Florida Bankruptcy Law Blog

Second Mortgage Lender More Likely To Pursue Deficiency Judgment

I have often written about mortgage deficiency judgments pointing out that up to now few institutional mortgage lenders are pursuing deficiencies in Florida. Borrowers should distinguish between personal liability on first and second mortgages. When either the first or second mortgage holder forecloses the first mortgage will likely take back the property. The first mortgages gets land which eventually can be sold. The second mortgage holder gets nothing at the foreclosure sale. If the first mortgage holder pursues a deficiency judgment (and again, this is usually not the case), the borrow can defend the action in part by arguing that the mortgagee has been satisfied by its repossession of the property. The borrower does not have this defense against the second mortgage. The second mortgage, having received nothing of value in a foreclosure, can sue on the mortgage note. The second mortgage can simply demand repayment of the promissory note underlying the mortgage without going through a foreclosure proceeding. The property value is irrelevant when the lender sues to collect the note.

I have not seen any case to date where a first or a second mortgage lender has sued the homeowner personally. I think the risk of personal liability is significantly higher when there are more than one mortgage obligations. It is also more likely that a second mortgage lender who does not foreclose can wait up to five years to bring suit on the underlying note after the first mortgage lender’s foreclosure action is complete.

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

Defending Mortgage Foreclosure

There are so many foreclosures and so few attorneys who know how to defend on behalf of the homeowner. I have referred many clients facing foreclosure to an Orlando real estate attorney named David Cohen. David has had good success delaying foreclosures and thereby giving his clients extra time to remain in their homes without paying any mortgages or taxes. David recently gave me an overview of his tactics and results fighting foreclosure suits on behalf of many people who were either unable to make payments or who decided to walk away from their homes with negative equity.

David Cohen explained that simply by filing an answer to a mortgage foreclosure complaint will give the homeowner at least five or six months in the home. Most homeowners do not answer foreclosure complaints, and foreclosure judgments are entered by default. Default foreclosure judgments are easy for the mortgage lender to process quickly. Filing an answer requires the lender to turn the file over to legal staff for more involved litigation. Creative defenses make the foreclosure more difficult. In some cases, a defense attorney can find technical defects in the foreclosure suit or the original loan documents which can substantially dely foreclosure and even defeat the lender’s lawsuit. David Cohen says that in most cases he is able to delay foreclosure suits more than six months and often as long a nine months after the complaint is filed and the homeowner is served with a summons.

Legal fees associated with foreclosure defense usually range between $1,500 and $3,500 over a four to nine month period. Complicated cases which delay foreclosure even longer may costs more for legal help. For most homeowners, the legal fees of foreclosure defense will be substantially less than their monthly housing expense so that it usually is a good business decision to hire an attorney to defend and delay foreclosure actions.

Workers Compensation Payments in Bankruptcy

I consulted today with a client who is the beneficiary of a workers’ compensation award. He currently receives monthly workers’ comp payments, and he expects an additional lump sum settlement in the near future. A creditor recently received a large court judgment against this client. The client wanted to know if the judgment creditor could garnish monthly workers’ comp payments or could levy upon the lump sum settlement after it is received and deposited in the debtor’s bank account.

Chapter 222 of the Florida Statutes included Florida’s property exemptions. None of the sections in Chapter 222 pertain to workers’ compensation benefits. However, the Florida Statutes treat workers’ compensation in a separate Chapter. Section 440.22 of the Florida Statutes provides that, "compensation and benefits shall be exempt from all claims of creditors, and from levy, execution and attachments or other remedy for recovery or collection of a debt." At least one bankruptcy court stated that compensation benefits remain protected if they are deposited in a financial account as long as the money is traceable to the workers’ comp payment.

