Florida Asset Protection Blog

Fraud Exception To Florida Homestead Protection

The Florida Constitution includes three specific exceptions to homestead protection: consensual liens (mortgages); taxes and assessments (homeowners associations) and debts for improvement (mechanics liens). There is an important fourth exception to homestead protection established not in the Constitution but through a history of court decisions. The fourth exception is the "fraud exception." Courts have held that people cannot protect money used to purchase or improve a Florida homestead when the money was obtained by fraud or by breach of a fiduciary duty. Courts use equitable remedies, such as an equitable lien or constructive trust, to pursue the money taken from a fraud victim and put in a Florida homestead.

It is important to distinguish homestead protection from a fraud judgment and the protection of an investment with fraudulent obtained money. The fraud exception to homestead protection applies only when the same money obtained by fraud is used to buy or improve the homestead. The creditor has to trace the money. If Florida resident becomes subject to a civil judgment based on a finding of fraud or breach of fiduciary duty the money judgment based on the fraud count cannot be enforced against the homestead property if the proceeds of the same fraud cannot be traced into the house.

As an example, someone who conducts a ponzi scheme cannot protect the stolen proceeds in a Florida homestead. However, the "bad guy's" homestead is protected from his ponzi victims if the debtor can show that his house was purchased with money other than ponzi proceeds.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Some Second Mortgages Suing Homeowners To Collect Notes Instead of Foreclosure or Deficiency Judgment

 I have stated before in this blog that most large mortgage companies were not pursuing deficiency judgments after foreclosure. More recently, I have seen a few situations where second mortgage holders were suing the homeowners for personal judgments. The second mortgage companies were not suing for a deficiency judgment after the first mortgage foreclosed. Instead, these second mortgage holders have filed law suits against the homeowners to collect the underlying promissory note. This means that the mortgage company does not wait for a first mortgage foreclosure and does not initiate its own foreclosure on its second mortgage. After the homeowner misses  few second mortgage payments, the second mortgage company accelerates the entire balance of the mortgage note (which is a standard provision of most notes) and sues the homeowner to collect the entire note balance. The mortgage company retains its second mortgage; any proceeds paid to the second mortgage company from a sale of the property would reduce the balance of the judgment.

Suing directly on the promissory note without foreclosure is common practice for commercial loans. Commercial lenders hold most loans in-house as contrasted with most conventional mortgages which were securitized and sold to investors. Commercial lenders rather get general judgments against the borrower than take back real estate which they cannot sell and which would not satisfy the loan. I have also seen isolated cases where small, local banks are suing borrowers directly on the note to collect residential first mortgages. These smaller lenders are following the lead of the commercial loan departments to seek personal judgments in lieu of taking back real estate. I have not seen any large banks or mortgage lenders sue homeowners directly on their notes rather than instituting foreclosure.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Homestead Protection For Commercial Property With Upstairs Apartment

The issue is whether you can exempt as homestead a commercial building with an second floor apartment used as your primary residence. A south Florida debtor owned a commercial building in Miami. He operated a adult entertainment club on the first floor. He claimed that he lived in an apartment on the second floor. During the day, when the club was closed, the debtor used the kitchen and the employee showers for personal use. He filed bankruptcy and sought to protect the entire property as homestead. The bankruptcy trustee objected to the exemption. The bankruptcy court overruled the debtor’s exemption of the entire building as homestead and ordered that the trustee sell the property for the benefit of the bankruptcy estate, reserving to the debtor a percentage of the sale proceeds for his extent of personal use.

The court ruled that when a debtor resides in a building used for residential and commercial purpose the appropriate resolution is to sell the entire property and apportion the net proceeds between the homestead and non-homestead portion rather than declare the building to be entirely homestead or entirely non-homestead. Its significant that in the Miami case the entire building was zoned commercial and that the business was open to the public. Therefore, I do not think the result would be the same if a debtor uses a part of a residential property for a home office. The case is In re Darrell Wilson, Case NO. 07-21261 in the Southern District of Florida.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Mortgage Foreclosures: Courts Make It Easier To Negotiate With Mortgage Lenders

People facing possible mortgage foreclosure often complain that their mortgage lender won’t talk to them about loan modification or that they don’t know how to reach any lender representative with authority to resolve their situation. Some courts in Florida are making it easier for homeowners to negotiate with their mortgage lender. However, help is not available until the case is within court jurisdiction in the form of a foreclosure lawsuit.

