Creditor’s Rights: From the Judge’s Perspective

Yesterday, I attended a TennBarU CLE course, called “Creditors Practice: A View from the Bench.”

Aside from the opportunity to earn brownie points as a smiling audience member to a Judge’s speech, the program gave the opportunity to hear about general sessions (a.k.a. small claims court) practice from the judge’s perspective. These courts often deal with unrepresented parties, and the practices and procedures are often confusing. The fast paced practices of the Shelby County General Sessions Court have been dubbed the “Rocket Docket.”

A common refrain was the difficult task of working with unrepresented people who don’t understand their rights. When asked about the non-lawyers’ ability to defend themselves, one judge noted that most people are “confounded by the whole process” and “surprised that it’s not more like The People’s Court.”

The Judges all try to protect anyone from being taken advantage of, but, at the same time, there are too many cases for the Judges to look after the rights of all who appear before them. From a creditor’s perspective, dealing with a pro se litigant offers those same challenges, and it’s good to hear that our judges recognize and account for those difficulties as well.

Real Property Taxes Always Get Paid First

In this economy, the best way to get paid on outstanding debt is to claim a lien on real property. Whether you’re a judgment lien creditor or a homeowner’s association, a lien can give you some sort of collateral for an otherwise unsecured debt.  In order to actually get paid, there must be equity in the property (otherwise, your lien has no value); where there’s no equity, the creditor’s lien must be recorded in advance of other creditors to get paid.

Unless, of course, that creditor is the county tax assessor, who gets to move to the front of the line for repayment. Tenn. Code Ann. § 67-5-2101(a) provides that:

The taxes assessed by the state of Tennessee, a county, or municipality, taxing district, or other local governmental entity, upon any property of whatever kind, and all penalties, interest, and costs accruing thereon, shall become and remain a first lien upon such property from January 1 of the year for which such taxes are assessed.

So, even though the bank’s deed of trust may have been recorded way back in 2002, the unpaid ad valorem county taxes for 2010 still trump that deed of trust. It’s no wonder that banks routinely require payment of the property taxes as part of the monthly loan payments.

This is one of the few exceptions to the “first to record” rule in Tennessee, and, if you’re a lien creditor, the rule of thumb is: you’ll always lose to the county property taxes.

Lien Litigation takes a Starring Role in “Holmes on Homes: Lien on Me”

The HGTV show Holmes on Homes aired a two hour special episode called “Lien on Me,” in which the host and his crew do remedial work on a house after the contractor has abandoned all work and filed a lien lawsuit against the homeowners. Apparently, the bank had canceled all further contractor draws on the construction loan, due to the lack of sufficient progress on the construction.

Like any Holmes on Homes episode, host Mike Holmes did a thorough inspection of the work performed and found the work to be incomplete, unprofessional, and, in some instances, dangerously incompetent. During the course of the filming, over 100 subcontractors were brought in, and the entire remediation took 30 months to complete. All that time, the lien litigation continued.

To say that “most homeowners aren’t so lucky” is a huge understatement.  In these situations, an owner may not have the financial resources to bring in a second contractor to complete or repair the existing work. Then, in the rush to correct the deficiencies, the owners don’t keep sufficient evidence and records of the work in dispute to prove the problems.

Holmes had a TV crew and a team of experts taking detailed notes (and HD video of all the problems).  I pity the contractor who has its work subjected to the glare of the video cameras and a TV host who has made his living identifying shoddy work.

Wall Street Journal reports on Hostile Debt Collection

The Wall Street Journal has an interesting article today, about the psychological wear of dealing with debt collection efforts. The story talks about the daily calls, 40 to 50 of them, one borrower received.

Obviously, the Fair Debt Collection Practices Act limits the contact that a bill collector can have with a borrower, but, even within the protections of that law, creditors can continue some pretty aggressive collection efforts.

This is where the collections process by an attorney and a collection agency part ways. When an attorney “escalates” collection efforts, the attorney has a number of tools at his or her disposal, such as a lawsuit and, post-judgment, bank levies, wage garnishments, and liens.

A collection agency, however, can only make more phone calls and escalate the frequency and aggression in the contact.

It’s obvious from the article that borrowers are adapting to collection efforts, even inventing mechanisms to avoid creditor phone calls, and learning other ways to beat the system. In this sea of debtors drowning in debt, the traditional collections method of bothering borrowers day and night certainly isn’t doing any good.

Wage Garnishments in Tennessee Collections

A quick post on a topic I get asked about often: Wage Garnishment.

Tennessee judgment creditors can garnish wages or contract sums due to debtors pursuant to Tenn. Code Ann. § 26-2-105, et seq. and § 29-7-101, et seq. Tenn. Code Ann. § 29-2-106 establishes the garnishment formula that calculates the amounts paid to the garnishor and the amounts to be retained by the debtor (typically 25% of the debtor’s wages). Garnishments are effective for six (6) months after issuance,  § 26-2-214(b)(1), and they are are paid in order of priority, so you may be competing with other creditors who go after the income first.

Collecting against a debtor’s wages is an effective way of getting paid, but, for debtors on the brink of bankruptcy, some caution should be exercised to determine if the seizure of potentially scarce income will push the debtor too hard.  If your debtor is already stretched thin, things will only get worse when you take 25% of his or her pay, so this is a weapon that should be used only with discretion.

