Judgments have life after bankruptcy, a New Jersey Court rules

We recently posted a discussion of Gaskill v Citi Mortgage, a September 2012 decision by the New Jersey Appellate Division where it denied an application to cancel a judgment under a New Jersey statute allowing that relief any time more than 12 months after a bankruptcy discharge. There is another point the court made: even though the personal obligation underlying a judgment may be discharged and uncollectible against the debtor personally, the judgment creditor can continue to levy on the residence and try to have it sold at Sheriff sale,  for another year! At first this sounds surprising, (how can they collect against my house a debt I do not have to pay?) but on this point, the court got it right. As we will see, this is a problem that can be easily prevented.

The reason is that a judgment in New Jersey becomes a lien on real estate until it is satisfied or removed. A bankruptcy discharge does neither. In most cases, the judgment creditor does not bother trying to have the Sheriff levy and sell post bankruptcy. The reason is simple: most houses have no equity or substantial mortgages. Any money from a Sheriff sale on a judgment must first satisfy the existing taxes and mortgages, and few houses have enough equity to risk the sale price being too low to leave anything for the judgment holder.

Happily, if the homeowner is in a position to keep their home after bankruptcy, there is an easy solution. The Bankruptcy Code has a provision for homeowners to “avoid” a judgment lien to the extent it “impairs an exemption”. In most cases this is the case. [There is a seemingly complicated formula, found at 11 USC 522(f)]. For our clients who want to keep their home and have judgments this is an option. The additional cost of these motions (which are rarely challenged) is worth the peace of mind. The result is a federal court order removing the judgment as a valid lien right away.

This little wrinkle is just one of the many “gotchas” that can lie in wait for the unsuspecting and poorly advised debtor. As in so much more in life, when it comes to hiring the right bankruptcy lawyer, “penny-wise is pound-foolish”. The small extra cost to have it done right is worth it.

Student Loan debt is the looming new crisis- but some options are open to dealing with collectors

Student Loans are now bigger than credit card debt, and cannot be discharged in bankruptcy (except for the really destitute and hopeless; very hard to show). And the government has access to information and collection methods not available to other creditors. As a result, the New York Times reports, debt collectors are pursuing these types of collection accounts and making much higher collection percentages. http://www.nytimes.com/2012/09/09/business/once-a-student-now-dogged-by-collection-agencies.html?_r=1

In many cases, this situation is putting an enormous strain on some unfortunate borrowers.

But, as the article points out, there are some programs to help. These include income based payment programs and discharges for those in public service. http://studentaid.ed.gov/repay-loans/forgiveness-cancellation. The first step for anyone is to get, keep and save all your student loan applications and documents.

And even though a personal bankruptcy will not discharge all student loan debt, it can help. In some cases, a Chapter 13 can be used to funnel payment to these debts.

As I have written before on these pages, the whole student loan situation is a ticking time bomb…

Getting a business loan requires planning

A recent article in the New York Times underscores that getting business loans requires thought and planning. http://boss.blogs.nytimes.com/2012/08/16/when-looking-for-a-loan-you-cant-fight-gravity/. More times than I can count, business people have come to me because they put their homes and future income up to obtain a loan for a business that later began failing. Sometimes the loans are used to pay the owners salaries, so that they are in effect borrowing to pay themselves!

Before getting any loan for a business, the owners need to have a plan how the loan is going to be paid back. If the loan is being used to keep the doors open instead of expanding or investing in making the business better, this is a big red flag.

One banker recently confided to me that banks are competing to sign up customers, but the customers they are chasing are the cream of the crop. Otherwise they are not interested. To get the best terms, you the business owner need to make your business model attractive. This requires  well-thought-out planning supported by realistic projections and solid data.

In these tough times, the businesses that survive will be the ones that thrive. Make yours one of the success stories.

For more about avoiding or dealing with business problems, take a look at our website and blog.

Credit is a two-edged sword: Businesses, like people, have to be careful how they use it

This article in the August 2, 2012 New York Times, http://www.nytimes.com/2012/08/02/business/smallbusiness/for-small-businesses-bank-loan-alternatives.html?_r=1 details how businesses can borrow money from more expensive sources than bank loans, but at much higher cost. It is informative, but it should remind us all that credit is a two-edget sword. Used properly and with proper planning it can help us thrive but used carelessly it can destroy hard earned success and impose a blight on the future.

Too often we have seen business people who used debt, including factoring or asset based lending (described in this article) to paper over more serious problems. If a business wants or needs to borrow, the first questions have to be “why do we need this?” and “how are we going to pay it back?” If borrowing is used to invest in improvements to business operations, or to expand into a profitable new area, it can be the germinator of future success. But if new debt is being used to pay the owners or carry the business, caution is necessary. Too often we have seen businesses that “kicked the can down the road” by borrowing in this way. Sooner or later the day of reckoning comes.

As with anyone using credit, thought and planning is critical. Business owners need to carefully evaluate present and future cashflow. Evaluate how the new money is going to be used, and balance the benefit against the cost. If a business is losing money, borrowing to make up the loss will simply accelerate the losses. Consideration should be given to reducing expenses before borrowing more.

And throughout this process, the best money a business owner may spend is for accounting or legal advice from professionals experienced in business and turnaround issues. No matter the situation, it always helps to understand all the issues and alternatives, including use of Chapter 11 bankruptcy, or bankruptcy alternatives such as business workouts or assignments for the benefit of creidtors.

Navigating the tricky waters of medical bills-to protect yourself against errors and abuses you need to watch and keep good records

This article in the New York Times highlights a problem we have seen increasingly of late, the sometimes confusing morass of medical bills.  http://www.nytimes.com/2012/06/23/your-money/health-insurance/navigating-the-labyrinth-of-medical-costs-your-money.html?_r=1. In this day and age, everyone needs to watch closely and keep careful records. In law as in life “those with the best paperwork tend to win”. Fighting and challenging medical bills, and demanding that insurance companies pay what they should is time consuming, and sadly, sometimes necessary.

Doing this, we know, can only compound the stress and distress of other problems. Unpaid medical bills may, and are often only part of the problem. If you are loaded with other debt, various forms of debt relief, or debt relief planning may be essential.  Medical bill collectors are held to the same rules and standards as other bill collectors.

We recommend:

1. Keep all your medical bills and medical records for at least 12 months, or until your treatment with that provides is finished and fully paid for 6 months.

2. Read the notices on your right to appeal limitations or denials of insurance and exercise your rights.

3. Anytime you speak to someone, take notes of the date, who you spoke to and what was said. If possible and something significant was said, confirm by fax or email.

4. Read all bills or Explanation of Benefits when you get them. Keep complete copies of all medical insurance policies for at least the past 4 years.

5. When signing agreements with providers, always ask for a copy of what you signed. This is your right. Watch out when signing for someone else.

6. If the bill is old, (ie over 6 years in New Jersey) watch out that by making even a small payment you may resurred an old and timebarred debt.

7. Don’t accept any abusive behavior from any debt collector.

Seek qualified legal advice.

 

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.

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.

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

http://www.nytimes.com/2012/05/05/your-money/medical-debts-can-leave-stains-on-credit-scores.html?_r=1

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.

 

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.

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