Florida Bankruptcy Law Blog

Mortgage Deficiency Judgments: A Different Opinion From Creditors

In response to my statements on this Blog that most lenders do not pursue mortgage deficiency judgments, I received a email from an experienced collection attorney expressing a contrary opinion. The collection attorney stated that he knows that lenders will be pooling mortgage deficiency judgments and selling them to collection companies for pennies on the dollar. Credit card companies have an established practice of selling non-performing credit card debt at seep discount. This same attorney says that many borrowers who walk away from mortgages will be in for a big shock in the future when collectors who have purchased the mortgage companies deficiency rights surprise the borrower with legal action.

Whether or not the attorney’s prediction is correct will be seen in the future. As stated often, my own experience over the past few years is that deficiency judgments are rare, and most attorneys and bankers I have spoken with agree. Yet, if its economically practical to purchase mature deficiency claims then there might develop an industry to pursue some of today’s numerous homeowners walking away from their mortgages. The homeowner needs to be aware of all opinions and predictions in order to make informed financial decisions.

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

Deficiency Judgments: Update On Tax Consequences

Mortgage deficiency judgments are main reason people express currently for seeking my asset protection advice. I have previously written on this Blog that most lenders do not pursue mortgage deficiencies and some of the reasons for this policy. I just recently spoke with an attorney who represents many mortgage lenders. He said that lenders continue to be inundated with foreclosures and are having difficulty managing the cases. None of the lenders he works for are pursuing deficiency judgments as a matter of course. Many lenders are planning to send 1099 tax forms to borrowers. The lenders file and send the 1099 forms to document their own tax loss. The borrower who receives a 1099 from a foreclosure must deal with its income tax consequences.

I have previously explained in prior Blog posts that borrowers can escape income tax liability associated with foreclosures, deeds in lieu of foreclosure, or short sales by filing a report of insolvency with the IRS. Most people lose properties because the mortgage debt exceeds property value, and the borrowers does not have enough other assets to continue mortgage payments. Most of these borrowers are insolvent. Also, anyone who files bankruptcy is presumed to be insolvent for tax purposes.

To be sure, borrowers concerned about tax consequences of mortgage foreclosure should consult with their CPA. The effect of receiving a 1099 from a mortgage lender is mostly a tax issue rather than a legal issue.

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

Preferential Repayment Of Parents' HELOC Loan

If a debtor repays a prior unsecured loan to another family member within one year of filing bankruptcy the trustee can recover the repayments from the family member as a preferential payment. Debtors are not permitted to prefer family members over unrelated unsecured creditors.

A prospective bankruptcy debtor stated that his parents used a home equity loan secured by the parents’ primary residence to borrow money to pay the debtor (their child) living expenses while he was looking for a job. The debtor did not sign a promissory note to the parents. The debtor found a job and started making the payments on the parents’ heloc loan. The debtor asked whether his payments to his parents’ lender are preferential repayments of an unsecured loan to his family members, or whether the payments are simply payments of a secured debt outside the scope of the preference statutes.

Although the home equity line of credit is a secure debt, it is not the debtor’s secured debt. In my opinion the debtor’s loan to the parents is an unsecured loan. It does not matter where and how the parents got the money to make the unsecured loan to their child. Repayment of the parents’ loan is a preferential repayment of an unsecured loan even though the debtor is writing checks to the parents’ home equity lender. I think a bankruptcy Trustee could go after money paid to the parents’ heloc lender within one year prior to a bankruptcy filing.

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

Credit Repair After Bankruptcy

Often I am asked about rebuilding credit after bankruptcy. Although credit rating is a lending issue and not a legal bankruptcy issue, I understand from reports of prior clients that most people find it easier than first throught to re-establish their credit ratings after bankruptcy. This past Sunday's Orlando Sentinel included an informative article about how bankruptcy debtor can repair their credit. Link: Rebuild your credit after bankruptcy -- OrlandoSentinel.com.

Based on the article most bankruptcy debtors are overly fearful of bankruptcy's effect on credit. The Orlando Sentinel  article points out that bankruptcy debtors will receive offers for new credit cards shortly after filing bankruptcy. Although bankruptcy is on your credit report for up to ten years it usually takes a much shorter time to repair the credit damage. Mortgage lenders tell me that bankruptcy debtors can qualify for new mortgages within two years of their Chapter 7 discharge or the filing of a Chapter 13.

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

Why Won't Mortgage Company Negotiate With Me?

At least once a day someone calls me about problems they face paying one or mortgages on their Florida real estate. Many people ask if I could assist them, or at least advise them, in negotiating a work out agreement with their lenders. They assume their lenders will realize that it is better for the lender to adjust their mortgage payment schedule than to force the borrower into foreclosure. The unfortunate fact is that as a practical matter very few lenders will work out customized deal with mortgage borrowers. Some lenders will accept short sales for borrowers already in default, but otherwise, most lenders will not deal with borrowers individual financial situations and modification requests. The main reason for lender inflexibility was expressed in a Wall Street Journal article written by economist Martin Feldstein

The article appearing in the March 7, 2008 Journal stated,

“Most mortgages are no longer held by originating lenders, but are securitized and sold to investors world-wide. More significant, mortgages are used to create complex, asset-backed securities that are cental to current credit-market problems. Investors no long own specific mortgages but only have rights to certain conditional payment streams. So generally, it is no longer possible to prevent foreclosures by negotiations between borrowers and lenders” In other words, you can’t negotiate adjustments to your mortgage payment and terms because there is no one to negotiate with.

For the same reason, there is no one in charge of pursuing deficiency judgments. The best approach for most people who find themselves hopelessly behind their upside-down mortgages is simply send in the keys and walk away.

What Happens When Debtor Buys A Car For His Child

Many young adults need their parents’ help to purchase their first car. Sometimes the parent puts the car in their own name in order to get lower insurance premiums or better loan rates. Typically, the child drives the car, makes the car payments, and pays for gas and repairs. When the parents decide to file bankruptcy they describe the car as their child’s car. Most bankruptcy trustees will argue that the car is the parents property and that any equity in the car becomes part of the bankruptcy estate. Parents will have to pay the bankruptcy trustee the amount of non-exempt equity in the car they intended to purchase for their child. Parents wanted to purchase a car for a child over 18 years of age should put the car in the child’s name.

Debtors who own "their child’s car" in this type of situation have a possible defense against a bankruptcy trustee’s efforts to bring the car equity into the bankruptcy estate. The parents could assert an argument that they hold legal title in trust for, or as a nominee for the child. The child has all equitable interest in the car. This argument could be effective where the child has paid his own money for all car expenses and where the child controls the use of the car.

posted by Jonathan Alper, bankruptcy and estate planning attorney, Orlando, Florida