Michael E. Zapin
The Law Offices of Michael E. Zapin
Bankruptcy – Still a Means to an End and a New Beginning
Chapter 7 Fresh Start
In theory, filing under Chapter 7 of the bankruptcy code involves selling off your valuable unprotected assets to repay a portion of your debts. Any remaining portion of your dischargeable debts would be wiped out by the court.
In reality, most Chapter 7 cases have been classified as “no-asset” cases. Contrary to myth, the filer’s assets were usually protected by statute, or were of such
insignificant value that it would have cost more to sell off, than the assets were actually worth. In such instances, the property was merely abandoned back
to the filer – meaning, the filer would get to keep his/her property.
The fruits of aggressive creditor lobbyists resulted in BAPCPA (the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” – pronounced “bapseepah” by
those in the know), designed to curtail alleged bankruptcy abuse.
One of the goals of BAPCPA was to steer many individuals away from Chapter 7 and into what’s known as Chapter 13. A Chapter 13 filing requires the filer to propose a plan for at least partial repayment of unsecured debt such as typical credit cards. Full payment of arrears on secured debt is also required over a maximum of five years. Most Chapter 13 cases result in at least a partial wipeout of dischargeable debts.
Whether you would still be eligible to file under Chapter 7 according to BAPCPA, or be steered into Chapter 13, depends on your income, expenses, and what’s actually left over at the end of the month. This analysis is called the “means test.”
Chapter 13: Just What The Doctor Ordered?
Yet, if you’ve fallen behind on your mortgage and you’re trying to save your home, Chapter 7 won’t really help you. Still waiting for that permanent loan mod to kick in? You may be waiting around forever, for something that will never come. Your true knight in shining armor may possibly be to file a Chapter 13 case.
With Chapter 13, you can cure the arrears owed to your bank (or automobile financer) over five years time, provided you keep current payments current. And what about current payments? Keep in mind you’re not the only one feeling the pinch of the real estate market downturn. The last thing your bank needs right now is another foreclosed home on its books.
How about that second mortgage or home equity loan? Under the present laws, if you are so truly “upside-down” on your home – meaning, that the fair market value of
your home is less than the amount you owe on your first mortgage, chapter 13 will allow you to strip away those secondary liens. They will be canceled as
liens of record against your home, and will be treated as “unsecured” debt (think: credit card debt) and given very low payment priority in your
chapter 13 case – often being paid at just pennies on the dollar.
Your first mortgage lender may be receptive to re-negotiating your debt in your Chapter 13 case. Though it won’t get as much as it was promised on paper, it will still be paid. And you? You may be tasting lemons from that adjustable rate mortgage you signed, but a good Chapter 13 plan can help you to keep the roof over that sacred lemonade stand of yours.
The Law Offices of Michael E. Zapin has over 17 years experience handling consumer bankruptcy cases, with offices in Boca Raton, Palm Beach Gardens, Sunrise, Miami and NY (main office in Boca Raton: 561-367-1444). Free confidential consultation by appointment. Learn more bankruptcy Fact or Fiction at http://thebankrupter.com/fact-vs-fiction.html
Short Sales Revisited in a Bankruptcy Context
Okay, I admit it. As bankruptcy counsel, I – like many of my colleagues- used to scowl at potential clients that came to me looking for a relatively quick “fresh start” in bankruptcy, while at the same time telling me that they were in the process of (or at least trying to) “short-sell” their real property.
A short sale is when the lender agrees to accept less than the amount that you actually owe, in order to pave the way for you to pass clear title to a bona fide purchaser.
In theory this sounds great. Many properties in today’s market are significantly “upside-down” (i.e. worth less than the amount of the mortgage(s) on the property).
Savvy purchasers know that they are living in a buyer’s market right now. Don’t expect them to “overbid” the fair market value simply as a favor to you, to permit
you to break even, or heaven forbid, actually make a profit. That’s just not going to happen. And that’s where the lure of the short-sale steps in. The
“deal of choice”of a good many real estate agents and brokers today – well, if not by choice – perhaps necessity.
