Foreclosures, Tax consequences & bankruptcies

Business bankruptcies are up 66% nationwide from the 1Q of 2007 to 1Q of 2006..

"Part of it certainly is a rebound from changes in bankruptcy law," said Daniel North, chief economist with Euler Hermes ACI, a credit insurance company in Owings Mills, Md. The changes attempt to shift filers away from liquidation into repayment plans.

"The other part is a deteriorating economy due to high energy prices, a tightened monetary policy and the housing meltdown," he said. "We're seeing pressure, particularly on suppliers of building materials and anybody who relies on the housing industry."

Locally, the crunch is most obvious in real estate deals and transactions, said Dale Ginter, a bankruptcy attorney with Downey Brand LLP, Sacramento's largest law firm.

"People who were able to refinance or sell their way out can't do it now," he said. "And my guess is it will continue for another year or so."

The other problem that foreclosed subprime borrowers will feel is the tax consequences of cash received from defaulted equity lines of credit.. forcing more bankruptcies..

There's another downside to the housing meltdown that's driving people toward bankruptcy court: Owners with second mortgages who owe more than their home is worth might face income tax consequences from foreclosure. Bankruptcy can wipe out the tax debt.

"People are filing bankruptcy to avoid this nasty, horrible tax," Gibbs said.