Florida Asset Protection Blog

Garnishment Of Homestead Reverse Mortgage Payments

During this past week I met with a new client who had recently been subject to a money judgment from a credit card company. The client, retired, had a reverse mortgage on his homestead which money he used to pay his basic living expense. As most know, a reverse mortgage involves a bank providing a guaranteed monthly payment for the owner's life in exchange for the house title upon the owner's death. The retired client was concerned that his creditor could garnish his monthly reverse mortgage payments. I don't think a court would permit garnishment of reverse mortgage payments if the mortgaged property were currently the debtor's homestead. Protecting money received and deposited in the debtor's bank account is more difficult.

Lets start with the general rule that although your homestead is creditor exempt once you convert the homestead equity to cash by mortgage or sale the money is no longer protected by the constitutional homestead protection- the one exception is the continued exemption of sale proceeds intended to purchase a replacement homestead. Application of this general principal would lead to the conclusion that proceeds payable or paid from a reverse mortgage are not protected. I think a court would not permit the garnishment for two reasons. In my opinion there is a strong public policy protecting the money people rely upon for retirement, and in most cases, reverse mortgages are used to fund retirement of seniors who have managed to pay off their mortgage. A brief legal research session revealed no Florida cases on this issue.

 

This client will have more problems protecting the reverse mortgage proceeds after they are deposited in a bank account. Florida courts have protected pension or 401k funds after deposited in financial accounts. There are too many cases holding that homestead proceeds lose asset protection in a bank account unless clearly intended to buy another homestead. This client will have to deposit his reverse mortgage checks in a protected financial account.

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

Homestead Protection Not Lost Just Because Judgment Shows Up On Title Search

From time to time people call me and state that a title search discovered a judgment lien on their homestead. They ask how a judgment can encumber their homestead property if homestead is exempt from creditors.

A title search does not answer the question of whether there are enforceable judgment liens on your homestead. The search will tell only what filing appear on the public record. Any civil judgment against you will appear when you do a title search of any property in your name. Whether a recorded judgment acts as a lien on your homestead is a separate legal issue that takes into account the Constitutional homestead exemption.

If a judgment is issued by a court and recorded prior to the time you occupy a home as your permanent and primary residence (homestead) then the judgment will attach to the property. Moving in to the house after the judgement will not protect the home from the judgment. However, if you occupy a house at the time a judgment is recorded the judgment stays on the public record but does not legally impair your title or your equity in the house.

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

Banks Have Incentives To Settle With Judgment Debtors Quickly For Low Amounts of Cash

Everyone knows that it is very hard to negotiate with a bank to modify a bank loan. Banks are difficult creditors to deal with. Yet, after a bank which has already sued and has a judgment against you is a relatively easy creditor. Banks tend to accept very low settlements of judgment debts whether the debt is related to a mortgage, a credit card, or a commercial loan. I never understood why banks tend to settle for "pennies on the dollar", although I assumed they had good reasons to resolve their claims quickly and cheaply. This past week I discussed bank settlement policies with a new client from Chicago who had worked there for the FDIC for many years. He was quite familiar with the internal workings and thinking of commercial banks.

The client explained why banks are anxious to settle judgment debts. I’ll try to paraphrase his explanation in layman’s language. If a bank has a personal judgment against you the bank reports the judgment as an asset. Accounting rules require that the bank mark down the judgment to its present value. Given the difficulty in collecting judgments in Florida against people with financial problems the bank will discount the judgment to a low percentage of face value. Next, the bank has to evaluate both the cost of pursuing collection, including attorneys fees, and also the administrative costs of carrying the judgment. I was not aware that bank’s incur significant administrative expenses of carrying bad debts such as accounting, auditing, and valuation of the debts. Typically, banks find that given the uncertainty of collection, the time and expense of collection, and administrative carrying costs, it is better for them to accept almost any amount of cash offer to settle the judgment debt. Additionally, bank regulations require banks to have capital reserves to offset "bad debts" so that uncollected judgments requiring setting aside capital which otherwise could be used to make new loans.

My retelling of my client’s explanation may not be totally accurate, but I think I understood the general point. Bank accounting and financial regulations render uncollected debts low value assets which are expensive to maintain on bank accounting books. If a bank has a judgment against you start your negotiations with a very low cash offer.