Why do agents and brokers like short-sales? (Note that there are plenty of reasons why they also despise them – but that’s a topic for another day). In theory, these folks like short-sales because it allows them to price the properties at present day fair market value, not merely the “wishful” value of sellers still living in denial.
Short sales – at least in theory – put brokers and agents back to work doing what they do best: selling, or at least trying to move the real estate markets again.
And… after a lot of hard work – for the successful short sale – the broker and agent reap a well-earned reward – the commission – payable just like in the good old days of the real estate bubble.
And of course the real estate brokers and agents aren’t the only ones that get put back to work. You’ve got mortgage brokers working for the buyers, title closers and title companies, appraisers and real estate attorneys, etc. Everyone goes back to work and (when things go well) they make money on the short sale, and of course the buyer gets a great deal compared to yesteryear’s prices.
So why the scowling? Well, most consumer bankruptcy practitioners believe that if it’s your intention to file for chapter 7 bankruptcy (fresh start), you’re simply wasting your time and valuable resources in pursuing the short sale.
Here’s the arguments that even I used to make:
1. “You are making money for everyone- except you!”
2. “What are you actually getting out of the short-sale? Not the one thing that you need the most – a general release of liability”
3. “Your short sale might trigger a taxable event – cancellation of debt income owed to the IRS”
All of these arguments are still valid ones -valid to this day. You do make money for everyone else. And in most cases, alas, your friendly lender will not let you off the hook for the difference between what you owe and what you actually pay the lender. They generally will reserve the right to sue you for the “deficiency” if you signed what’s known as a “recourse” loan.
Even if they don’t sue you, unless you were short-selling your primary residence, they can still whack you with a 1099-c (cancellation of debt income) that becomes a priority tax obligation (generally not dischargeable) in bankruptcy.
These are all indeed very good reasons to scowl – and to scowl still.
So why the sudden change of heart? If not an outright change, at least to give pause – to “revisit” the issue of the short-sale, even with an impending bankruptcy on the horizon?
Everyone learns from his/her own experiences. I’ve experienced the frustrations of several clients that thought that by simply “surrendering” their property in
bankruptcy, they could wash their hands of it, once and for all. In text-book fashion, that’s the way it’s supposed to happen.
You would tell the Bankruptcy Court you intend to surrender the property. You might even move out and take up residence elsewhere. You would notify your lender that it’s okay for them to go ahead and foreclose against the property only (otherwise known as obtaining an “in rem” judgment – not a personal judgment against you – i.e., it does not go on your credit report as a foreclosure).
And in pure textbook fashion, your lender quickly “swoops in” to cause an immediate changing of the guard – relieving you of the pangs and perils of your former home
ownership by causing the instantaneous sale of the property to a new purchaser.
The reality for most homeowners in this situation, however, is staunchly different. For most, there is no immediate “swooping in” by the lender. No quick “changing
of the guard.” In most instances, your beloved former home will continue to sit empty. The hallowed halls wallowing in self-pity. Festering. And dreaming about the possibility of taking you – its abandoned homeowner – down with it.
You think I’m kidding? Well, until there is a changing of the guard, title to that bird’s nest is still in your good name, bankruptcy notwithstanding. And that bird’s nest has a real possibility of becoming a bee’s nest if misfortune should cross its path.
Picture someone tripping and falling at your former residence. Guess who the first party is going to be, named in that lawsuit while you’re still on title? I’ll give you a hint: it’s not Bank of America.
If mold starts to grow from the inside-out of that former residence because you cut off the electricity when you “surrendered” it in bankruptcy, guess who’s
going to face a possible stiff fine from the Department of Health or Environmental Protection Agency?
Claims of these types can accrue post-discharge (after your bankruptcy case is concluded). Meaning, those debts are new debts and your former bankruptcy case will not speak to them. And your former bankruptcy case will not protect you from them.
Folks, the list can go on and on. It’s the gift that can keep on giving, and not in a very good way. These are the things you’ve got to think about, given the current economic climate, the glut of properties on the market and the vast number of foreclosures clogging our courthouses. Lenders are not really in all that much of a rush to make anything happen these days.