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

Negotiating With Car Lenders

I had a conversation with some bankruptcy attorneys at the bankruptcy court building. The attorneys told me that their own bankruptcy clients have had increasing success negotiating with automobile finance companies to modify terms of car loans after the clients filed Chapter 7 bankruptcy. Apparently, the declining value of used cars in a weak economy has made car lenders more flexible. The attorneys told me that their clients reported that automobile lenders are willing to modify interest rates, payment amounts, and even reduce loan balances to entice the borrower/debtors to reaffirm car debt. The lenders are less interested in repossessing used cars. Lenders are more likely to renegotiate with debtors who are behind on car payments at time of filing.

If you are preparing to file bankruptcy and are behind on car payments you might try calling your car lender to see if you can convince them to modify your car loan. If the lenders refuse to discuss modification, call them again after you file bankruptcy. For some people, even a reduced payment will not make reaffirming debt worth while. For others, a reduced car payment is what they need to afford the car they have.

I find that many bankruptcy clients are better off giving up their present car even if their lender might improve rates or terms. The simplest solution is to file bankruptcy and buy an inexpensive used car with low payments. Clients believe they cannot qualify for a car loan after filing bankruptcy. However, most lenders tell me they will extend car credit following a Chapter 7 bankruptcy discharge. Even if you pay a higher interest rate, the higher rate of a modest car loan is usually more affordable than a modified car loan on an expensive car with negative equity.

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

Bank of American Gets Tough On Credit Card Payments

People who bank at Bank of America and who have credit cards through the same bank are having problems when they don’t pay credit card payments. Bank of America, more than most banks, is enforcing a provision in their credit card agreements which allows them to take money out of customers’ bank accounts to pay the credit card. They are taking money without any advance notice. No client has asked me to review their Bank of American credit card documents, so I am assuming the bank has a legal contractual basis for their practice.

If you bank at Bank of American and have their Visa or Mastercard cards, and if think you may fall behind on credit card payments, you should consider moving your checking account to another bank. Even if you leave open the BOA checking account, open an account somewhere else and move most of your money. I don’t know if other banks have the same rights in their customer agreements. If you bank somewhere else you should find out whether your bank can automatically deduct credit card payments from your accounts at the same bank.

A bank cannot invade your checking account once you file bankruptcy.

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

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

Did Transfer of IRA Proceeds Lose Protection Prior to Bankruptcy?

A prospective Chapter 7 bankruptcy client told me he had recently withdrawn substantial money from his IRA and had given the money to his adult son. The client intended to buy a house to be used as his new homestead, but he had bad credit. The son had good credit. The client gave the IRA money to his son so that the son could qualify to buy the house in the son’s name. Subsequently, the son would transfer title to the parents. The client withdrew the IRA proceeds and deposited the money in his own account before transferring the same money by written check to the son. The issue was whether the money in the son’s account is protected if the parent files bankruptcy. Was the transfer of the money to the son a fraudulent transfer?

This is one of those situations where innocent planning error could undermine valid substantive planning. The IRA was exempt from creditors and the bankruptcy trustee under Florida statutes. The IRA statutes do not expressly protect proceeds from IRA or other qualified pensions; in contrast, the statutes expressly protect annuity proceeds. There are some court decisions which hold that the legislature intended to protect the proceeds of retirement accounts, but the law is not clear.

There can be no fraudulent transfer of an exempt asset by definition. If the client transferred the money directly from the IRA account into the son’s financial account I do not think any creditor could attack the transfer as fraudulent if the transfer was a gift to the son. But, when the creditor withdrew the IRA money and deposited into his own financial account the money may have lost its exempt status because the IRA was converted into a normal bank account in the client’s own name. The subsequent transfer to the son could at least be challenged as a fraudulent transfer. .

Whether the transfer to the son is a fraudulent transfer depends on the parties’ intent. The client would argue that the intent clearly was to give the son exempt money from the IRA as a gift. A bankruptcy trustee might argue that the transfer was to the son, not as a gift, but to the son as a nominee or alter-ego of the debtor because the son was going to use the money to by a house for the debtor’s exclusive personal use. The money would be non-exempt at least until the new homestead was purchased and occupied. Like most fraudulent transfer issues, this situation depends on the particular facts and the testimony of the participants. This plan could have worked without challenge with more careful asset protection planning.