Using Money In "Homestead Account" To Purchase Annuity: Is This Fraudulent Conversion

Money received from the sale of a homestead is exempt from creditors so long as you are holding the money to buy a replacement homestead and as long as the sales proceeds are segregated. If you decide to downsize your homestead and use only part of the money to buy a house, can you use the rest of the sales proceeds to buy a protected annuity? The general rule is that using exempt assets (homestead proceeds) to buy another type of exempt asset (annuity) is not a fraudulent conversion. Because the homestead sales proceeds are exempt when you intend originally to reinvest all into a new house it may seem that you can safely use any portion of a homestead account to buy any other exempt asset. Or, do homestead proceeds lose their protection when invested in anything other than a new homestead.

A client had sold a house for $500,000 and had segregated the money in a separate bank account. The client was being sued and was concerned about protecting the funds from the creditor. After searching for an equal replacement house, the client decided to buy something less expensive because he could not afford the taxes and utilities of an equal size house. The client wanted to buy a $250,000 homestead and use the remaining $250,000 to purchase an annuity hoping that both assets would be protected from the anticipated expected civil judgment.

I think the purchase of the annuity would be reversible as a fraudulent conversion under the facts above. Homestead accounts, i.e., money held for replacing a sold homestead property, are exempt based on judicial decisions. There is no statute or constitutional provision referring to a "homestead account." The exemption afforded homestead accounts is contingent and dependent upon the owners intent. The money is exempt when and only so long as the owner intends to reinvest the money in a new homestead. If the money is not reinvested in a new homestead within a "reasonable time" courts will find that the debtor no longer intends to buy a replacement homestead and that the funds are no longer protected from creditors.

When this debtor makes the decision to purchase an annuity with some homestead funds he no long intends to reinvest the same funds in a new homestead and the exemption of funds intended for the annuity is lost. Money used to purchase an annuity would lose its homestead exemption and become non-exempt property when the debtor begins shopping for the annuity. Thereafter, the actual purchase of the annuity would constitute the conversion of non-exempt money into the exempt annuity and would be subject to reversal as a fraudulent conversion if done with the intent to protect the money from the anticipated judgment creditor.

Tax Issue In Conversion of S-Corporation To Limited Liability Company

Limited liability companies are generally better asset protection entities than corporation. A judgment debtor can levy upon the debtor’s stock in a corporation and in the case of a small corporation possibly stop the corporation business and liquidate corporate assets. In the case of a debtor’s limited liability company interest the judgment creditor’s remedy is limited to a lien on distributions, if any, and the creditor cannot stop the LLC operations or force the sale of the LLC’s assets. In the past, the corporation, and particularly Sub-S corporations, were the most common business entity for closely held small business. When owners of small corporations become concerned about asset protection they often want to convert their S corporations to LLCs, possibly LLCs taxed as S corporations for tax purposes.

This past week one such corporation owner discussed with me the procedures to convert his profitable corporation to a limited liability company. Florida statutes provide a means to convert a domestic or out-of-state corporation to a Florida LLC. The issue we discussed was whether the conversion of a corporation would be treated for tax purposes as a liquidation and would accelerate the owner’s income tax liability.

To be sure, I forwarded the tax question to a local account named Lonnie Young. Lonnie has years of experience accounting for small business clients. He responded by email as follows:"

A conversion from S to an LLC can qualify as a tax-free reorganization under § 368-(a)(1)(F). In a Letter Ruling the basis and holding periods of the assets in new LLC are the same as in the prior Sub S. The S Corp status did not terminate as a result of the reorg since new LLC retained its S corp election and continued to meet S corp requirements per § 1361 (Ltr Rule 200528021).There will be issues if the ownership as a result of this re-org changes. Same owners, same percentages should not be a problem."

So, if a S Corporation owner wants to reorganize as an LLC taxed as an S corporation (by filing Form 8832) he should be able to do so without adverse tax effect as long as ownership does not change. I would be interested to know if the answer is the same if one spouse converts his S corporation to an LLC owned by the two spouses jointly when the spouses file joint tax returns- is this merger a change of ownership for tax purposes?

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

|Can Creditor Garnish Alimony And Support Payment Owed To Divorced Debtor?

I dealt with an interesting question today about alimony and support questions. Sometimes people ask me if there are asset protection tools to guard against awards for payment of alimony or support (generally, the answer is "no") or what types of assets are vulnerable to enforce family court judgments. Today’s issue was different. A divorced woman was facing a large civil judgment. The divorce court awarded the woman alimony, and her ex-husband sent her monthly alimony checks. The woman depended upon the alimony to pay her basic costs of living. She wanted to know if a judgment creditor could garnish the alimony payments from the ex-husband.

Florida statute Chapter 222 which lists the asset exemptions applicable to Florida residents does not include an exemption for alimony or support. There is no exemption in the Florida constitution nor under federal law. Florida courts, however, have protected alimony and support from garnishment. One court held that alimony was not the type of debt or obligation subject to garnishment, and that public policy calls for the protection of alimony and support. See Waters 547 So 2d 197 . At least one bankruptcy court recognized this garnishment exemption.

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

Tenants By Entireties : Account Owned Through Couple's Living Trusts

Bank accounts owned jointly by a husband and wife are exempt from the individual creditors of either spouse as tenants by entireties property. Today, one of may clients described a joint bank account that was titled in the name of their respective living trusts. The account was owned by the Husband, as trustee of husband’s living trust and Wife, as trustee of wife’s living trust. We discussed the issue of whether a bank account owned by spouse’s living trusts, rather than the spouses’ individual names, is a protected entireties accounts.

Florida courts have extended homestead protection to a residence owned by a debtor as the trustee of the debtor’s living trusts. The homestead provision of the Florida Constitution applies protection to "natural persons." The courts have "looked through" the living trust to find that the trustmaker and trustee, the natural person, is the real legal owner of the property who is entitled to protection under the homestead clause of the Constitution. It is not clear whether courts would similarly look through a married couple’s separate living trust to construe a bank account titled in the name of marital trusts as an entireties account. I conducted just a few minutes of legal research and found no Florida state court or bankruptcy case which discussed this type of fact pattern. I suspect that most courts would consider a bank account titled jointly in the names of spouses’ separate living trusts to be an entireties account. There would be a greater chance of tenants by entireties protection if the couple included in their trust agreement a statement that they intended to retain tenants by entireties ownership of assets owned jointly by their respective living trusts or by a joint living trust.

Debtor May Be Able To Add Asset Protection Provisions To An Irrevocable Trust

Most families want simple estate plans. Sometimes the simple plan, a will leaving our money to our children equally and immediately upon our deaths, is a really bad estate plan in the event any of our children have legal problems after our deaths. A better plan, for asset protection, is an estate plan that holds the childrens’ inheritance in a continuing trust where it remains protected from our childrens’ creditors as long as they keep the trust in effect. A caller this past week told me his parents, recently deceased, had made a living trust which provided for the immediate distribution of his inheritance. The parents’ trust was in the process of administration. The caller was concerned because he had a large potential judgment creditor. I explained that a judgment creditor could levy upon his share of the inheritance. The creditor could garnish the money payable to the debtor from the living trust.

If the debtor’s parents were still alive they could amend their living trust plan to protect this child’s inheritance in a continuing trust. However, after the parents are both deceased their living trust is irrevocable. The client wanted to know if it was possible to amend the provisions of his parents’ trust when his parents are no long alive.

There are Florida statutes that provide for the modification of an irrevocable trust after the deaths of the trustmakers. Modification does not require a court order. The statutes state that the terms of an irrevocable trust may be changed with the consent of all the beneficiaries and the acting trustees. Contingent beneficiaries- people who may have a future interest in the trust estate- would probably have to agree to the modification. In this instance, if the caller and all his sibling beneficiaries, together with their adult children who have a potential future interest, agreed to modify their parents’ trust they may be able to add asset protection provisions. The modification could apply only to the debtor child without affecting the other beneficiaries’ inheritance. The family could amend the trust so that only money payable to the debtor child be maintained inside the trust under terms and conditions protecting the inheritance from the child’s creditors.

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

Workers' Compensation Proceeds: Are They Exempt From Creditors?

Florida Statute 222.11 protect from garnishment wages and other compensation earned by a head of household, and it further exempts wages deposited in the debtor’s bank accounts. . A client asked me this week if workers’ compensation payments were exempt under the wage exemption statute. The client thought that if the law protects wages paid to an employee the law should also exempt money paid on account of injuries incurred during employment. I found that the wage exemption statute, 222.11, does not exempt workers’ compensation, but that other Florida Statutes provide an exemption from creditor garnishment.

Florida Statute 222.11, the wage exemption statute, does not mention or even refer to workers’ compensation payments. Workers’ compensation is dealt with in Chapter 440 of the Florida Statutes. Section 440.22 provides that payments due the beneficiary of workers’ compensation cannot be assigned and theat the benefits due or payable are exempt from claims of creditors. The statute does not specifically exempt workers’ compensation after it is paid and deposited into a bank account. However, the Florida Supreme Court has interpreted the statute and the legislature’s intent to protect workers’ compensation proceeds after they are paid and deposited so long as the debtor is able to identify the money deposited in the bank to workers’ compensation. The case is Broward v. Jacksonville Medical Center, 690 So. . 2d 589

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