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.

Mortgage Modification? Try filing bankruptcy…

Many people wanting or needing a mortgage modification are drowning in debt. Indeed, it may well be that in a fruitless effort to stay caught up on credit card debt that they let their mortgage payments slide… which is exactly the wrong thing to do.  Surprisingly, a bankruptcy filing may be the best avenue to getting the relief that overburdened borrowers may need.

To begin the process of saving a home through mortgage modification, you need to shed excess debt so that you can free up more income for paying housing costs. And since your ability to pay is a major factor in whether you get a mortgage modification or other relief, anything which reduces other expenses is quite helpful.

For some people, a Chapter 13 Plan in which they cure their mortgage arrears over 3 to 5 years, often without interest, is the best course of action. Many other tools can be used in Chapter 13, including possibly removing second or third mortgages (see other posts by me in this blog)

Even better, in New Jersey, (and in a few other places) the court has implemented a “Loss Mitigation” program which allows people filing bankruptcy to request mortgage modification or other forms of relief (such as a deed in lieu of foreclosure or short sale). Doing this has several big advantages. First, the process is under court supervision. Second and just as important, debtors have use of the DMM Loss Mitigation Portal. This is a specialized website that collects and makes available to borrowers and lenders (and in this case the court) any documents which have been uploaded in a particular case. As a result, no lender can claim they did not get the documents you filed, since they are always available right on the web portal, along with a record of when they were filed and by whom. This eliminates a big problems (and a big source of frustration for borrowers). Third, lenders have to designate a single point of contact on the lender side–a person who is responsible and answerable for the lender. Finally, the court monitors the process and sets deadlines by which things either happen or they do not. No more dragging things on interminably!

Some of these ideas are being adopted outside of bankruptcy. But in our view, when courts get involved, if anything good is going to happen it is more likely.

Cram down or strip off– a way to surface after being underwater

Many people have homes that are “underwater”, ie the mortgage balances are more than the home is worth. Under certain circumstances, in a Chapter 13 bankruptcy, relief is available through a “cram-down” or a “strip-off”. A cram-down is where you get the Court to reduce the lien to the amount of equity available for it. For example if the first mortgage is $150,000.00 and the house is worth $160,000.00, there is only $10,000.00 in equity for the second mortgage. If the second mortgage is more than this, it can be crammed down to the $10,000.00, in Chapter 13.

There are, however, two big catches. First, you cannot do this if the second mortgage is secured only by your  residence. You have to have given some other collateral as well. This could happen where the second mortgage was given in support of a business loan also secured by the assets of a business.

Secondly, if you do the cram down, you have to pay off the reduced balance through your Chapter 13 plan. However, once you do that, you have only the first mortgage.

Cram down is usually not available for most homeowners. But a “strip-off” can be. A strip-off is where there is ZERO equity for the second mortgage (ie the value of the house equals or exceeds the first mortgage). Many courts, including those in New Jersey, will allow this. The result is that the stripped off junior mortgage becomes an unsecured debt, treated the same as credit cards or other unsecured debt. And at the end of the plan, the second mortgage can be discharged.

Either way, the result is a court-ordered “mortgage modification” that can help beleaguered homeowners get back on track.

These are options that deserve careful consideration, and assistance of a qualified bankruptcy attorney. They also require careful consideration of your long term and short term financies and objectives.

Medical billing errors can destroy your credit

As a follow up to our previous post, I invite you to read the attached more recent article from the New York Times on how medical billing errors can create havoc with your credit score

We recommend demanding that as part of any resolution of a medical billing error, the offending biller be required to remove and correct any erroneous entries and agree in writing not to repost the erroneous bill as unpaid. Merely marking it as resolved is not enough to prevent damage.

You also have rights under the Fair Credit Reporting Act to dispute the erroneous report with the credit reporting agencies. We suggest this be done in the form of a letter which you send by fax or certified mail (be sure to keep a copy!!)

If this is only a part of your financial problems then you will need to consult with an experienced attorney.