So instead of scowling, I’m suggesting that your best bet might actually be to hedge: file for bankruptcy and do the short-sale. For the simple reason that if there’s one good thing that a short-sale will do for you, it will be to provide you with a measure of certainty and closure: that on a date-certain you are no longer the record-owner of that property and no longer legally responsible for it, if something should go dreadfully wrong.
Now it’s a delicate dance that you’ve got to do. If that bird’s nest wasn’t your primary residence, and was simply investment property, timing here is of critical importance. If you execute the short sale before your bankruptcy, then it could trigger the dreaded 1099-c (cancellation of debt income) and lead to a possible non-dischargeable priority tax obligation owed to the IRS, in your bankruptcy case.
There is an exception to that cancellation of debt rule: if you can prove that you were “insolvent” at the time the transaction took place, you can avoid the tax liability.
I’m suggesting that the better practice may actually be to file the bankruptcy case first, and then look to short-sale the property. In most situations if you were contemplating a short-sale, the likelihood is that the trustee appointed to your bankruptcy case would have abandoned the bankruptcy estate’s interest in that property – usually even before your bankruptcy discharge. If not, you’ll want to request the abandonment from the trustee, before entering into any short-sale arrangement. (Legally, until the bankruptcy estate abandons the interest, it belongs to the trustee – not you).
The bankruptcy discharge (assuming you get one) will wipe out your personal liability on the promissory note to your lender. Once that puppy is gone, it ain’t comin’ back. Trust me.
I don’t care if your lender has you sign something post-bankruptcy at your short-sale closing, saying that you acknowledge that they reserve all rights to proceed against you for any deficiency. It’s not going to happen. On this point, the feds are pretty clear.
11 U.S.C. §524(c) states that a dischargeable debt in bankruptcy (i.e., your promissory note) can only survive your bankruptcy case, if the new agreement entered into with your creditor was “made before the granting of your discharge” and you received certain required “disclosures” and the new agreement
“has been filed with the court”, among other technical requirements.
Many short-sale lenders (in a tacit nod to the feds) will follow up their boilerplate acknowledgment by you, with a statement “unless otherwise prohibited by law.” You obviously don’t need their statement, since such an agreement made outside the watchful eye of the bankruptcy court is in fact prohibited by law.
So now you can go ahead and tabulate your game plan. You can get your discharge (if you’re entitled to it) and finally rid yourself of that bee’s nest – all at the same time (well, almost the same time).
Tell your broker or agent you heard it from a bankruptcy attorney first. They may actually thank you for it. More importantly, they won’t have a reason to scowl at me and my colleagues any more.
Michael E. Zapin is a consumer bankruptcy practitioner and proud member of NACBA (National Association of Consumer Bankruptcy Attorneys) with offices throughout South
Florida. Tel. 800-447-1329. Local 561-367-1444. Visit http://www.thebankrupter.com for more information.
Asset Protection and Bankruptcy: Pigs Get Fat But Hogs Get Slaughtered
I’m going to focus this discussion on Chapter 7 “fresh start” bankruptcy – also sometimes referred to as a “straight liquidation.” I want to dive right into
the belly of the beast so to speak, so if you don’t understand the basic concepts of “fresh start” and “liquidation” or the different types of bankruptcy, head on over to my website (address below) and then come back. (Don’t worry. I’ll wait.)
YOU: You’re sharp. Intelligent. A good thinker. And a pretty good businessperson. Unfortunately, you, like many others, have fallen on hard times due to the depressed economy.
Your hemorrhaging cash every month, possibly borrowing from Peter to pay Paul. You’re not in steerage, but you’re not in first class either. Any which way, it doesn’t matter, because you’re still on the Titanic, and you know it’s only a matter of time.
And so you try to think ten steps ahead. To do what any good businessperson ought to do – to plan for the future. And therein lies the problem.
Many states have what’s called an “anti-fraud” statute. The language is usually similar to that found in the bankruptcy code at 11 U.S.C. § 727, which basically says, if you transfer property within one year of your bankruptcy filing, and you do it with “intent to hinder, delay or defraud a creditor” (or the
trustee), for one, the bankruptcy court can “unravel” or reverse your transaction (i.e., recover the property), and at worst, the court can throw
your case out of bankruptcy court.