Some of the judicial districts in Florida are requiring court supervised mediation in all foreclosure cases when the property is owner-occupied. Mediation slows down the foreclosure process, and more importantly, it requires that a lender representative with authority to compromise on the lender’s behalf to sit down at mediation, face-to-face, with the borrower or his attorney and discuss in good faith a compromise other than foreclosure. A lender who does not attend a scheduled mediation can be sanctioned or have the foreclosure suit dismissed.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Fraudulent Transfers By Disclaimer To Estate Planning Trust

An attorney wrote to me with an interesting asset protection question involving a typical estate planning tool. A homestead property was owned by husband and wife as tenants by entireties. The husband died. The couple had established a typical living trust which included a credit shelter trust that became irrevocable after the first death. The surviving spouse and children were the beneficiaries of the credit trust. The husband died. The wife disclaimed her survivorship interest in the jointly titled homestead so that the house automatically passed to and was titled in the husband’s credit shelter trust. The question was whether the disclaimer jeopardized the homestead protection from creditors. I think the protection would remain intact for the wife’s benefit during her lifetime.

There are many Florida cases which hold that a debtor’s primary residence is protected from forced sale if the debtor has either a legal or an equitable interest in the property. In this case, the surviving wife has an equitable interest in the homestead because she is the beneficiary of the credit shelter trust which trust holds the legal title.

The result may be different if the wife disclaimed an entireties asset other than the homestead. The entireties title ends upon the husbands death and the entireties asset automatically pass to the wife. If the wife had creditors at the time of her husband’s death the creditors could go after what has become the wife’s individual assets. If the wife tried to avoid ownership by disclaiming the non-homestead entireties asset to a credit shelter trust the disclaimer could be reversed as a fraudulent transfer. There are cases holding that estate planning disclaimers are transfers for the purpose of Florida’s fraudulent transfer statutes.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Second Mortgage Does Not Need "Deficiency Judgment" To Sue Borrower Personally

The risk of  personal liability from a mortgage foreclosure depends on the nature of the mortgages and the lenders. Second mortgage holders are more likely than first mortgage holders to pursue personal liability after a foreclosure. Among second mortgage holders, the risk of personal liability after foreclosure also depends on the nature of the second mortgage loan. Second mortgage loans by large, national lending institutions were most often made to help finance the purchase of the property or to finance an addition or improvement to the property. These second mortgages are typically conforming FNMA mortgages which were sold on the secondary mortgage and ended up as part of a marketable security sold to investors (the so-called toxic mortgages). These second mortgage holders are less likely to sue the borrower after either the first or second mortgage holder forecloses on the property.

Other second mortgages were made to secure personal or business lines of credit extended by local banks. These loans were essentially consumer loans or business loans where the lending bank insisted on security in the form of a junior lien or mortgage on the borrower's real property. These consumer loans are not conforming FNMA loans and are not sold on the secondary market. The notes are held by the issuing bank or other commercial lender, and if you do not pay the loan on time the lender is likely to sue you for the money. In most cases, the lender will not wait for the first mortgage to complete a foreclosure and the lender itself will not foreclose the second mortgage. Instead, the lender will sue you directly on the underlying promissory note. If the lender gets a judgment against you, the judgment is a lien on all of your real estate subject to the superior rights of the first mortgage.

Although these types of commercial lender holds a second mortgage its lawsuit to collect money is not a deficiency judgement because the lender's action does not depend on the value of the property or the results of a foreclosure sale. These second mortgage holders are simply suing to collect an unpaid promissory note.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Foreclosures, Deficiency, And Income Tax: Investment Loss May Offset Imputed Income For Some Investors

People facing foreclosures on investment property usually hope their lender will not pursue a deficiency judgment and will forgive balances due under their mortgage note. If the investor is fortunate enough to avoid a deficiency lawsuit he still faces income tax issues because of the general rule that forgiveness of a debt results in imputed taxable income. There is no imputed income if the real estate owner files bankruptcy or if he is insolvent at the time of the foreclosure. CPAs are dealing with foreclosure taxation issues for many of their clients during this tax season. I recently discussed with an experienced CPA the tax issues associated with foreclosure for those taxpayers not exempt from imputed income by reason of bankruptcy or insolvency.

