Is the foreclosure mess ending? Hopeful signs but careful planning still needed.

Recently, the New York Times has reported that the residential housing market is showing signs of life, with prices and sale activity in certain aress going up.  http://www.nytimes.com/2012/06/28/business/economy/new-indications-housing-recovery-is-under-way.html. Another article reports that increasing numbers of homeowners in financial trouble have been able to get help through a refinancing program called HARP. http://www.nytimes.com/2012/06/24/realestate/mortgages-increased-interest-in-expanded-harp.html. (HAMP is the other program people have heard about. HARP is for people who are current on their mortgages)

This is good news for many, but we caution not to look at the problem piecemeal. Too many of our clients did just that, thinking that refinancing their home or taking money out of pensions or IRA’s would solve all their problems when in fact the underlying problem of too little income and too much expense or debt remained. When we help people with a mortgage modification or restructuring, we always counsel that this is only part of the solution. A close look at spending vs income, with planning for future needs (the car will need tires! I need that root canal!) is essential.

Most important is a long term change in lifestyle and priorities. Just as a crash diet fails without long term changes in eating habits, any credit fix will fail if overspending continues. We always explore all the choices our clients have with a  broader long term view in mind.

We hope that all our clients will find their way to long term financial stability, and will learn to enjoy not having to worry about how to pay the next unexpected bill.

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.

Seeking a Loan Modification

I came across an old Wall Street Journal Op-Ed piece from January 2010, “Why Mortgage Modification Isn’t Working” (Jan 20, 2010) in which the author notes that only 1% of mortgage modifications under the federal HAMP program had been successful. Since then, a lot of press and a lot of attention has been given to the problem, but although there has been some progress, it does not appear that major changes have taken place.

As of this writing (November 2011), the road to mortgage modification success is bumpy, uneven, winding and difficult. A recent survey I conducted among colleagues revealed that some are granted relief while others equally or more qualified are denied without rational explanation. My own experience as a foreclosure mediator confirms this. But with the right guidance, a healthy skepticism and realistic expectations, the process is still worth undertaking, for those whose financial situation makes them viable candidates. If you believe a mortgage modification is worthwhile for you, please link to our QuickList of 6 pointers to follow.

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