Effective Post-Bankruptcy Dismissal Collections Start Immediately

In a tweet yesterday, I discussed a savvy move by a judgment creditor: as soon as a Chapter 13 Bankruptcy gets dismissed, issue a garnishment to the Chapter 13 Trustee for any funds held by the Trustee.

What a smart move by the creditor. While the author of the article calls it a “horrible result,” I’d point out that Debtors’ attorneys do something similar all the time: when a case gets dismissed, they immediately ask that the Trustee release funds on hand for payment to them for their legal fees.

Like I’ve said before, a bankruptcy dismissal is a good thing for a creditor, and, when the case is dismissed, a creditor who takes quick action will generally be rewarded. It doesn’t have to be as bold as a garnishment to the Chapter 13 Trustee–it can be as simple as being the first creditor to file a lawsuit, the first to file a judgment lien, or the first to levy a bank account (and you know where they work and bank…just check the Bankruptcy Schedules).

The key word? Be the “first” to take aggressive action.

Expired Homebuyer Tax Credits Only Part of the Drop in July Home Sales

Yesterday, the real estate sales numbers for July were released. CNBC was predicting “armageddon”, citing the expiration of the home buyer tax credits as the primary cause of the drop in sales.

While the home buyer credit is probably responsible for the April and May spikes, it’s not entirely responsible for the July swoon.

As a recent homebuyer who received absolutely no benefit from the tax credits, I’m painfully aware that the tax credit wasn’t the “cure all” needed to fix the housing market. And while dropping prices and low interest rates have historically been a boon for home sales, the biggest issue now is that existing home-owners, a.k.a. home sellers, have less room to cut prices and are stuck staying in their existing house.

These home sellers are those who bought homes in the last 4-6 years with 0% to 10% down, and, with falling prices, they can’t pay off their existing mortgage (and a realtor) in any sale, but they’re not Bankruptcy/default risks. Long story short, they’re stuck: they can’t sell and, as a result, can’t buy.

The tax credits only helped these home sellers in an indirect way: the tax credit added cash into the transaction that allowed the seller to give the buyer less of a price break. But, the tax credits helped the real estate markets by greasing only one wheel of the car. Now, we have to look at the others.

Recent Foreclosure Study from California Refutes Foreclosure Stereotypes

The Center for Responsible Lending has issued an interesting new report regarding the California foreclosure crisis.

As described by the Credit Slips blog, the findings contradict “the stereotype of the California foreclosure crisis as resulting from house flippers and social climbers overreaching to buy 4,000 square foot mansions.”

Credit Slips notes that “the typical foreclosure story is not a family reaching too far in order to buy an unaffordable house, but more likely, of using home equity to pay credit card debt and maintain a middle-class standard of living in the face of stagnating incomes” and concludes that “…the last to arrive at the bottom rungs of the middle class ladder are the first to be pushed back off.”

Tennessean Reports a Steady Increase in Nashville Bankruptcy Filings

The Tennessean ran a story this morning, Bankruptcy Filings Rebound, that discusses the fact that Bankruptcy filings in Nashville and the Middle District of Tennessee went up in July 2010, after declining the prior few months.

Although the article doesn’t say so, I wonder if the re-commencement of foreclosure sales under the new Tennessee foreclosure law is playing some part. (Remember, under this law, creditors must mail out a “Notice of Right to Foreclose” to borrowers, and the timing of the new law resulted in a drastic drop in foreclosures in May and June, 2010.)

In discussing the rising rates, the article cites continuing unemployment rates, expiring unemployment benefits for many laid-off workers, and a general rise in small business failures. The article says that the current number of bankruptcy cases is the highest since the changes in the Bankruptcy laws in 2005, but other experts note that we’re seeing less filings than we actually should be.

Last Week’s Tweets of Note from @Creditorlaw

Here are a handful of tweets from my twitter feed, @creditorlaw:

In the NY Times article about the rising tide of defaulted Home Equity Lines of Credit, one homeowner justifies the reasonableness of his offer to repay 10% of his outstanding debt by boldly saying “It’s not the homeowner’s fault that the value of the collateral drops.”

Yikes…banks share some blame, but all of it?  Regardless, this article seems to suggest that the banks won’t be doing anything with this bad debt and are happy to get pennies on the dollar. Don’t forget, in Tennessee, a creditor may have up to six years to sue on defaulted debt and, even then, a judgment is good for ten years. Will these debtors still be broke in ten years?

On another tweet, the Wall Street Journal reports that business bankruptcy filings are down, while consumer filing rates remain high.

My guess? Either through weak guarantors or de-valued collateral, lenders realize that the only way to get paid is to work with the borrower and hope they can right the ship, whether it be selling widgets or selling houses. If they learned anything from quick bankruptcies and worthless judgments in 2008-09, it’s the principle behind “bend, don’t break.”

From the other side of the coin, Credit Slips reports that, even though default rates are skyrocketing, the numbers of consumer of bankruptcy filings aren’t following that same extreme trajectory–in fact, they are tracking the numbers in the pre-BAPCA (2005) days.

This has everybody stumped: why aren’t more people filing Bankruptcy?

This article from the Memphis Commercial Appeal suggests that people aren’t filing Chapter 13s because they can’t even afford Bankruptcy.