Florida Bankruptcy Law Blog

Beware Of Short Sales

Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Using Bankruptcy To Halt Eviction Against A Business

A caller late Friday asked whether a business could file bankruptcy to stop an eviction. The caller owned a small business with a few locations. Each location was owned by a separate corporation. One of the locations was doing poorly and was facing eviction within the next week. The lease was in the name of the business and personally guaranteed by the owner. The caller wanted to know if bankruptcy would stop the eviction and give the business more time to improve its operations.

A corporation can file Chapter 7 or Chapter 11. A Chapter 7 would stop the eviction, but the business would have to cease operations and its assets, if any, would be liquidated. A Chapter 11 would stop the eviction and give the business time to reorganize. However, this caller, like many small businesses, so not realize that Chapter 11 cases are complicated and very expensive. Chapter 11 generally is not appropriate for a small business which cannot afford even to pay rent.

The caller asked if he could file a personal Chapter 13 to stop the eviction. In that case, the individual owner, and not the corporation that owned the store, would be the bankruptcy debtor entitled to the benefits of the automatic stay. There is what is known as a "co-debtor" stay in Chapter 13, but the co-debtor stay applies to consumer debts. In this case, the individual’s Chapter 13 would no stay an eviction against the non-filing corporation.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Filing Bankruptcy In Florida After Short Move To Another State Looking For Work

A professional licensed in Florida emailed me this interesting fact situation. The man’s professional business in Florida failed. His business failure in Florida had caused him to run up substantial credit card bills in his name alone. He and his wife rented out his Florida home on a month to month lease, and they both moved out of state looking for better opportunities. His wife got a high paying job out of state. They rented an apartment in their new location where they have lived for two months.. He asks whether a Chapter 7 bankruptcy would be possible, and if so, could he file bankruptcy in Florida after returning to his former homestead. He is also concerned about his bankruptcy jeopardizing his wife’s money and jewelry.

There are some interesting issues in this real life fact situation. I do not think the debtor relinquished Florida residency by moving to a new location for two months. They probably did not abandon their Florida homestead by leasing it to someone else on a month to month arrangement. However, the real issue is whether they intended never to return to Florida when they went looking for a better life elsewhere. If they could prove they always intended to return to their former home they probably could protect the home under Florida’s homestead exemption.

The wife’s high paying job might cause them to fail the means test, except that the husband stated that his debts were primarily business related which fact would exempt his bankruptcy from means testing. The money his wife accumulated from her own work would be exempt from the husband’s bankruptcy. If he and his wife retained Florida residency any jointly owned accounts and property would be exempt in the husband’s case assuming there are no joint unsecured debts.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Does Business's Bankruptcy Stop Lawsuits Against the Business Owners?

Many personal bankruptcies are filed by owners of failed small businesses. Sometimes the bankruptcy is filed by the owner to discharge personal liability, and other times the business entity files bankruptcy to reorganize or liquidate the business operation. I received an email from a business owner whose business had filed Chapter 11 bankruptcy and who was confused about the effect of his business’s filing on legal actions pending against him personally as the director, officer, and guarantor of the business. He stated that business creditors had filed state court actions for, among other things, fraud, breach of fiduciary duty, and fraudulent conveyances. The writer wants to know if his corporate bankruptcy prevents or stays the creditors’ state court proceedings.

The general answer is that the business bankruptcy does not stop creditors’ pursuit of claims against the business owner in state court. The business and the owner are distinct legal entities. Each may, or may not, seek bankruptcy protection. Even though the owner may be jointly liable with the business for the business debts the bankruptcy filing of the business will not generally stay separate suits against the owner. One exception to this general rule may be the fraudulent transfer actions in state court. If the creditors are alleging the business may fraudulent conveyances to the business owner (such as, distributions of money or property to avoid business creditors) the fraudulent conveyance claims probably belong to the bankruptcy trustee and are stayed in state court. The breach of fiduciary duty claim may also belong to the bankruptcy trustee. In many of these failed business situations both the business and the business owner end up filing their own bankruptcy petitions.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Opinions Wanted: Are There Punitive Damages For Fraudulent Conveyance Under the Bankruptcy Code?

I am aware that some readers of this blog are attorneys, and I write this post to seek their opinion.

I found an interesting issue in a California bankruptcy case concerning fraudulent conveyance. A bankruptcy corporation paid many expenses within one year of bankruptcy including salaries and other money due to corporate insiders who had provided services to the corporation. The Trustee filed a complaint alleging the payments to insiders were fraudulent transfers. Some corporate insiders were Florida residents. The bankruptcy trustee sued these Florida insiders under the fraudulent conveyance sections of the bankruptcy code and under Florida’s fraudulent conveyance statute. A jury returned a verdict against the insiders, in favor of the bankruptcy trustee, finding that there were fraudulent transfers and that such transfers were made "with malice." The court entered a verdict against the Florida insiders finding them jointly and severally liable for the total amount of fraudulent transfers by the debtor corporation and imposing $2 million punitive damages. The individuals are considering whether a fraudulent transfer judgment can include punitive damages.

I have not heard of any court decision that punitive damages are permitted for fraudulent conveyance under the bankruptcy code. I know one case from 1984 in Texas were a federal appellate court held there can be no punitive damages under the applicable bankruptcy code sections. I think some bankruptcy court have awarded punitive damages for fraudulent conveyance under applicable state fraudulent transfer statutes. Florida courts take a strict view of fraudulent conveyance remedies and have not allowed any damages other than the reversal of the transaction. Anyone’s informed thoughts would be appreciated. Is there a basis for punitive damages for fraudulent conveyance under the bankruptcy code?

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Simultaneous Chapter 13 Bankruptcies?

I received an email from someone currently involved in a Chapter 13 bankruptcy somewhere in Florida. The debtor stated that he filed bankruptcy two years ago, and he states that at the time he filed his Plan his home mortgage was current. Now his home mortgage is in arrears; he says the mortgage company got a relief from stay; and he wants to know if a debtor can file a new Chapter 13 case just to take care of the mortgage during the time when the debtor is paying on a Plan from an existing Chapter 13 case. The short answer is "no." The bankruptcy law does not provide for simultaneous bankruptcies, nor does the law contemplate bankruptcies filed with respect to selected assets.

The question does not make sense. The initial Chapter 13 bankruptcy should have included all debts and required current mortgage payments. I don’t see how this debtor fell behind on the home mortgage without defaulting in Plan payments under the initial Chapter 13, assuming the existing 13 including the current mortgage payments. It may be that the debtor failed to list his mortgage in his initial bankruptcy so that the Plan payments did not include current mortgage payments. If that’s the case, his mortgage problems are self-created and he will lose his house to foreclosure.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida