Florida Asset Protection Blog

The Truth About Short Sales According To Wall Street Journal

Today, April 30, 2009, the Wall Street Journal published an article on Short Sales. The Journal report is consistent with items previously posted on this Blog. Foremost, the Journal warned that most lenders accepting short sales are not waiving personal liability or deficiency judgments. These lenders require the homeowner to sign a new promissory note for the short amount. I previously posted my opinion that short sales are a trap for homeowners. The buyer, lender, and real estate agent each gain from a short sale, whereas the homeowner is left with the same liability he would face if he let the property go to foreclosure. Actually, the homeowner is in worse shape- in the case of a foreclosure the lender would have to prove the property’s fair market value in order to pursue a deficiency judgment. Proof of value takes time and money invested in attorneys fees and appraisals. When the borrower agrees to a short sale and signs a new note the borrower has liquidated value, that is, he has consented to a property value equal to the sale amount. Short sales still affect your credit, and even if the credit impact is less than foreclosure, you should consider whether the credit benefit is worth the liability. The Journal tells of one homeowner who walked away from a short sale ready to close when the bank insisted he sign a promissory note for the forgiven value.

There is another article in today’s Journal about short sale which makes interesting reading for distressed homeowners. A Short Sale May Not Mean You're Home Free - WSJ.com. This article explains the potential income consequences from a short sale. Its a relatively clear and comprehensive explanation of taxation issues in mortgage debt foregiveness. I learned new things about the tax consequences of foreclosure. Read the article before you consider foreclosure or short sale, and always talk with your CPA to make sure you understand your situation. A bank may not chase you to collect  a deficiency judgment, but the Internal Revenue Service will likely pursue collection of income taxes triggered by debt foregiveness.

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

Keogh Plan: Bankruptcy Court Denies Exemption To Debtor Who Is Sole Owner And Sole Participant

Section 222.21 of the Florida Statutes exempts retirement plans that have been preapproved by the IRS as exempt from taxation pursuant to Section 401(a) of the Internal Revenue Code. In a recent bankruptcy proceeding the court considered a debtor’s claimed exemption of his tax deferred Keogh plan. The Code Section 401 states that a qualified pension or trust includes a trust created or organized by an employer for the exclusive benefit of his employees. The debtor provided the court with letters from the IRS and Treasury Department supporting his position that his Keogh was a qualifying tax deferred pension plan. The bankruptcy court found that the issue is whether a self-employed debtor would qualify as a participant in a Keogh plan when he is the only participant who shares the benefits and protection of the plan.

The bankruptcy court cited a U.S. Supreme Court case for the proposition that a working owner of a business is not a "participant" in an ERISA pension plan sponsored by this corporation when he is the sole owner and employee. The bankruptcy court held that the Florida legislature did not contemplate exempt funds in a Keogh plan when the claimant is the sole shareholder and sole "participant" in the plan. In re Sarah Baker 9:08-bk-11158.

posted by Jonthan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Homestead Protection Of Parent's Home Occupied By Child With Homestead Tax Exemption

An attorney called me to discuss whether a debtor could protect as homestead a house they owned which was occupied by their children. The case involved a divorced woman (the client) which children and her mother. The client and her mother each owned and occupied a Florida home. The client is in the process of leaving her home and moving in with her mother to help care for her, and she is also adding her name to the legal title of her mother’s home for estate planning purposes. The client gave permission to her two sons to occupy her home after she moved in with the mother. The client filed for homestead tax exemption on the home she owned; her mother claim a homestead tax exemption for her home. The client was being sued and anticipated a judgment being entered against her. She asked her attorney, and the attorney asked me, if the client/debtor could protect her home occupied by her son as a homestead property.

This client is confusing the homestead tax exemption with homestead’s creditor protection. A Florida resident can protect the home they occupy as their permanent residence provided they have legal or equitable interest in the home. This client can protect her interest as co-owner of the mother’s home (after she is added to the title) because it will be her new legal residence. After she moves out of her house and into the mother’s home the client cannot protect her interest in her former home because it is no longer her primary residence. The fact that the mother (improperly) continues to claim the homestead tax exemption of hher home after she moves out does not extend creditor protection. 

The attorney who called me said he would argue that the client’s former residence can remain protected because it will be the homestead of her family members. I think the family would have a better argument if the mother conveyed legal title to her home to her son after he moved in. The mother’s creditors would argue that the transfer is a fraudulent conveyance; they would be correct. The mother’s creditors could not take the home from the transferee son after he has legal title as well as possession. The mother’s creditors could possibly get a general money judgment against the son for the value of the property received, but the general judgment is a better alternative for the debtor’s family than loss of the mother’s house.

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

Fraudulent Transfers: Exception To Four Year Statute of Limitations

As a general rule, a creditor cannot challenge as a fraudulent conveyance any transfers of assets made more than four years ago. I use the four year statute of limitation applicable to fraudulent transfers and conversions as a planning guideline and do not advise most clients to consider additional asset protection tools to protect transfers four years in the past. There are, however, exceptions to this general rule which permits creditors to challenge older asset transfers. Specifically, Florida Statute 726.110 provides that a creditor can challenge as fraudulent an asset transfer to avoid pre-existing creditors for one year after the creditor was or could reasonably have been discovered by the creditor under certain conditions. This Statute gives some creditors the ability to challenge a conveyance no matter how ancient for a period of one year after the creditor’s actual or constructive discovery.

The Statute seems preserves creditors’ rights in certain circumstances where, for example, a debtor has concealed an asset conveyance so that the transfer could not reasonably have been discovered, although that condition is not expressly stated in the Statute. I do not think a creditors’ right to challenge effectively transfers is without practical time limits. The farther back in time a debtor has conveyed assets the easier it is to defend the transfer. Assume, for instance, a creditor finds though discovery in aid of execution of a judgement that the debtor transferred title to an asset five or more years ago. This old transfer, if not purposefully concealed, would be difficult to reverse as fraudulent even if the creditor could get by the four year statute of limitations on the grounds of recent discovery under the one-year rule. Effective asset protection is mostly common sense, and older planning done openly is usually easily defended.

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

Liability Traps Under Florida Trust Code: Serving As Trustee of Family Trust Has Risks

Many people in Florida serve as trustees of family trusts where the beneficiaries are other family members and their respective children. Serving without compensation as a trustee for other family members at the bequest of a family trustmaker is not a problem as long as all family members get along. However, when disagreement and dissension arises within the family the job of trustee is a liability trap. Disgruntled family members, sometimes motivated by their spouses, ma

y be able to sue family trustees for failure to comply with trustee duties set forth in Florida’s trust laws.

Florida enacted a revised trust code in 2007 which increased duties for trustees of all Florida trust. Each trustee is required to provide all beneficiaries of every trust an annual accounting. The beneficiary does not have to request the accounting; the trustee is required to compile and deliver annual accountings whether requested or not. Beneficiaries may waive their right to an accounting provided the waiver is given in writing to the trustee. A trustee who fails to provide an annual report, or fails to perform other trustee duties, is liable for breach of trust under Florida Statute 736.1001 (1). Any beneficiary can sue a trustee for failure to provide an accounting or for other breach of duties under the trust code. If a beneficiary brings a legal action for breach of trust the court is required to award costs and attorneys fees.

Mortgage Foreclosure: Second Mortgage Lender Sues Directly On Promissory Note Instead Of Deficiency Action

I have reported recently that some second mortgage lenders have become more aggressive by suing defaulting homeowners personally. I recently received an email from a litigation attorney representing New York residents who purchased an investment home in Florida subject to a first and second mortgage. I had referred the client for mortgage foreclosure defense. If the second mortgage holder (Chase Mortgage) had pursued a deficiency claim in the foreclosure proceeding they would have had to domesticate the Florida judgement in New York in order to pursue a personal claim against the New York residents. In this case, the second mortgage is pursuing a more aggressive (and more effective) attack against the borrowers by proceeding directly against the mortgage’s underlying promissory note.

The email I received from the litigation attorney explains the situation;

"A client you referred to me (from New York ) is getting pursued by an aggressive 2d mtg. The 1st Mtg on a property in Hernando County (Brooksville) is in foreclosure. Chase ignored the action and instead has filed a separate suit against the owner in his home state of New York. They do not mention the mortgage in the suit, rather they are suing strictly on the note. This is a big problem as there will be no offset for the property value and New York does not appear to afford the same homestead protections as we have here. In other words they are seeking what is tantamount to a deficiency decree and will not have to go through any procedure to domesticate it in the state where the assets are located."

This tactic is prevalent in foreclosures of commercial loans against developers and builders. I would pursue the same tactic if I owned this second mortgage. I still rarely see deficiency claims from first mortgage lenders, but this report is another example of more aggressive collection by second mortgage lenders who receive nothing from foreclosure of "under water" Florida real estate.

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

Fraudulent Transfer By Failing Business To Owners Or Their Family Member Creditors

When a small family business encounters business problems they do everything they can to preserve money. One of the first steps usually is reducing or deferring salary payable to the owners. Some businesses borrow money from other family members to pay bills. Some business cannot recover nor can they obtain enough capital to survive a recession, and eventually, they recognize that the business must shut down. I have often been asked by owners of failing businesses whether they can use what money is left in the business to pay themselves deferred salary or to repay their family members. The owners would prefer to pay themselves and their family rather than expose what money remains in the business to creditors. The owners think its fair to pay what are legitimate obligations to themselves or family. Unfortunately, payments from a failing business to owners or their family may be subject to reversal under Florida law.

Florida’s fraudulent transfer statutes provide that a transfer is fraudulent as to creditors whose claim arose before the transfer was made if the transfer was made to a business insider, the debtor business was insolvent at the time of the transfer, and the transferee insider had reasonable basis to believe the debtor business was insolvent. When a business is in trouble and about to close the business is presumably insolvent and the owners are aware of its financial conditions. Salaries paid to owners prior to closing would usually be considered fraudulent as to business creditors. Transfers to repay family loans is less clear as the family recipients would have to have reason to know of the business insolvency.

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