Now, you’re probably wondering, what in the world does “intent to hinder, delay or defraud a creditor” really mean? I’m going to be honest with you. I don’t know. And frankly, neither do the courts.
Pigs Get Fat, But Hogs Get Slaughtered
What makes construing the law particularly difficult is that most courts say that a modest and reasonable amount of “pre-bankruptcy planning,” or “exemption
planning” is okay. Yet other courts find this behavior unacceptable.
The analysis of those courts that permit exemption planning, seems to be based on the maxim, “pigs get fat, but hogs get slaughtered.” And most courts agree that
they know a hog when they see one. The difficulty, however, is trying to identify the pig.
The courts will tell you that the intent to “hinder, delay or defraud” a creditor must be an actual intent as opposed to a constructive intent. However, this is really just a term of art. Any way you slice it, the court is going to find “actual intent” based on the circumstances of the transfer. Most courts will look
to what they call “badges of fraud” to make a determination if you did a transfer with an actual intent to “hinder delay or defraud.”
Some of these common badges of fraud are:
1. Your transfer was to an “insider” (i.e., a close relative, friend or someone who has the power to influence your decision-making).
2. You retained possession or control of the property transferred, after you made the actual transfer.
3. Your transfer or obligation was concealed from the court.
4. Before you made your transfer or before your new obligation was incurred, you were sued or you were threatened with suit.
5. Your transfer was of substantially all of the your assets.
6. You fled the jurisdiction after your transfer.
7. You removed or concealed assets from the court.
8. The value of what you received for your transfer was less than a reasonably equivalent value.
9. You were insolvent or became insolvent shortly after your transfer was made or your obligation was incurred.
10. Your transfer occurred shortly before or shortly after you incurred a substantial debt.
11. You transferred the essential assets of your business to a lienor (an alleged business creditor of your company) who then turns around and transfers the assets to an insider of your business.
Now sure enough, if you answered “yes” to all of the above “badges,” your transfer will trigger the anti-fraud statutes. But, what if you answered yes to some,
but not all of the above badges? That’s where the analysis can get really sticky.
And some jurisdictions will weigh these badges differently. In other words, the badges that seem more intrinsically “evil” will be afforded greater weight. Such as, “concealment” from the court (#7 above); or incurring new debt to fund an exempt asset (#10 above); or retaining control over an asset after the
transfer – a form of deception (#2 above).
Interestingly, consultation with a bankruptcy attorney has not been labeled an outright badge of fraud, but your mileage on the consultation will vary, depending on which jurisdiction you file your case in.
There are some cases that say that engaging in these transfers after consulting with an attorney (particularly a bankruptcy attorney) is another factor the court can consider as to whether your transfer was with actual intent to hinder, delay or defraud a creditor.
It’s quite a quagmire for us bankruptcy attorneys. A delicate dance, if you will, between coldly advising clients of their rights and the consequences of filing a case under the client’s present circumstances, or more directly telling a client outright what he or she should do with his/her assets in order to “maximize”
the use of the client’s exemptions (i.e., the laws that protect the particular asset).
In some jurisdictions, it can be considered a malpractice to not appropriately advise your client as to the exemptions he or she may avail of, or to not advise your client how to maximize his or her exemptions. And yet, in other jurisdictions, this kind of advice can apparently get the client (and possibly the lawyer) into a whole lot of trouble, if viewed as evidence of intent to hinder, delay or defraud. (Can you say “conspiracy to commit fraud???”). Lawyer and Client. Caught between the proverbial rock and hard place!
So the best advice to maximize your use of bankruptcy exemptions? Don’t wait for rain before you purchase your umbrella. Get it while the sun is still shining.
Trigger as few badges of fraud as possible and put as much time in between whatever it is you are doing, and the ultimate filing of your bankruptcy case.
Michael E. Zapin has been practicing bankruptcy law for over 17 years.
His office primarily serves the South Florida region.
Contact Michael or his staff at The Law Offices of Michael E. Zapin at (561) 367-1444; by email at email@example.com; or visit their website: http://www.thebankrupter.com for more information.
“There is life after bankruptcy.”