The CPA explained that even those investors who receive 1099 forms because of  a lender’s release of deficiency liability may not end up paying additional income tax. He said that investors who use their investment property for a business purpose such as production of rental income can write off the losses associated with foreclosure in full in the year of their real estate loss. Generally, the owner's investment loss will offset  imputed income. On the other hand, investors who do not rent their investment property or use their property for another business purpose, but simply hold the property for appreciation, are not considered to use the property for a business. These passive investors can only deduct $3,000 per year of long term capital loss. The passive, non-business investor must amortize his investment loss over many years at the rate of $3,000 per year even though they must immediately recognize imputed income from a lender's debt forgiveness. Of course, as long as the lender retains the option of suing on the note for any deficiency there is not forgiveness of any debt and no imputed income.

The above summary is my understanding of the income tax effect of foreclosure and imputed income associated with the release of mortgage note liability. I am not a CPA and am not a tax attorney. Check with your own CPA if you have questions about your particular tax situation.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Mortgage Assistance Program Enacted By Federal Government

I receive several emails and calls daily from people with problem home mortgages. This week several people have asked me whether they qualify for help under the government’s new mortgage assistance program. I read an article in the Wall Street Journal that described the two mortgage assistance programs implemented this past week. The Journal article included a chart that helped explain the program benefits and qualifications. I have reproduced the Wall Street Journal chart to assist Blog readers. WHO WOULD QUALIFY

I know nothing other about the new mortgage program other than what is in the Journal’s chart. I am following the proposed Chapter 13 bankruptcy amendments which would allow people with upside-down primary residences to reduce mortgage principal to current market value with conditions. A Chapter 13 law has been passed by the house and a similar law is awaiting Senate consideration.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Tenancy By Entireties Protection Different In Some Other States

Tenants by the entireties protection from creditors is not the same in all states. Some states do not recognize the concept of tenancy by entireties ownership between married couples. Some states recognize entireties ownership of real property but not personal property. A client today claimed that a parcel of real property he owned in another state was protected from his individual creditors because the deed said it was owned as tenants by entireties. When I researched the laws of the state in question I found that the state laws did recognize entireties ownership of real property. However, the ownership had asset protection consequences different from Florida law.

In Florida, tenancy by entireties real property and personal property is completely exempt from the creditors of either spouse. The laws of my client’s state were different. The state’s case law held that entireties property is exempt from forced sale, but that a creditor could still put a lien on the debtor’s interest in the entireties property. When the entireties ownership terminates by divorce or by the spouse’s death the creditor can foreclose its lien against the debtor’s interest. Just because you own property in a state that recognizes entireties ownership do not assume that your property has the same degree of asset protection afforded to entireties assets by Florida’s laws.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Mortgage Deficiency Claim Statute of Limitations

I am often asked by clients how long does a mortgage lender have pursue a deficiency judgment. I have told many people that I have heard different answers from different attorneys ranging from one year to five years after foreclosure. I have also explained to the same clients that I have not seen any case on this issue and that no one has ever hired me to do legal research. That’s true until now. Attorney Larry Kosto, acreditor attorney in Orlando, sent me a 2005 court decision dealing with the statute of limitations for mortgage deficiency claims. The case, Chrestensen v. Euoge

st, Inc., held that a mortgage creditor has five years to file a lawsuit for a deficiency judgment and that the five year time limit begins to run from the date of the foreclosure sale. The time period does not begin when the foreclosure case is filed or when a judgment for foreclosure is entered. In this case, the creditor filed a separate lawsuit for deficiency after the foreclosure. The court did not deal with a common foreclosure procedure wherein the lender includes a deficiency claim, or count, within the original foreclosure action. There, the court may close the case if a motion for deficiency is not pursued within one year following the foreclosure sale. The Chrestensen case found at is 906 So. 2d 343.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida