Bah Humbug: Christmas is a Great Time of Year for Collections

Ok, I realize that this post drastically increases my chances for a visit from the Ghost of Christmas Past, but here goes: Christmas is a great time for collection of debt.

Here’s why: Debtors who run retail businesses probably are flush with cash, whose bank accounts can be levied against.

(Just in case Santa reads this blog, I’m not going to point out that individuals may have more cash this time of year than others.)

Under Tennessee law, you can garnish a judgment debtor’s bank accounts, and that levy will freeze and seize all of the funds in the account, which will be paid to the Clerk–and then to you.  The difficult part is discovering where the debtor has bank accounts and, then, catching that account while it has money in it.

Before you call me a scrooge, keep in mind that if the debtor doesn’t pay the creditor from this money, it’ll probably go to other creditors.  Make sure that you’re at the front of the line for payment. While smart research is the biggest step, effective collections sometimes depends on luck and good timing.

Ghost of Christmas Past, bring it on.

The Six Ds of Debt Collection

I went to Bankruptcy Court yesterday with a real collections expert. I won’t reveal name or age, but I’ll say this: he was telling me a story involving accepting weekly payments of 50 cents on a $50 judgment.  (That means he’s been doing this a very long time.)

While waiting for Court to start, he told me about the Six “D”s of Collection. When a borrower veers into one of these, you’re far more likely to be dealing with a bad account:

  • Death
  • Divorce
  • Drugs
  • Dice (All forms of gambling)
  • Diamonds (High rollers)
  • Doctors and Dentists

Some of these are obvious, and some might be offensive (sorry, Dr. Nickels), but all make sense.

And heaven help you if you just loaned money to a plastic surgeon with a weak heart who is celebrating his recent divorce with a trip to Las Vegas with an all inclusive stay at the Bellagio.

Creditor Rights Tip for Williamson County Court: Go to Merridee’s Breadbasket

If you do creditor rights legal work, you’ll end up in of court a lot, often in different courts in different counties.

As a result, you start to learn your “favorites,” whether it be a favorite judge, a favorite car ride, or, most common, a favorite lunch or breakfast place.

Here’s my Williamson County favorite: Merridee’s Breadbasket in Franklin. For 9am dockets, you can go over there for coffee, pastries, or a real breakfast. For the lunchtime foreclosures, you can get a great sandwich combo deal, which includes a giant piece of pie.

No, this isn’t an advertisement. But, yes, I was in Williamson County Chancery Court yesterday morning, and, yes, my day started over at Merridee’s.

A Trustee’s Powers in Bankruptcy: How the Trustee can Make Money for Creditors

Everybody is asking about the efforts of Irving Picard–the Trustee in the Madoff Bankruptcy–to recover the money lost by investors. His stated goal has been to recover all of the lost investments. The question is: How? (Or, Really?)

The goal of every bankruptcy trustee is to find money or assets to sell. In most cases (probably 98% of them), there are no assets (the people are broke and they owe money against all of their property).  Of other 2%, the assets recovered fall into three categories:

  • Actual, real assets:  The debtor has money, cars, property, or anything else of value that is lien-free, meaning they own it out-right, not subject to any creditor’s claim.  This is rare; most debtors stay out of bankruptcy in order to keep their assets away from a trustee.
  • Assets resulting from avoided liens:  Upon the filing of a bankruptcy, the trustee is granted an interest in the debtor’s property, called the “hypothetical judgment lien.” If any creditor’s lien on property is defective, the trustee can attack and eliminate that lien, thus creating a “lien-free” asset. Note to Secured Creditors: This is the most common way trustees find assets. 
  • Bankruptcy Lawsuits:  This includes lawsuits to recover preferential transfers, fraudulent conveyances, and various other post-petition actions. These types of actions aren’t rare, but they generally occur in the larger bankruptcy cases.

These are the most common weapons in a trustee’s arsenal. The Madoff Trustee is claiming that the alleged Ponzi scheme constitutes fraudulent transfers to the paid investors.  If he can recover all or most of the lost investments, he will have earned his money on this one.

Remember to Review Credit and Collection Procedures Every Year

I had lunch with a client today–actually, the Chief Financial Officer, the Regional Credit Manager, and my local Credit Manager (yes, it was a fancy lunch, and I was paying)–and, toward the end, the CFO asked a great question: Are we doing anything to hurt ourselves or our ability to collect our debt?

What a simple, effective question to ask yourself, and your attorneys, at least once a year.

My response was what they wanted to hear: they aren’t.

They have solid credit applications, which provide for recovery of attorney’s fees, late charges, and include/require personal guaranties of corporate debt. Their invoices are clear and include due dates and adequate descriptions of the services provided. Internally, they seem to have good practices for prompting action on past due invoices that preserve all applicable lien deadlines.

In other words, they aren’t creating any openings or holes for their borrowers to avoid repayment of debt. At year end, it’s a good idea to review your practices and documents, whether internally or with counsel, with an eye to addressing any issues.

In this economy, people are looking for any reason to avoid repaying their debt. Be proactive in eliminating those reasons.

Losses, Both Financial and Emotional, Continue to Mount in Madoff Matter

This past weekend, two stories in the Wall Street Journal showed the continuing reach of the Bernie Madoff fallout: one, about the Bankruptcy Trustee’s lawsuit to recover a portion of the ponzi profits from a random investor, Harry Pech; the other, a story of Madoff’s son’s suicide, which was undoubtedly linked to the schemes.

An innocent investor, Pech’s refrain is common in these cases, in which Trustees sue to recover preferences or fraudulent transfers under the Bankruptcy Code. Both actions are rooted in the theory that all similarly situated creditors should be treated (i.e. should suffer) equally.  A creditor (or investor) who receives more than his fair share is a prime target for suit.

In a scheme in which Pech lost thousands and thousands, it seems unfair that he’d be sued just because others lost more than him. But, with an eye toward fairness, that’s exactly how these actions work, and the Trustee can look back two years to examine distributions by the debtor.

Car Lenders Should be Weary of Pre-Bankruptcy Purchases

Bankrate poses an interesting reader question: Should I buy a car before filing Bankruptcy? Bankrate’s response is measured, and it focuses on ability to pay for the car, balanced with the assumption that the debtor will get better loan terms pre-Bankruptcy than after.

This is pretty common, whether it be borrowers strategically buying with their pre-Bankruptcy credit score or non-strategically buying a car without regard to their finances. Cars, being fairly important to get to work and around town, then become an issue in the bankruptcy case, as the debtor can’t simply surrender it to the creditor.

The changes to the Bankruptcy Code in 2005 recognized this issue and included protections for car lenders. In 11 U.S.C. Sec. 1325(a), Chapter 13 debtors must repay the full debt associated with any vehicle purchased within 910 days of the bankruptcy filing. (In regular terms, that’s about two and a half years.)

So, maybe there’s some benefit to buying a car right before a bankruptcy, but creditors have enhanced rights for those last minute purchases.

Plus, there’s an argument that incurring substantial credit before filing bankruptcy is deceptive  ( i.e. where someone buys a $30,000 car, while also planning a bankruptcy filing), and such transactions could be fraudulent and excepted from discharge. Not to mention, if the filing follows the purchase too closely, the Bankruptcy Trustee may be able to void the transaction and sell the car.

Long story short, you probably shouldn’t buy a car before filing for bankruptcy.

New Frontier: Facebook, Myspace, and Social Media as a Collection Tool

A few years ago, the creditor’s lawyer in me thought that Myspace, Facebook, and LinkedIn were going to be a debt collector’s best friend. A savvy collector, I thought, would use the employment information, pictures, and all the other information available on the sites to locate, investigate, and collect against their borrowers.

I mentioned this a few months ago, and, recently, Credit and Collections News ran a story on Facebook’s efforts to prevent this, and so did the Credit Slips Blog. In those instances, collectors were leaving collection communications on debtor’s facebook walls.

While I don’t agree with their exact tactics, it is smart to utilize these sites. Social media sites are designed to be a hub of an individual’s life, with cell phone, address, work, and other personal information, all freely available. If people are going to make that information public, then it should be open for public, third party use. Why wouldn’t a creditor use those sites?

Plus, if you’re going to accept a friend request from a stranger in a bikini, you sort of deserve what you get.

Foreclosure as a Financial Planning Option for Borrowers?

This Forbes blog post asks an interesting question: Is letting your house go to foreclosure a sound financial planning option?

The article notes the increasing foreclosure rates and attributes the continued rise in unemployment, the recent lender processing errors, and decreasing stigma associated with foreclosure.

To the extent that the homeowners are over-extended in a house that they can never afford, foreclosure may very well be an unavoidable option. But, I’d stop short of calling it a “sound strategic” choice.

Walking away from a house can lead to harsh consequences. A foreclosure may leave a deficiency balance on the homeowner’s loan, which the lender can later sue for. An abandoned house can incur accruing taxes, homeowner’s association expenses, or other third party claims that the owner would be liable for while the foreclosure is pending.

From a creditor’s perspective, the realization by an owner that she can’t afford the mortgage and must surrender the property may, indeed, be the first step in straightening out her financial health. But, simply walking away from the real property shouldn’t be viewed as a smart “strategic” option, because of the harsh consequences that will probably follow.

Co-Borrower Beware: Bankruptcy Provides Only Limited Protection to Co-Signers

Have you ever been asked by a relative to co-sign on a debt in order to help them get the car or apartment they want? Well, you’ve probably put a big target on your back, says the Bankruptcy Law Network.

In most cases, if the borrower files Bankruptcy, sooner or later, the creditor is going to take collection action against the co-signer. The reason is simple: the borrower needed your good credit to get the loan in the first place, so, obviously, the lender is going to look to you if the deal goes bad.

As the article above notes, a bankruptcy filing by the borrower only provides limited protection, if any at all.

The moral of the story? Don’t co-sign on debt, unless you’re willing to pay it all back in the end.