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

Income Tax And Bankruptcy

read over materials about asset protection from income tax debt which had been published by Larry Heinkel www.taxproblemsolver.com. . Larry is an expert in the area of income tax debt in bankruptcy. His article pointed out some common misunderstandings about tax debts. First, Florida’s homestead law does not protect homeowners from income taxes. A tax lien attaches to your homestead unlike a civil judgment. Next, Florida’s statutes prohibiting creditors from garnishing wages of the head of household does not protect against IRS collections. Also, a divorce decree which specifies which spouse is responsible to pay tax liability is not binding on the IRS. The IRS can go after either divorced spouse for the full amount of tax debt.

Discharging tax debt in bankruptcy is complicated. The general rule is that Chapter 7 bankruptcy can discharge taxes for which the tax return was due to be filed more than three years prior to the bankruptcy. The "due date" is April 15 following the tax year plus extensions. Larry Heinkel points out that there are many events which can extend the due date for purposes of bankruptcy analysis. Also, tax returns first filed within two years of bankruptcy or taxes assessed within 240 days of bankruptcy cannot be wiped out. Taxes in bankruptcy is a very complicated area which is why Mr. Heinkel’s services are in demand. Make sure your bankruptcy attorney really understands the income tax rules.

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

Chapter 7 Debtor Uses Investment Mortgage Debts To Pass Means Test

There has been a significant increase in bankruptcies by people facing default in one or more investment real estate mortgages. Many of these bankruptcy debtors are trying to protect themselves from deficiency judgments following foreclosures on investment properties. These debtors usually have household income above median income; their high income enabled them to qualify for several investment mortgages make decent incomes. Absent the debt service for one or more investment mortgages, they would have ample income to pay their ordinary consumer expenses. Many of these cases are raising interesting issues for calculating means test analysis.

These mortgage debtors usually plan to stop paying all their investment property mortgages after filing bankruptcy and allowing the banks to foreclose. Relieved of the debt service of the investment mortgages, these debtors have substantial net monthly income. This creates interesting issues when the debtors calculate their means test analysis. Secured debt requirements help debtors pass the means test. The more secured debt service a debtor has the more likely his net monthly income will justify a Chapter 7 bankruptcy. The question is whether these debtors can include in their means test investment mortgage debt service they plan to stop paying as soon as they file.

I have been calculating means tests including all investment secured debt. The means test asks for secured debt the debtor is contractually obligated to pay when he files bankruptcy. There is not exclusion for debt abandoned after filing. Regardless of the debtors intent to surrender the investment properties there is always the chance they he may sell the properties or change his mind after filing. It seems impractical to wait until the debtor makes up his mind about the mortgage debts and properties after filing. For these reasons, I think the debtor can use all existing investment mortgages to pass the means test even if he intends to keep none of the mortgage debt. I recall a bankruptcy case that reaches the same conclusion but I don’t have the citation.

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

Avoiding Tax Liability From Deed In Lieu Or Short Sale

Here’s another idea about dealing with the threat of deficiency judgments and the income tax consequences of a deed in lieu or short sale. At a social gathering over the weekend I had a conversation with Larry Kosto, a well-known creditor collection attorney, about how debtors can avoid income tax liability when a bank forgives debt underlying a mortgage. Larry said some of his creditor clients who are amenable to taking a deed in lieu or a short sale have entered into a written stipulation with the borrower that the value of the property surrendered is equal to the amount of the underlying debt. In such event, the lender is agreeing that it is fully satisfied by taking back the property. There is no deficiency liability. If the lender does not pursue a personal judgment against the borrower the borrower has not benefitted from taxable forgiveness of debt.

If you negotiate with your mortgage lender about voluntary surrender of the property see if they will stipulate that there is no difference in the amount of debt and property value to avoid potential income tax liability from debt forgiveness.