Florida Bankruptcy Law Blog

Bankruptcy Discharge of Credit Card Debt Used to Pay Taxes

A caller asked me if he could discharge in bankruptcy a credit card charge of $10,000 used to pay property taxes on commercial real estate. The general rule is that all credit card debt and other unsecured debts are dischargeable in Chapter 7 bankruptcy. However, Section 523 of the Bankruptcy Code provides for exceptions. One the exceptions is certain income tax and property tax which are "priority" debts. The Bankruptcy Code does not permit a debtor to discharge credit card debt incurred to pay non-dischargeable taxes. In other words, the Code does not allow people to convert non-dischargeable property tax or income tax into unsecured credit card debt to be wiped out as part of general unsecured debts.

Are Partnership Distributions Means Test Income?

The means test considers all regular family income. In some cases, it is unclear whether money the debtor receives to pay living expenses is income for means test purposes. Consider a person who invests $200,000 in to a business partnership. The partnership initially generates positive cash flow which is distributed to the partners. After some time, the business slows down and does not produce cash flow from operations. The investor needs money to pay living expenses. Each month the partnership agrees to pay the investor approximately $5,000 as a return of his initial capital contributions. At this rate, the investor will receive $60,000 per year from the partnership. The investor asked me whether the return of capital is considered as income for his means test analysis if he has to file Chapter 7 bankruptcy.

Means tests are reviewed and administered by the U.S. Trustee office. I called an attorney for our local U.S. Trustee and posed the question. The attorney could not provide a definitive answer. The attorney said that if the partnerships distributions to the investor were in the nature of loans then the money would not be considered means test income. If the money was profit distributions then it would be income. If the money was return of capital the treatment is unclear. The best plan would be for the partnership records to show that the $5,000 monthly payments were loans. There should be a partnership resolution documenting the amount and the nature of the distributions. It would probably help this prospective debtor if distributions required the consent of other partners, and if under the partnership agreements, the distributions could be suspended by partnership vote.

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

Mortgage Deficiency : Time Limits

A mortgage lender has the option to pursue a deficiency judgment following a foreclosure. Many people have asked me how long does the mortgage lender have to decide whether or not to get a deficiency judgment. Otherwise stated, what is the statute of limitations applicable to deficiency judgments. I do not practice civil litigation and have no personal experience litigating mortgage deficiency proceedings. I referred the question to a professional colleague who is involved in real estate and lender litigation. He said that there is a four year statute of limitations on deficiency judgments. If so, a lender has up to four years after a foreclosure judgment to file an action for a deficiency judgment against the borrower. As a practical matter, most lenders decide whether or not to seek a deficiency shortly after the foreclosure is complete. It is possible, but unlikely, a borrower will face a deficiency action years after the foreclosure judgment.

More On Mortgage Deficiency Judgments

In the current real estate recession many of my new clients are investors who purchased too many residential rental properties too late in the market cycle. Most of these people are frustrated because their mortgage lender will not negotiate to adjust payments until the market improves. They also fear the lender’s active pursuit of deficiency judgments if there is a foreclosure. This past week I discussed the current mortgage and real estate situation with a man with over 25 years in the mortgage lending and banking business. What he told me may interest some of you.

He explained that most people believe that their mortgage lender is the neighborhood bank or mortgage company with whom they placed the mortgage initially. In today’s global economy, once a loan is issued the mortgage note is then packaged with other mortgages and then sold to much larger financial institutions. He said that large hedge funds buy millions of mortgage debt and then turn the mortgages over to another company for servicing. These large hedge funds cannot negotiate mortgage adjustments with individual borrowers; they cannot make separate deals with each person who claims financial trouble. The large mortgage service companies adopt policies that apply to everyone and then uniformly apply these policies. Most often, if you are not already in default, the mortgage service company has no program to help you.

Although some of the hedge funds and service company go for deficiency judgments after foreclosure, most do not. These large financial institutions which hold most of the residential mortgages are not set up to litigate deficiency judgments because the ability to get a deficiency and the amount of the deficiency is different in every case. The individual I spoke too also pointed out that in "bank think" a person who cannot pay his mortgage probably is not financially able to pay a deficiency judgment so it does not pay the mortgage service company to pay additional legal fees to get deficiency judgments.

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