No one should have to suffer with a diminished credit score because a medical service provider made a mistake. But ignoring this aspect is unwise.

Hopefully new laws can be passed to put the burden on the medical providers to correct erroneous reports of unpaid bills.


Medical bills and billing traps-a prime cause of financial problems

Here is another perceptive article from the New York Times about the traps people can get into when they end up in a hospital or medical facility that is out of their insurance company’s provider network .

The system is completely irrational, but that doesn’t help people who find themselves trapped by high medical bills. We are still finding that medical expenses are still a major contributor to financial distress and eventual bankruptcy. We are also seeing increasingly aggressive collection efforts by hospitals. In recent cases, these have continued even after a bankruptcy filing.

If you are facing high medical bills, we recommend you start by verifying the charges and the services. In some instances, collectors are trying to collect beyond the amounts they have agreed to accept from the health insurance carrier. You can start by using the appeal process through your health insurance.

You have the right to dispute a medical bill, if you think there is a basis. But too often, people throw out or ignor the Explanation of Benefits or “EOB” issued by the health insurance carrier. You need to keep all medical bills and related papers.

Even if the process does not end entirely in your favor, consider efforts to settle for a reduced amount.

Of course, before agreeing to pay anything, you need to prepare a personal budget to compare your monthly net income to the total you need to spend to meet basic living expenses.  There are budget forms on the the Forms page of our website. Don’t get yourself in over your head by promising more than you can pay.

If the bills are substantial, you may benefit from a free consultation to examine the options available to you.

Avoiding mortgage and debt relief scams

This little article in the New York Times caught my eye. It points out how some desparate homeowners are being scammed by companies claiming to be able to help with mortgage relief.

There is a lot of hype about mortgage relief. And there is a cottage industry of companies that promise to reduce your debts through negotiation (these are called “Debt Relief” agencies). The consistent thread I see is that it is hard to predict who gets what results from lenders and when. But here are some things to remember:

1. No lender is required to modify any mortgage or other loan. It is a contract. If the lender is going to give you something, they are going to want something of value in return.

2. Reputable professionals do not make promises of specific results when it comes to loan modifications. They can give you opinions on possible or likely outcomes.

3.  A licensed attorney in your state may require an up front deposit, but you are entitled to have a clear written explanation of what fees are going to be based on.

4. A loan modification may be the right move for you, or it may not. You need to explore all the alternatives.

5. Finding the right professional for you requires some research. Stay with recognized professionals with whom you feel comfortable.

How small family owned businesses succeed, and how to avoid feeding a failing enterprise

Here is a great little article from the New York Times explaining what attributes are common to small family owned businesses. Recommended reading.

In our experience the watchword for business owners is “fail to plan, plan to fail”. These businesses do the following:

1. They stay on top of their game, and stay flexible, ready to find and meet the needs of their customers and of the marketplace.

2. They make everyone pull his/her weight, and avoid favoritism to family members. I would add that business owners who develop a sense of entitlement to a certain income or livestyle can be the downfall of the business.

On the other hand, many business owners do not do the converse: make the business pull its weight, and if it is not then start asking hard questions.. Instead, they blindly put money into a failing business without asking the tough questions, why this is necessary. We all know some businesses are cyclical, and have to get through the lean months to make money in season. But if the good times are not enough to pay off the deficit run up during the lean times, all that happens is that the owners end up further and further in debt until they run out of money. Long before this happens the owners need to take a hard look at what is happening.

3. They seek out and get qualified advice from attorneys and accountants.  This follows from the “fail to plan…” thought above. Sometimes early advice from a trained and objective outsider can be just what is needed to get back on track.

With years of experience advising business owners, and in dealing with the aftermath of failed businesses, we know how these sad results can happen. Business owners who think they must contuinue to run a failing business need to explore the alternatives, and the ways they can avoid the vicious trap of feeding a failing business. Too often the end result is an avoidable or far-too-costly and painful business bankruptcy.

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