Archives for June 2012

Estate Planning property transfers and gifts-the hidden trap of fraudulent transfer liability

Lately I have read two articles in bar journals discussing aspects of “estate planning” involving transferring property to relatives or into self-settled “special needs” trusts. Neither article mentions much less discusses the New Jersey Uniform Fraudulent Transfer Act. Yet the prospect of a transfer being unwound by a creditor or creditor representative (such as a bankruptcy trustee) is a real concern. Both those engaged in such planning activites and their lawyers need to keep this in mind.

Under both state and federal law (11 USC 548), a transfer can be “avoided” and the transferred property or its value recovered by creditors where the transfer was either with intent to “hinder delay or defraud” creditors, OR the transfer was made for less than “reasonably equivalent value” in exchange, at a time the person making the transfer was insolvent, rendered insolvent, or put into a position of not being able to meet current or reasonably anticipated future debts.

Stated in simpler terms, you cannot give away your property that creditors could seize to pay your debts, unless you get money or value in exchange that is roughly equivalent to what it is worth. Of course, if you pay off all your debts and stay debt free for a reasonable period of time afterwards, this may not be a problem.

Claiming that you intended to do estate planning rather than depriving your creditors is a defense that any good attorney can defeat, especially if the transfer was made to close family members, or creditors were starting to hound you. Intent to defraud can (and usually is) proven by looking to various “badges of fraud”. Not getting fair value in exchange is one of them.

Transferring your assets into a trust for your own benefit does not protect them from the claims of creditors. These “self-settled” trusts cannot, under New Jersey statutes, be used to insulate the property from creditors.

Most importantly, the creditors who can pursue fraudulent transfer claims include “future” creditors, not just those who were owed money when the transfer was made. While a 4 year statute of limitations applies to many such  state law claims, even after the 4 years is up, a creditor can sue up to a year after he or she learns of the transfer. And federal agencies, such as the IRS (or a bankrutpcy trustee in a bankruptcy case where taxes are owed) has up to 6 years.

We often say that those who want to engage in “asset protection” need to do it at a time when they do not need it. Usually, the impetus to these efforts is some impending problem, legal, medical or otherwise. Like so much else, timely counselling by someone who knows this area and has both pursued and defended these types of claims is invaluable. With proper guidance and planning, the problems I have outlined here can be minimized or avoided.

Student loan debt at record levels- what options are there?

In late May 2012, the Federal Reserve Bank of New York reported  that debt from educational loans in the U.S. rose 3.4 percent to $904 billion in the first quarter,  increasing  from $874 billion three months earlier.  This, while all other forms of household debt fell a combined $383 billion, according to the report. Ninety-day delinquency rates for student loans is now higher than that of mortgages, auto loans and home equity lines of credit.

This is a massive problem that voters and lawmakers are going to have to deal with. At the personal level, most but not all of these debts cannot be discharged or eliminated in bankruptcy, under the present law.  Not all loans used for education are exempt from discharge. Only the following types of loans are protected:

1. Loans made, insured or guaranteeds by a federal, state or other government

2. Loans made under a program that received  funding from government or a nonprofit institution.

3. Educational loans qualified under certain sections of the Internal Revenue Code.

The first step is to locate or ask for all the information on  any programs under which the loan was made. This can usually be obtained from the original financial aid office.

In a very few cases of extreme hardship, the law does allow even these types of loans to be discharged. This is a difficult test to meet.

Even without an ability to discharge these loans, for people drowning in other debt using a bankruptcy to remove that debt load can make the job of repaying student loans easier. We also encourage clients to reach out to the student loan lenders for relief in repayment terms.

In those cases where there is a co-signer on the loan, a Chapter 13 bankruptcy provides a means to focus payments made under a bankruptcy plan towards repayment of the student loans.

For anyone facing these types of debts careful planning and consideration of all the choices is critical. Bankruptcy is one tool, but it is not right for everyone. Ignoring the problem is worse. Consultation with experienced legal counsel is very important. Long term planning for all involved is key to long term financial stability.

Third Circuit to injured plaintiffs- your claim can be discharged before you know it exists

When a defendant files for bankruptcy, anyone with a potential damages claim is at risk that their claim will be discharged and lost. But what about the plaintiff who does not know he/she has been injured? Under two recent rulings of the Third Circuit Court of Appeals, these claims can still be discharged so long as the claimant has been “exposed to a debtor’s product or conduct” before the bankruptcy was filed. In a more recent 2012 decision (Wright v Corning), that Court held that in a reorganization bankruptcy, even such claims where the exposure happened before the debtor’s plan has been confirmed (something that happens usually many months after the bankrutpcy is started) can likewise be discharged. The Court held that notice by publication is sufficient to alert claimants “that by being exposed to a debtor’s product or conduct, they might hold claims even if no damage is then evident”.

The facts in Wright v Corning illustrate the problem. In 1998, Wright purchased Owens Corning roof shingles which were installed on her house. The defects in these did not become apparent until 2009 when they started leaking. Corning filed its bankruptcy in 2000. Notice to potential claimants for defective shingles and other products was given by publication in local and national papers. In 2005, West purchased shingles which also turned out to be defective. This purchase was AFTER the bankruptcy filing, but BEFORE Corning’s reorganization plan was confirmed.

The Court, following the majority rule elsewhere, held that both sets of claims would be treated as debts that would be discharged by the bankruptcy filing and plan confirmation. This did not happen in this case because until 2010, the Court’s rule had been that such claims did not exist until the damages became apparent, and thus it was a denial of due process to sand-bag them, since at the time in 2005, they were entitled to rely on the old rule in effect. However, for any cases filed since 2010, claimants will not get such a “do-over”.

This should strike non-bankruptcy practitioners as unfair. However, the Court relied on the broad statutory definition of claim, which affords debtors seeking bankruptcy relief the broadest scope of protection against future claims.

Note that this same rule also applies when the defendant is an individual filing under Chapter 7 or Chapter 13.

Any time a potential plaintiff might have a possible claim, early and affirmative action in a defendant’s bankruptcy is critical. No doubt many deserving claimants whose damages become apparent after the bankruptcy will lose out. Hopefully, Congress will address this, or insurance will be available.

Even lawyers getting scammed over the Internet.

The New Jersey Law Journal reports that “Despite repeated warnings from the FBI, law firms continue to fall for an old internet scam. It begins with an e-mail requesting assistance with some
form of debt collection, financial settlement, or real estate transaction. If the law firm agrees, it receives a large check from the alleged debtor, and the purported client instructs the firm to deposit the check, deduct its fee, and send the rest of the money to the client. The check turns out to be counterfeit and the firm is left holding the bag, usually for $100,000 or more. According to the 2011 Internet Crime Report, the Internet Crime Complaint Center has received more than over 600 attorney collection scam complaints totaling more than $16 million in losses.

Anyone can be a victim of these types of scams. I regularly get emails from these fraudsters. The tip-off is usually some generic language explaining that the proposed defendant or counter-party is in “your jurisdiction” or “your area”. Some even list bogus telephone numbers. One claimed to come from a legitimate law firm. I went directly to that firm’s website and learned that this gentleman was a fraudster. Another time, the fraudster claimed to be from a business in Utah, but when I independently tried to contact them, using Google to verify identity by phone, the fraud was revealed.

DO NOT even respond to these emails until you have absolutely verified the existence of a real business through multiple sources. Nowadays, I would take the position that no large payment from overseas is going to be disbursed until the institution verifies directly with me that the funds are good, in writing.

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