Archives for March 2012

Student Loans-nondischargeable in bankruptcy-time for a change?

Recently, Sen Richard Durbin of Illinois stated at a hearing on the issue that it was time to reverse a 2005 amendment to the Bankruptcy Code that made it impossible to discharge student loans taken out under government programs or qualified under such programs. http://www.bloomberg.com/news/print/2012-03-20/durbin-urges-private-student-loans-be-discharged-in-bankruptcy.html. We quite agree. Student loans have become another “easy money” disaster in the making, much like the easy mortgage loans that go so many people in trouble and have now generated a long-term housing crisis.

Before 1998, student loans could be discharged after 7 years. Now, the only way such loans can be discharged is by showing special hardship. That showing is very difficult to make, and generally requires that the borrower have no present income, and no prospect of any income any time in the future.

We see plenty of people who are saddled with student loans that are 3-10 times their total annual income. Most have no extra money in which to make any payment, without foregoing basic necessaries like food, transportation, or basic medical care.

Many student loan lenders, unlike mortgage lenders, seem to be far more willing to adjust payment terms to meet the borrower’s financial realities. (They can afford to wait, knowing there is no escape and the interest keeps accruing. The result can be perpetual debt. To be fair, if the bankruptcy law changes, lenders may end up being more aggressive and the cost of student loans could go up. But we think that freely lending to people without regard to their ability to repay and without some avenue for repayment or relief is not in our society’s best interest.

We hope the change comes about. One alternative is to make such loans dischargeable in Chapter 13 through a repayment plan, or to setting easier standards for a court to find them dischargeable. However, even if changes in the law do not come (and the lenders have a powerful lobby), many people can discharge other debts or make other arrangements through bankruptcy that can contribute to solving the student loan problem. This needs a careful and individualized review by a qualified attorney.

Starting over after business failure: your debts can follow you if you get it wrong

We have seen a lot of business owners whose businesses are failing and who want to start over. That is not as simple as it sounds, and doing it wrong could result in the old creditors coming after the new business and its owners.

Usually, the owners want to just start up the same business, with the same customers at the same location with the same owners. That is a recipe for problems. The problems come from two principles.

The first is successor liability. The second is that business owners operating a firm in the “zone of insolvency” have a “fiduciary duty” (or an obligation to serve as a trustee) to their creditors. A detailed discussion of these principles is beyond the scope of this article.

Starting Over After Business Failure

In New Jersey, a new business can have successor liability for the debts of the old if a court finds that a “de facto merger” occurred, or if the business is the “mere continuation” of the old. This means that the old creditors can pursue the new business for payment, providing they can convince a court that this is the case. Courts look for the following to show a defacto merger/mere continuation:

1. the new business has the same ownership, management, personnel, physical location, assets and/or general business operations as the old one;

2. the old business shuts down suddenly at about the time the new business starts up.

3. the new business or its owners assume some but not all debts of the old business, especially those ordinarily needed to continue business;

4. the new business holds itself out to the public as continuing the old business.

Any time business owners start a new business under a new name, successor liability is a risk. There are steps that can be taken to minimize the risk. Each case is different, and a detailed review by a knowledgeable and experienced bankruptcy or business attorney is needed, in advance of any such move.

The second trap is fiduciary liability of business owners. Violating this duty could expose the business owners to a later lawsuit and debts that might not be dischargeable in a personal bankruptcy. Simply put, business owners are held to a high standard of care towards their creditors when a business is failing. They have a duty to maximize the value of the business, and to not take steps which benefit themselves unfairly at the expense of creditors or which treat creditors unfairly. This does not mean that business owners are not entitled to be paid for their services, or that they have to put more of their own money into the failing business.  But lining their own pockets, or transferring assets to themselves or others without the company getting fair value in exchange; engaging in preferential treatment of certain creditors; or making false statements to creditors are some of the “no-no’s” to avoid. Again, this is not a complete list and what can or should be done is very fact sensitive and requires careful review by an experienced attorney. As always, careful planning and advice are critical

Business owners are entitled to try to start over, but without careful planning and the right advice, the result could be that the old debts beleager the new business

Bankruptcy Pros and Cons When facing Foreclosure

People facing foreclosure have a lot of issues and concerns. They are especially in need of advice.

This article I wrote for our local bar journal, to be published in April covers three topics:

(1) liability if the property is vacated before delivery of the Sheriff’s deed;
(2) risks of possible deficiency liability; and
(3) a quick but not dispositive discussion of some possible tax liabilities.

These are all important to deciding whether to do a short sale or deed in lieu of foreclosure, file for bankruptcy, or ride it out to the Sheriff’s sale.

Read article here.

NJ Supreme Court to borrowers: don’t sleep on your rights when faced with foreclosure

In late February 2012, the New Jersey Supreme Court came down with a major decision in US Bank NA v Guillaume. While the ruling addressed important legal issues, its history and result shows why homeowners facing judicial foreclosure cannot assume that a possible mortgage modification will make their problems go away. The Guillaumes, it turned out, had some valid defenses to the foreclosure Complaint when it was served upon them. Instead of filing an Answer raising those defenses, they went to a housing counsellor and tried for a loan modification, which was eventually denied. During the eight months while that request was pending, the foreclosure process marched on. The lender filed a motion for entry of  judgment of foreclosure, and gave the Guillaumes the required notice they were doing so. Still the Guillaumes ignored the process. Six months after that motion was filed a judgment was entered against them. Again, they asked for a loan modification. About a month later they received notice of a sheriff’s sale. Only then did they hire an attorney who sought to set aside the judgment of foreclosure and asserted various defenses. That request was denied. Eventually the issues got to the Supreme Court which held in essence that the Guillaumes had slept on their rights and had lost the right to defend the foreclosure.

This is a pattern of denial that we see too often. While the defenses to a foreclosure are limited, they do exist, but the time to seek legal advice is at the start of the process not the end. Too often also, people think that their chances of getting a loan modification  are better than they are. No matter what the situation, it does not get better over time. The best time to assess the options available and to work towards a suitable outcome is right away. Whether the solution is bankruptcy, or a vigorous foreclosure defense, or some other option, a foreclosure should be a wake-up call.

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