED non-profit credit counseling agency that states that they have received a briefing on opportunities for available credit counseling and have been assisted in performing an individual budget analysis.
Most credit counseling agencies will not be approved under the Bankruptcy Reform Act. The US Trustee’s Office will (eventually) provide a list of Credit Counselors. Once it is published you should choose ONLY an agency on the list. Until then, make sure any Credit Counseling Agency you deal with belongs to the AICCCA or the National Foundation of Credit Counseling. If the counseling agency says it cannot help you, or the proposed plan payments are more than you can afford, you may go to a debt relief agency (an attorney or bankruptcy preparer) to discuss filing a Chapter 7 or a Chapter 13 bankruptcy petition. Because the Bankruptcy Reform Act adds so much complexity we suggest that you consult with an experienced bankruptcy attorney.
 

    3. Calculation of Income and Expenses:  In general, the rules for calculating what you must repay to creditors have been altered to favor creditors. If you are required to file a Chapter 13 case under the means test, then your monthly expenses will be closely compared to the IRS National and Local Standard Expense guidelines. The Bankruptcy Reform Act strictly limits the amounts you can claim as expenses. The court may require you to eliminate or greatly reduce spending on luxury items (like expensive cars, SUV’s, jewelry, etc.), extracurricular events for children (sports, etc.), vacations, etc. The tight budget required under the Bankruptcy Reform Act can result in a substantial burden on your family that is not imposed under the current law.
 

    The Bankruptcy Reform Act does provide several allowed expenses in addition to the IRS guidelines. For example, up to $1,500 per year per child may be paid for a dependent under age 18 to attend a private or public elementary or secondary school. Charitable contributions up to a total of 15 percent of gross income may be made to qualified religious or charitable entities or organizations. Actual expenses that are reasonable and necessary for the care and support of an elderly, chronically ill, or disabled family member are also allowed.
 

    4. Other Changes: For example, non-purchase (i.e.-the money borrowed was not used to buy the item) liens held by Finance Companies on electronic household goods can now be avoided only on 1 radio, 1 television, 1 VCR, and 1 computer. The practical effect is that if you have 2 tv’s, 2 computers, a vcr plus a dvd, etc., you must pay the finance company “replacement value” (retail value considering condition) for those items to keep them (in both Ch 7 and Ch 13 cases). If you financed a car within 2 ½ years of filing, or made any other major purchase within 1 year, you must pay the full balance owed to the creditor to keep the item, even if, for example, the car has high mileage and is worth only half of what is owed. You may return the car to the creditor, but with financial problems you would probably have a difficult time replacing it with a reliable vehicle.
 

    5. Preparer Responsibility: One of the most significant changes is that the person preparing a bankruptcy petition must give assurances about the accuracy of the contents of the petition. In the case of attorneys they must make “reasonable inquiry to verify that the information contained in such documents is well grounded in fact”. In the existing system the debtors sign the petition under penalty of perjury, under the Bankruptcy Reform Act the attorney must verify the petition and schedules. That requirement alone will probably significantly increase the cost to file bankruptcy, furthering the goal of Bankruptcy Reform to discourage people from filing at all.

    6. Conversion to Chapter 7: In the past debtors often converted from a Chapter 13 case to a Chapter 7 case after the secured portion of their debts were paid in full by paying creditors the value of the items securing the debts. Under the Bankruptcy Reform Act, if there is an unsecured portion of a debt, and a debtor converts to a Chapter 7 case, the lien secures repayment of 100% of the unsecured portion, and the debtor may find themselves in instant default. For practical purposes, most debtors will be required to complete their Chapter 13 plan (36-60 months) to get the benefit of a reduction in the amount they pay to secured creditors.
 

    7. Child and Spousal Support Obligations: Child and spousal support obligations are given top priority and, with very few exceptions, must be brought current and kept current during the pendency of a bankruptcy. Obligations for repayment of debt that are in the nature of alimony, maintenance, or support, and that arise out of a state court divorce proceeding, are already non-dischargeable – however the Bankruptcy Reform Act makes it easier for the non-filing ex-spouse to preserve the non-dischargeability and enforce those payments.
 

    8. Further Miscellaneous Provisions: If a judgment for possession of a leased or rented apartment or house has already been given to a landlord, a debtor must certify that a defense exists in state court and must pay the entire rent owed within 30 days. The minimum time between filing Chapter 7 cases has been raised from 6 years to 8 years. If a discharge has been granted in a Ch 7 case, a Ch 13 case apparently may be filed but before a discharge can be entered in the Chapter 13 case the debtor’s Ch 13 plan must continue until at least 4 years from the date of the Ch 7 discharge. Several provisions strongly discourage multiple filings, even if additional bills accrue after a first case. In general, tax returns that have not been filed must be filed. The dischargeability of taxes in bankruptcy has been further reduced. The length of time that a debtor must live in a state to claim that states exemptions has, in most cases, been increased to 720 days, and a cap of $125,000 has been put on homestead exemptions for property acquired in the last 3+ years. The Chapter 13 “super-discharge” that is obtainable under current law is greatly reduced under the Bankruptcy Reform Act.
Conclusion. There is no question that the current bankruptcy laws offer more relief from the burden of debt than the Bankruptcy Reform Act will. If you have a lot of credit card debt, large medical bills, high mortgage payments (or have a variable rate mortgage), high car payments, you need to carefully review your financial situation and if needed act now. Most of the provisions of the Bankruptcy Reform Act will not take effect until 6 months after the date President Bush signs it into law. You may have that long to get your finances in order and decide if you need to file bankruptcy.

Real Estate Law

ASSIGNMENT OR SUBLEASE - THAT IS THE QUESTION.
By: Kerry M. Lavelle


    Assignments, subleases and leases are commonplace, the differences between the two are a product of common law. Without a thorough understanding of differing rights among landlords, tenant's, and transferees (sub-tenant's resulting from assignments and subleases), parties may find themselves unpleasantly surprised.

    What distinguishes an assignment from a sublease?

    The quantity of the interest transferred is the difference.

    In an assignment, when a tenant transfers its entire estate in the leasehold estate, the transfer is called an assignment.

    When a tenant transfers less then the remaining term or less a the tenant's entire estate, thus leaving the original tenant with the reversionary interest in the lease, the transfer is called a "sub-lease".

    In an assignment, privity of contract between the landlord and the original tenant remains intact. However, the assignment of lease ends the original tenant's right to possession, but absent is an express release under the terms of the lease, its contractual liability under the lease continues. When the assignee takes possession of the premises, the assignee obtains privity of estate with the landlord. Privity of estate binds the landlord and the assignee to the terms of any covenants running with the land, but only so long as the privity of estate continues. As a result, the assignee becomes liable to the landlord for the payment of rent and the breach of any other lease covenants running with the land. The assignee however does not come into privity of contract with the landlord unless the assignee expressly assumes the tenant's obligations under the lease.

    As previously noted, the original tenant can not relieve itself from liability under the lease nearly by assigning the lease to a third party. In an assignment, the tenant remains secondary liable for the obligation of the assignee of the lease.

    In secondarily sublease, unlike an assignment, the subleasee does not establish privity of estate nor privity of contract with the landlord. Instead, when a sublease occurs, the original tenant retains both privity of estate and privity of contract with the landlord but not the subtenant. A legal relationship exists between a landlord and subtenant.

    What provisions does your lease contain? Many courts perceive restrictions on the assignment or sublease as a restraint on alienation. As a result, courts often interpret restrictive language against the landlord. For instance, prohibitions against assignments do not preclude subleases and visa-versa.

    Most leases contain language requiring landlord consent for transfers of the tenant's leasehold estate. When the requirement for landlord's consent exists, the tenant's failure to obtain such consent generally will enable the landlord to recover damages. It is important to note, however, that the breach of a covenant prohibiting the assignment or sublease does not, in and of itself, terminate the lease. Although when an assignment in breach of the restriction may provide the basis for forfeiture, the assignee will still receive a good title to the lease as a result of the assignment. The landlord will still be entitled to recover rent from the assignee in spite of the breach.

    Under common law, in some state statutes, assignment and subleasing creates specific sets of rights among the landlord, tenant, and transferee. These preestablished results may be undesirable from the standpoint of the parties and the structure of a particular transaction. Thus, drafting a compressive transfer clause plays an essential roll to insuring that results are consistent with the expectations of the parties.

    If you have any questions on your lease, do not hesitate to contact us at Klavelle@lavellelaw.com to discuss your situation.
 

Family Law
 

THE NEW ILLINOIS GRANDPARENT VISITATION STATUTE
By: Julie M. Dombrosky
 

    Illinois grandparents can now petition for court-ordered visitation with their grandchildren. This new statute, which went into effect as of January 1, 2005, also extends to great-grandparents and siblings. The statute is more narrow than an earlier Illinois law that was invalidated by the Illinois Supreme Court in 2002, making Illinois the only state without such a statute. The reaction was substantial enough to impel Illinois legislators to get to work drafting a new law that would hold up to constitutional scrutiny.
 

    To have standing to bring a petition for visitation, the petitioner (i.e., the grandparent, great-grandparent, or sibling) must show that his or her requests for visitation with the child have been unreasonably denied by the child’s parents, and that: (1) one parent has died, (2) one parent has been declared legally incompetent, (3) one parent has been sentenced to jail for more than one year, (4) the parents are divorced and at least one of them does not object to the visitation, (5) a parent’s rights have been terminated (other than in Juvenile Court), and (6) the child was born out of wedlock and the parents are not living together.
 

    At trial, the grandparent, great-grandparent, or sibling must overcome the court’s presumption that parents are fit to make decisions regarding who the child spends time with. The court recognizes that the parent has a fundamental right to parent his or her child. Accordingly, visitation with the grandparents will only be ordered if they are able to show that some mental, emotional, or physical harm will come to the child if visitation is denied.
The new statue includes a number of factors that a court may consider in its determination of whether to order the visitation. The factors include, but are not limited to: (1) the preference of the child, if the child is old enough to state a preference, (2) the mental and physical health of the child, (3) the mental and physical health of the petitioner, (4) the length and quality of the relationship between the child and the petitioner, (5) the quantity of visitation time requested, (6) the child’s customary activities, (7) whether the child resided with the petitioner for at least six months, and (8) whether the petitioner had frequent or regular contact with the child within 12 months of filing the petition.
 

    The law sets a high bar for grandparents seeking court-ordered visitation with their grandchildren, and makes clear the state’s support of a parent’s right to raise his or her child without interference from the state unless the child’s health, safety, or welfare is at risk. However, this important right has returned to Illinois and is available where the circumstances warrant its application.
 

    If you have questions regarding this or other visitation issues, please feel free to contact jdombrosky@lavellelaw.com.
 

For past e-newsletter articles of interest, please visit the Lavelle Legal Services, Ltd. website at:         http://www.lavellelaw.com/newsletters/newsletter.htm.

 

This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.