Bankruptcy & Loan Modifications

When you work with an attorney on a bankruptcy filing, there’s a long list of documents you’ll be asked to gather and give to your attorney. Some of the most critical documents you’ll gather are your last three years’ worth of tax filings, both state and federal. Why are these so important?First, and most important, tax returns contain a great deal of the financial information that your attorney will use when preparing your bankruptcy petition. Your attorney will review your returns to get a good foundational grasp of your financial situation—what real estate you own and whether it’s investment property; what bank accounts or investments you may hold; whether you are self-employed and how the business has been doing over time, and so on.

Similarly, your attorney uses your tax returns as a kind of financial checklist when preparing your bankruptcy petition. Most of the information that you’ve already reported on your tax returns is information that your attorney must include in your petition.

Importantly, bankruptcy is information-based. In other areas of law, when you go to court, you may be asked to testify and tell your side of the story. At your bankruptcy hearing, your bankruptcy petition—the specialized financial report that your attorney has presented to the court for approval—tells your story for you. The bankruptcy trustee who examines your petition may ask some questions, but the more accurate and detailed your attorney’s information, the easier it is for the bankruptcy trustee to review and approve your petition.

So don’t flinch when your attorney asks for copies of your tax returns. You can share them confidently, knowing that your attorney is helping you toward bankruptcy’s “fresh financial start.”

The forgoing post was drafted by Attorneys Marsha Graham and Liz Weishaar who work in an of counsel relationship with the Law Office of Goldstein and Clegg, as well as for Weishaar and Graham.

Bookmark It

Hide Sites

There are certain things any business owner must do in preparation for bankruptcy.  You must make sure you know how much money you have spent and on what; you must know how much income your company has brought in over the past two years; you must know what accounts payable and receivable are still outstanding.  In essence, you must be very careful to preserve all corporate records.  If you do not, and a creditor or the Bankruptcy Court Trustee finds out, then you may not be entitled to a bankruptcy discharge.If a business owner fails to keep or preserve recorded information from which his financial condition and business transactions might be ascertained then the bankruptcy court may not grant the business or individual a discharge of his or her debt pursuant to 11 U.S.C. § 727(a)(3).  More specifically, under the Bankruptcy Court law, if the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case, then a discharge of debt shall be denied.

The rationale behind this rule is that the a Debtor must “give creditors and the bankruptcy court complete and accurate information concerning the status of the debtor’s affairs and to test the completeness of the disclosure requisite to a discharge” In re Martin, 554 F.2d 55, 57-58 (2d Cir.1977)   This section of the code is in place to ensure that a creditor has the ability to determine if the debt owed to them was either entered into with intentional fraud or deceptive intent. �
With the foregoing stated, it is a very difficult thing for a creditor to stop a discharge for poor record keeping.  The initial burden lies with the creditor to demonstrate that the debtor failed to keep and preserve any books or records from which the debtor’s financial condition or business transactions might be ascertained. White v. Schoenfeld, 117 F.2d 131, 132 (2d Cir.1941). If the creditor shows the absence of records, the burden falls upon the Debtor filing for bankruptcy to convince the court that the failure to produce certain records was justified. ID; see also In re Sandow, 151 F.2d 807, 809 (2d Cir. 1945)  However, there is no specific case law that indicates what constitutes justification, but rather the court looks at reasonable person standard.  Underhill, 82 F.2d at 259-60; see also Meridian Bank, 958 F.2d at 1231 (stating that “[t]he issue of justification depends largely on what a normal, reasonable person would do under similar circumstances”). It is a “loose test, concerned with the practical problems of what can be expected of the type of person and type of business involved.” Morris Plan Indus. Bank of N.Y. v. Dreher, 144 F.2d 60, 61 (2d Cir.1944).
As a result of this standard, it is highly advisable to make sure you keep back ups of your computer and paper records, and that you take steps to ensure that those records are in your possession should you ever need to produce them.  This practice will certainly streamline your bankruptcy process.

As always, if you have any questions regarding this or any other business practice associated with the preparation for bankruptcy, you should contact a local bankruptcy attorney.

Bookmark It

Hide Sites

What should owners of homes know about dealing with today’s economy? The new words of “Short Sale” or “Loan Mortgage Modification” are new terms that homeowners never thought they would need to hear or understand what they mean in order to possibly save their homes or their credit. No one planned for such a drop in home values and such a rise in costs.With all the new terms and with all the sever changes in this economy, it is no wonder that homeowners fear doing anything when they are faced with financial hardship. Homeowners need not longer fear these terms and more importantly understand why loan modifications and short sale refinancing may make the difference between a homeowner keeping their home, avoiding bankruptcy and saving their credit.

We all heard about the great “bailout” of 2008. We heard both the pros and the cons with our government bailing out several banks, insurance companies, financial institutions and etc. However, the biggest pro for homeowners will come from this bailout. The pro is that mortgage companies are now starting to stop foreclosure sales, short sales and going back to the owners to modify their loans so to allow them to keep their home irrespective of their failure to pay their mortgage payments. Therefore, debtors will begin to see an order of process for homeowners to fight to keep their homes in these unprecedented times of financial suffering.

A loan modification will be likely the first step for homeowners to consider. A loan modification is simply a homeowner asking the mortgage company to modify the current terms of their mortgage. Homeowners will ask a mortgage company to modify their mortgage because of being late on payments, variable interest rates, too high of monthly mortgage payments and etc. Homeowners can seek this relief on their own directly with the mortgage company. However, the process is very time consuming and often frustrating for a homeowner. It recommended that you hire a law firm to help get you through the process.

One final point is that mortgage companies today are requiring that loan modifications be conducted first and attempted by the homeowner before they will even consider a Short Sale.

LISTEN TO THE LOAN MODIFICATION PODCAST HERE

Bookmark It

Hide Sites

An individual’s largest asset is usually their homes. In an attempt to keep these large assets in the family and to avoid probate, individuals are either gifting the homes away to children early by signing over the deed or setting up a living revocable or irrevocable trust. Unfortunately sometimes these instruments are not used properly, don’t take in all that needs to be done in estate planning and could cause harms not initially apparent when initially create them.Trusts are used to manage assets. They can be set up to accomplish any number of goals such as providing income for a child, grandchild or other family member or it can provide income for a favorite charity or distribute assets in an attempt to reduce tax consequences or security assets from those inevitable issues that come with aging.

If you are setting up a trust in order to protect your assets from creditors or other unforeseeable situations which may arise as you age you must look at both types of trust closely to determine which is best for your circumstance. There are two types of living trusts, revocable and irrevocable. The difference being that the revocable trust can be changed or modified, giving the creator the flexibility of continued control over the assets during his lifetime. The other type of trust is an irrevocable trust. Once an irrevocable trust is established it cannot be changed. The creator will have no access or control over the assets any further through their lifetime once it is placed in the irrevocable trust. Some individuals do not like particular aspect of irrevocable trusts. They want the protection of the trust however they do not want to give up all control of their assets. Depending on what needs to be done in the protection of the assets, an individual might have to give up all control over the property in order to get the protection necessary from creditors or lien holders.

It is important to understand prior to forming such an instrument, that general creditors may use the Uniform Fraudulent Transfer Act (UFTA) under G.L. c. 109A to void or rescind a transfer by a individual debtor for less than fair consideration, regardless of whether the transfer is to an individual or a trust. The Fraudulent Transfer Act can be used by an individual’s creditor if they can show that: 1) the debtor had “actual intent” to “defraud either present or future creditors”; or 2) the debtor believed “that he will incur debts beyond his ability to pay as they mature”; or 3) even if there was no fraudulent intent, the debtor was “thereby rendered insolvent”. What this act will do is render an individual’s trust void and rendered charges against the individual for a fraudulent transfer. This “look back” period as it is called is a statute of four years. If for example an individual has placed a piece of property into a trust and then enters a nursing home the creditor or Medicaid will look back four years from the date of incurring the charges to see if any property was transferred. If such property was transferred and the intent is considered fraudulent then the trust is considered void and the nursing home will be able to attach the home for charges incurred.

Also prior to placing assets into a trust the individual must understand that in bankruptcy, debtors must report all transfers made within one year of signing the bankruptcy petition. In conjunction with the one year “look back” period in bankruptcy, creditors may also use the Fraudulent Transfer Act to reach assets that have been transferred without fair consideration within their four year “look back” period as well.

If after discussing all aspects of why you need an instrument for estate planning with your attorney understanding the difference in the instruments, what they can and can’t do is the next step. While a revocable trust gives the individual the ability to continue to control their assets, this control makes it impossible for the trust to offer any protection to an individual from creditors seeking to collect on a debt. “The established policy of the Commonwealth long has been that a Settlor (person who creates the trust) cannot place property in the trust for his own benefit and keep it beyond the reach of his creditors”. Merchants Nat’l Bank of New Bedford v. Morrissey, 329 Mass. 601, 605 (1953). Under State Street Bank & Trust Co. v. Reiser, 390 Mass. 864 (1984), and those cases following, after the settlor’s death, creditors of a settlor also have access to any and all trust assets that the trustee could have distributed during his lifetime. The plain meaning is that a revocable trust offers no creditor protection to the creator of such a trust.

A revocable trust may also result in loss of homestead protection and right of survivorship. A homestead or homestead exemption means that your home is protected from creditors up to the limit of the exemption for as long as the house is your primary residence. A homestead prevents most creditors from taking the house away from you to satisfy a debt that you owe the creditor. It will also protect your home in the event that you have to file for bankruptcy. If the home is placed in a trust, the homestead does not work. The home is no longer a primary residence, it is placed in the trust name and is no longer in your name. The placing of the home in a trust also will break the right of survivorship relative to a spouse that survives you.

An irrevocable trust in turn will protect you from your creditors as long as the trust is created in such a way the individual has no control over the trust asset for which it was made. In making any type of long term estate plan it is the best policy to speak to an attorney regarding your assets, your long term planning, and how you would like to manage such assets during and after your lifetime. Due to the “look back” period this should be done sooner rather than later.

Bookmark It

Hide Sites

Pursuant to the U.S. Bankruptcy code, subsequent to a debtor filing a chapter 7 or 13 bankruptcy, they are unable to obtain another discharge of unsecured debt for 8 years. As such, many debtors believe they have no way out of new debt incurred. This could not be further from the truth. There is substantial statutory and case law that suggests a right to negotiate in good faith with creditors. Moreover, creditors must partake in the interactive process.It has long been held that if a creditor has no agreement for acceleration of an entire obligation upon default, the creditor may not accelerate a debt unless the debtor’s default rises to the status of an anticipatory repudiation. See, e.g., Sheet Metal Workers Local No. 76 Credit Union v. Hufnagle, 295 N.W.2d 259, 29 U.C.C. Rep. Serv. 1087 (Minn. 1980).

The Uniform Commercial Code (“UCC”) § 1-309 provides that a term allowing an acceleration of payment or performance or additional collateral at will, or when the creditor or the creditor’s successor in interest deems himself insecure, and language of similar import, will be construed to mean that the creditor has the power to do so only if he in good faith believes that the prospect of payment or performance is impaired. Section 1 - 309 has been increasingly applied to real estate transactions. See generally Greenwald v. Columbus Bank & Trust Co., 228 Ga. App. 527, 492 S.E.2d 248, 34 U.C.C. Rep. Serv. 2d 547 (1997) (good faith itself does not give rise to an action).

Section 201 of the Bankruptcy Reform Act can be construed as a model to require creditor’s to negotiate in good faith with debtor’s prior to filing any legal action to collect the debt. It would have amended Section 201 proposes to allow a bankruptcy judge to reduce a creditor’s claim by up to 20% if the creditor had “unreasonably refused to negotiate a reasonable alternative repayment schedule.

Perhaps the most relevant and significant factor pointing to a strong suggestion if not requirement for creditor’s negotiating with debtors stems from litigation itself. At a clerk or magistrate’s session in small claims court prior to appearing before a judge, the magistrate will almost always offer free mediation services provided by the court, and in many cases go so far as to require the Plaintiff and Defendant to attend a non-binding mediation session prior to appearing before the District Court Judge.

The gist of the forgoing would seem to indicate that a debtor is not without recourse even if they have filed for bankruptcy and obtained a discharge on unsecured debt within the past eight (8) years. In many case, it may be a good idea to still speak with a bankruptcy attorney or credit counselor to garner assistance in proposing a workout plan with one’s creditors.

Bookmark It

Hide Sites

In order to file for a chapter 7 bankruptcy, and not have the trustee file a motion to dismiss based on a presumed abuse claim, a debtor must fall under the state’s median income level. The new median income levels have recently been released for cases filed on or after February 1, 2008 will be subject to the Census Bureau’s updated median family income data and the Administrative Expense Multipliers.
You can check out the updated figures at the U.S. Trustee’s “Means Testing” page.

Bookmark It

Hide Sites