July 2010 – Creditors Rights 101

Creditor Lawyers Beware: House Passes “Protecting Gunowners in Bankruptcy” Bill

As a creditor’s lawyer, I’m not sure I like the recent passage of H.R. 5827, which allows a bankrupt debtor to exempt up to $3,000 in value of his “rifle, shotgun, or pistol” collection. The Bankruptcy Law Network explains the possible reasoning behind the law:

“Americans should retain the right to defend themselves with firearms even though they face financial difficulties.”

And, yes, collection attorneys are the intended target of this law. (Pun intended…it’s Friday, people, and I’m blogging about exemptions.)

All kidding aside, bankruptcy and state law “exemptions” are actually the best defense against judgment collections. These laws allow a judgment debtor to protect a limited amount of assets from garnishment or levy by creditors. Assuming he properly claims this exemption (and most state court debtors never do), a debtor can fully protect his $3,000 rifle collection from a Chapter 7 Trustee or a creditor.

Foreclosure Sales: Only the Well-Informed Buyers Avoid Disaster

Foreclosure is bad. It’s bad for the homeowner (who loses their property). It’s bad for the lender (who gets a house it doesn’t want back). It’s bad for the neighbors (who may have to deal with a vacant house and decreasing property values).

But, for those with available cash or credit, this economy can offer the deal of a lifetime on the house of their dreams.

For every story like the one above, though, there are dozens more involving people who only buy trouble at foreclosure sales. Maybe the house still has people living there. Maybe the house is still subject to prior liens or taxes. Maybe the sale is on “as is, where is” terms for a reason.

Successful foreclosure purchases require advance homework, involving an inspection of the property records, the tax records, and maybe even an inspection of the property (or at the very least a drive-by). A buyer who does none of the above is running a very good risk that she’ll be buying a nightmare, not a dream home.

Think Before You Sue: When the Titans sue Lane Kiffin, Only the Lawyers are Guaranteed a Win

The big legal news in Nashville this morning is that the Tennessee Titans have filed a lawsuit against USC’s Lane Kiffin for poaching the Titans’ running backs coach, Kennedy Pola.

While it’s going to be a fun soap opera to watch, from a legal standpoint, I wonder if anyone talked to the Titans about divorcing their emotions from their legal rights.

This comes up all the time in collections matters, where the creditor client is emotionally charged up about a monetary loss and may want to file a lawsuit against a broke borrower as a matter of principle, but without regard to the likelihood of an efficient, successful outcome. Before any lawsuit is filed, the lawyer and client should have a frank discussion about the costs of getting to a judgment and, after that, the potential for successful recovery.

This isn’t to say that the Titans will not win in this lawsuit, but I predict that it’s going to be costly and time consuming to deal with. This is generally where I remind the collections client of the saying “Don’t throw good money after bad.” There’s no need to get into a fight if the fight itself isn’t worth the reward at the end.

Of course, I’m rooting for the Titans on this one.

Be Careful When Accepting Voluntary Payments from a Discharged Debtor

The Bankruptcy Law Network Blog answers an interesting question: despite receiving a bankruptcy discharge, can a borrower then voluntarily repay discharged debt? The answer is “Yes”, but the better question may be “Why?”

The post notes that a borrower may have personal reasons for repaying some discharged debts. Examples include a debt owed to a family member or to a creditor who is crucial for future services (i.e. maintaining a business trade credit relationship).

The post, however, doesn’t consider the creditor’s perspective in this invariably risky situation. If you are prohibited by the discharge injunction from affirmatively collecting the debt, how do you accept payments without crossing the “no collections” line?

There’s no easy answer to that question. A prudent creditor must be very careful in all discussion and documentation of the discharged debt, and it should keep such debts separate from all post-bankruptcy, non-discharged debt.

Frankly, the creditor should treat such payments just like a “gift”–there’s no obligation for the payment, and you can’t force or request that the payment be made.

Home Sales Drop in June, While Existing Home Inventory Rises

The National Association of Realtors released a report today that home sales dropped in June 2010, mainly as a result of the expiration of the home buyer tax credits. The silver lining, they say, is that June 2010 was still better than June 2009.

What’s really scary is that existing home inventory continued to rise in June. Apparently, in the rush to get homes built and sold prior to the end of the tax credit, builders were left with far more houses than buyers.

The tax credit isn’t coming back, so July probably will not be much better. My prediction? The next report you’ll be seeing is that foreclosures are up in August and September.

Patience can be Rewarded: Tennessee Judgments are Good for Ten Years

A few years ago, when borrowers still had cash or available credit, collections was an easier process–sometimes involving only a strongly worded letter or the filing of a lawsuit. Even post-judgment, collections could just be a matter of finding the bank account with all the cash or placing a lien on the rapidly appreciating real property.

In this recession, creditors need to realize that judgment collections is a process, and no longer an event.

Fortunately, Tennessee creditor lawyers have the benefit of Tenn. Code Ann. § 28-3-110, which provides that a judgment is valid for ten years and, even then, can be renewed for another ten years.

So, while you may be dealing with a debtor without any money now, keep in mind that this economy can shift for the good, as quick as it went bad. In collections, patience can lead to money.

Michael Vick’s Gifts May Result in Fraudulent Transfer Lawsuits

The Wall Street Journal’s Bankruptcy Beat Blog reports that the Bankruptcy Trustee is going after Michael Vick for making allegedly fraudulent transfers to family and friends. Well, the Trustee is technically going after the family and friends to recoup the $2 million in gifts and transfers.

Under Section 548 of the Bankruptcy Code, a trustee can reach back and recover transfers within two years of the case filing, where the debtor had “intent” to delay or defraud creditors or where the debtor didn’t receive “reasonably equivalent value” in exchange for the transfer. This is fairly common: as things start going bad, an insolvent person transfers his valuable property to others in order to keep it out of his creditors’ reach.

But, where a bankrupt just gives money or property to others, particularly friends and family, that puts a big target on those recipients. The goal of the fraudulent transfer statute is to recover those assets, and then distribute them evenly to all creditors–not just the people the debtor likes. (Note to Creditors: Most states have similar laws as well.)

So, whether the goal was to protect his assets or help his family, all Vick did was get them sued in Bankruptcy Court.

How to Get a Chapter 7 Trustee’s Attention: Show Off Your Stuff on TV

In most cases, Chapter 7 Bankruptcy Trustees have far more cases than they have time to focus on each case. It’s common that there are 30-40 cases on each 2 hour docket.

But, a sure-fire way to stand out and really get the Trustee’s attention is show off your wealth on reality TV. That’s what one cast member of The Real Housewives of New Jersey did, and, now, in her individual Chapter 7, the Trustee’s scrutiny of her disclosures revealed that the debtor failed to disclose all her assets, which may allow the Trustee to contest the discharge under 11 U.S.C. 727.

A bankruptcy discharge wipes out all debt, but the price to be paid for that benefit is that a debtor must disclose everything–both debts and assets. From a creditor’s perspective, a well-informed Trustee can be the last hope for any recovery.

Unpaid Invoices: To Collect or Not?

In this economy, everyone is looking to find new revenue, and this invariably leads them to that stack of old invoices and accounts receivable they never touched when they were so busy dealing with good, paying customers.

Collections attorneys are seeing more “first time” collections clients and, with those clients, are seeing the same two issues.

First, a creditor who has never sued over unpaid invoices has also probably never had its invoices scrutinized in Court. There, every aspect of the unpaid bill, down to the date, the address, and the amount owed, is nit-picked and magnified. Are your invoices and credit applications “collections ready”?

Second, customers don’t like being collected against, and successful collections can be as much “public relations” as it is legal strategy. Is the collections approach you take appropriate and representative of the way you treat customers, good or non-paying?

These are simply issues to consider and, with the right planning, you may be able to avoid expense and hassle in the process. Plus, maybe, you can turn that stack of invoices into money.

Negative Equity May be New Culprint in Foreclosure Crisis

Negative equity drastically increases foreclosure risk. This Christian Science Monitor article notes that the current focus of existing home mortgage modification programs–reductions in monthly payments and interest rates–is misplaced, because the real culprit may be the fact that so many people simply owe far more than their houses are worth.

While lenders may be willing to shave down monthly payments and interest, should they also be willing to shave off tens of thousands of dollars of principal on loans? Does the cost of foreclosure outweigh a discount on the debt?

The above article reminds me of the Tennessean’s 2009 article that the “Making Home Affordable” Modification Program wasn’t helping the foreclosure crisis as expected.

So far, the federal programs look to cure certain symptoms, but can’t seem to reach all of the problem, sort of like plugging a hole and then having another leak spring up.