Detroit: Too Big to Fail?

Here in the 313, we're used to having it rough.  This is a place where nothing comes easy.  Detroit has been existing within the shadow of a lost world-class status since the riots in 1967.

Now that Washington D.C. lawyer and Snyder-appointed emergency manager Kevin Orr has settled-in and taken a look around here in the "D", it's starting to look like this appointment may have come too late.

There is a mountain of things to correct; the deep oaken roots of 100-years of corruption need to be pulled out of the Detroit soil; it is proving very difficult.  The prospect of the largest municipal bankruptcy in United States history is now looming large; the consequences of the decades of mismanagement are coming home to roost.

Mr. Orr is zeroing-in on municipal pensioners, municipal employees, and an overall 20-billion dollar debt restructuring package.  If the restructuring fails, this mess will be placed in the hands of a federal bankruptcy judge; the state problem goes federal.

Now that the battle lines have been drawn, the unions, of course, are squawking.  They claim a multi-million dollar war chest to fight all of Mr. Orr's decisions.  Not surprisingly, none of Detroit's municipal workers want their pensions or their health care benefits cut.  Orr says these perks need to be compressed to stop the swelling of an out-of-control deficit of a non-productive municipality.

As a small business with some 20 employees here in the suburbs, we here at the Law Blogger must admit that, while we are life-long Detroiters, it is irritating to hear the sabre-rattling unions and pension managers make these legal threats when we have seen years of lavish and outlandish junkets along with a strong whiff of corrosive privilege.  Nobody involved in a City of Detroit pension needs to take a trip to Hawaii on the City's dime; under these financial straights, that is just plain wrong.

In sum, Detroit is just a promise gone bust; gone way past the point of no return.  Now an outsider, a Washington D.C. lawyer, must try to get us our city back.

What can we do, what can you do, to help...?

Post Script:  On July 19, 2013, Detroit's Emergency Manager filed a petition under Chapter 9 of the US Bankruptcy Code.  Despite the Michigan Attorney General's challenge to the petition, the Court of Appeals said the petition could proceed, and the Bankruptcy Judge in Detroit has asserted jurisdiction over the case and has stopped all challenges in state court forums.

www.clarkstonlegal.com
info@clarkstonlegal.com

Read more »

Posted in: bankruptcy,Detroit,Governor Rick Snyder,Kevin Orr,lawyer

Debt Relief: Student Loans

Ever since the Great Recession put the strangle hold on the U.S. economy back in 2008, the default rate on student loans has skyrocketed.  This in turn has increased the debt collection case-load among the various United States Attorneys.

Michigan, hit particularly hard in the recession, is ranked 11th among the states in overall student debt load.  A full ten percent of the loans to Michigan students are defaulted.  The problem has become so acute, the U.S. Attorney's Detroit office hired a private law firm to aggressively pursue claims against students that defaulted on federal government loans.

Due to the number of public and private educational institutions located within the jurisdiction of the United States District Court for the Eastern District, and considering the drastic tuition increases to which these institutions have resorted, the USDC - EDMich has one of the most robust civil collection dockets in the nation.

It is crucial for college grads, law students, and other graduate students to avoid getting enmeshed in this collection docket.  Unfortunately, bankruptcy is not an option for educational loans.

The crux of the problem is that the ever-increasing student loan burden is met at graduation with a continuously shrinking job market. A veritable disaster waiting to happen; a disaster that is happening.

What is a graduate to do?  First, do not ignore the problem.  These loans will not go away, regardless of the nievete or hard luck of the student borrower.  Ignoring the debt will only remove any repayment options such as forbearance or rehabilitation periods.

Second, student debtors should thoroughly educate themselves on the student loan statutes and regulations prior to commencing negotiations with the federal lender or collection entity.  The Internet is an excellent source of information that will lead the borrower to primary resources.

Third, consider hiring legal counsel to assist you with negotiations with the lender; definately hire legal counsel if you have been sued.

Fourth, if you are a current student, scour the Internet for as many grant and scholarship opportunities as you can find prior to executing additional loans.  There is "free" money out their for students; you just have to find it.

Finally, be realistic when establishing your educational goals.  Avoid paying out-of-state tuition if at all possible.  Michigan has many great institutions of higher learning that fit the bill.

Good luck out there getting educated.  Take it seriously as you are mortgaging your future to obtain your degree.

www.clarkstonlegal.com
info@clarkstonlegal.com

Read more »

Posted in: attorney,bankruptcy,Detroit,forbearance,student loan,United States Attorney,United States District Court

Bankruptcy: What will I lose? What can I keep?

Our good friend and colleague out here in Clarkston, David Shook, provides another bankruptcy-related guest blog post.

Many debtors imagine repo men descending on their homes to loot and pillage their estate seconds after the bankruptcy papers are filed in federal bankruptcy court.

While this makes for great television, the facts could not be further from the truth.  While there are cases where assets need to be sold for the benefit of creditors, there is a process to be followed, and the opportunity for hearing before a judge, prior to the sale of anything in a case.

Debtors are allowed to retain up to fixed amount of value in assets through a process of exemptions, which are written into the Bankruptcy Code.  Exemptions allow for the first dollars of any asset to remain in the debtors possession throughout the bankruptcy process.  If for some reason the Chapter 7 Trustee should choose to sell an asset for the benefit of the creditors (which is very rare) the Debtor would receive the exemption amount from the sale proceeds, prior to creditors seeing a dime.

Keep in mind the system focuses on the debtor’s value in the property, not the value of the asset.  I receive many a creditor phone call to inform me that “Bob” filed bankruptcy, but got to keep his Corvette, ski boat, etc.   If the Corvette is worth $25,000 but subject to a creditor lien of $23,000, Bob has only $2,000 in equity in the car.  Given The Code, allows the debtor an exemption of up to $3,450 in an automobile, there is no benefit to creditors in selling the car.  Thus the bankruptcy Trustee has no interest in the selling the Corvette, if “Bob” continues to pay the creditor on his car loan, he may retain it after bankruptcy.

On the other hand if the Corvette does not have a creditor lien, or the lien is small enough to warrant the sale of the asset, the exemption must be paid to the debtor from the sale proceeds.  In our example the Corvette is worth $25,000, but the creditor lien is only $5,000.   Here the Trustee might very well sell the car, pay off the creditor lien, and all expenses of sale, and retain $18,000.   The Trustee must give the Debtor the exempt amount from the sale proceeds.

While $3,450 might not sound like a good deal, depending on the amount of debt this may be a great deal.  In effect the debtor has traded the Corvette for $3,400 in cash and wiping clean all creditor claims.

If upon review, it is determined a debtor may have assets that cannot normally be retained in bankruptcy, Chapter 13 of the Bankruptcy Code may very well help.  One of the benefits of Chapter 13, which focuses on the repayment of debts over a 3 to 5 year period, is a debtor is allowed to “buy back” assets from the estate. 

In this example the Debtor is allowed to pay creditors the value of the Corvette ($25,000), less the lien and exemption ($5000 + $3,400 = $8,400) over the life of the plan.  Again depending on the amount of debt involved, paying $16,400 over a 36 to 60 month period may very well be a great deal.

So what can you keep in a bankruptcy?  One of the few clear benefits for the debtor in the 2005 bankruptcy reforms relates to retirement accounts. 

The vast majority of tax deferred retirement accounts, IRA’s, 401(k), 403(b), etc., are exempt from the bankruptcy estate.  While the probations against transfers discuss in my last post apply, and it is not advisable to move a $10,000 CD into a IRA on the eve of bankruptcy, normal contributions are exempt regardless of the balance in the account.  A debtor, who puts 6% of his gross pay into a 401(k) or contributes the maximum deductible amount to his IRA each year, has an unlimited exemption in the account.  As I tell clients, the difference between your case, and a case with $100,000 in an IRA, is the money you have after bankruptcy.

I have seen several cases over the years where the Debtor has hundreds of thousands of dollars in an IRA or 401(k).  In one example the Debtor had close to two million dollars in his IRA’s.  All of these funds where retained free of claims by creditors or the Trustee.

For all of the energy invested in wealth retention, the best protection is also the simplest.  Everyone with a paycheck should have some type of retirement account, and deposit as much as possible into the account, up to the deposit limit’s set by the IRS.

Great advice Dave.  Any of our readers with questions are encouraged to contact Mr. Shook for answers.

info@clarkstonlegal.com

www.clarkstonlegal.com

Read more »

Posted in: bankruptcy,Clarkston,Clarkston Legal,David Shook,lawyer

Asset Transfers Prior to Bankruptcy: Can I just give my son the Corvette?

Attorney David Shook

This is the first in a series of guest blog posts from Clarkston-based Attorney David Shook, who has a law practice focused on consumer and small business bankruptcy.

As dad said, you can do that, but be prepared for the results.  Folks are terrified they are going to “loose everything” in a bankruptcy. 

The fact is the Bankruptcy Code allows the debtor to keep assets with no equity or up to a fixed dollar amount, through a process of exemptions.  The vast majority of bankruptcy cases are no asset cases where the debtor loses nothing. 

While the billboards I see proclaiming, “lose the debt, keep your stuff”, are rather extreme, this proclamation is more accurate than the misconception that the bankruptcy court takes all your possessions. 

In spite of the facts, too many people transfer assets to friends and family as the creditors begin to circle; in some cases with bad results. 

The Bankruptcy Code makes the results of transferring an asset very clear. “Transfers made with the intent to hinder defraud or delay creditors,” within one year of filing a bankruptcy is a basis to deny or revoke the discharge of a debtor.  In addition, transfers made in up to 6-years prior to filing the bankruptcy petition, regardless of the intent of the Debtor, may be avoided by a creditor or bankruptcy trustee, and can be liquidated to benefit creditors. 

I tell clients on a regular basis, people do things in the normal course of life that are not an issue, until you file a bankruptcy.  There may be legal defenses, in addition to practical considerations, but the graduation gift of $10,000 five years ago could very well be an issue in today’s bankruptcy filing.

The most extreme result of transferring an asset is rather nasty.  The Debtor’s discharge may be denied, and the person you transfer the asset to may very well be sued.  If the Trustee is successful, the asset is returned to the Estate, and sold for the benefit of the creditors. 

Thus every debt included in the bankruptcy is ruled non-dischargeable in the case, and any future cases.  The brother (or son) is on the bad side of a federal lawsuit, and if the Trustee wins, the Corvette is sold and the proceeds paid to creditors. This is not what I would call a good outcome.

Payments to creditors on legitimate debts may also cause issues in a bankruptcy case. Payments within 90 days to any creditor, or 1 year to “Insiders” (think family, and business associates), called preferences in bankruptcy-speak, may be avoided and used to pay all creditors.  Thus, using your tax refund to pay off the $3,000 loan from your sister, on the eve of bankruptcy, is never a good move. 

To add to the penalty for voluntary preferences, or any other transfer for that matter, normally a debtor can exempt and keep (I will address exemptions in a future post) the same $3,000.00 as part of a bankruptcy proceeding and pay the family after the case has completed.  However, if the same amount is voluntary transferred (vs. garnishment or other creditor action), and then recovered by the Trustee, the Debtor is not allowed an exemption in the recovered asset.     

                   

The issues surrounding the return of preferential payments to the estate are normally much less of concern to a client.  Most Debtors have little concern over the fact any one credit card company is forced to return the $1,000 payment made within 90 days of filing.  However, having to wait 7 months to allow the year to run on the money paid to mom, or any other close family member, can rattle the nerves.

Involuntary transfers (again think garnishment of wages) made within the 90 days may also be recovered, quite possibly to the benefit of the debtor.  In certain circumstances, a bankruptcy will not only force the creditor to stop garnishment, but allow the debtor to recover and keep the amount taken by the creditor.

As with any legal issue, get professional advice from an attorney who practices in your area of concern.  No matter how skilled the practitioner, the web is no substitute for a legal consultation.

www.clarkstonlegal.com

info@clarkstonlegal.com

Read more »

Posted in: bankruptcy,bankruptcy trustee,consumer,creditors,debtor,lawyer

SCOTUS Reprise: Stripper's Estate Gets Second Oral Argument

Money isn't everything, right.  Yet here is SCOTUS, taking a close second look at the money.

A case involving a Texas Billionaire's massive estate and a washed-up model turned stripper is on the SCOTUS docket for oral argument today, for the second time.  You recall this case.

The estate of former Guess Jeans model whose, er, "married" name was Vickie Lynn Marshall, and who worked under the name Anna Nicole Smith, has carried on the lawsuit she filed shortly after J. Howard's death in 1995 at age 90.

Plenty of eyebrows were raised and family feathers ruffled in 1994 when Mr. Marshall took Smith as his third wife.  Then he died and the lawsuits began.

And these lawsuits have just not stopped, despite (and perhaps because of) the fact that all the litigants have died.  Anna Nicole Smith died in a drug overdose in 2007, shortly after the U.S. Supreme Court reversed an unfavorable decision for Smith issued by the U.S. Court of Appeals for the Ninth Circuit.

The case involves the scope of federal jurisdiction, eventually engulfing three separate court systems. At his death, Marshall had long established a trust estate plan leaving everything to his son, E. Pierce Marshall, who was also named trustee of the trusts.  Smith contested the trust plan, asserting that Marshall told her he would leave a portion of his estate to Smith.

What would have been a simple, although large, Texas county probate tussle went federal when Ms. Smith was hit with a default-judgment for, of all things, sexual harassment.  She filed for bankruptcy in California and her deceased husband's trustee-son claimed non-dischargability along with libel for statements Smith allegedly made against the decedent.  Smith counter claimed in the bankruptcy court for interference with her husband's estate plan.

Now hang with me on this....

The federal bankruptcy court not only dismissed the trustee's claim, it awarded Smith nearly half a billion dollars on her counter claim, finding that Marshall's son did interfere with his father's testamentary wishes.  This ruling was taken to the U.S. District Court where Smith's award was reduced to a paltry $88 million.

In the meantime, in an entirely separate proceeding, a Texas probate jury found that the decedent's estate plan was valid, ruling against Smith.  These decisions were then considered by the Ninth Circuit who invalidated the federal district court's award to Smith, holding that the Texas probate court had exclusive jurisdiction over such matters.

SCOTUS disagreed back in 2006, reversing the Ninth Circuit and holding that some issues tainted by state probate court could legitimately find their way into federal court via a properly raised bankruptcy-related issue; i.e. Smith's counterclaim.  The High Court then remanded the case back to the Ninth Circuit for a determination on the merits of that claim.

On those said merits, the Ninth Circuit again ruled against the stripper.  Again, the stripper, this time through her estate because she had died, appealed to SCOTUS who once again granted certiorari.  Responding to her claims is the estate of E. Pierce Marshall, who died shortly after Smith.

And now, viola, oral argument, chapter two is here today.  Stay tuned for the result.

This time, the issue concerns the very nature of federal jurisdiction and the constitutional powers (under Article II of the Constitution) of the federal courts; delving even deeper into that subject than the first go around. For a more detailed analysis of this case, SCOTUS expert Lyle Denniston has put together an excellent oral argument "recap" published on the SCOTUSblog.

Regardless of how the High Court rules, the lesson we take away from this suit is that money drives the bulk of all litigation.  Sometimes justice is just roadkill in the process.

www.clarkstonlegal.com

info@clarkstonlegal.com

Read more »

Posted in: Anna Nicole Smith,bankruptcy,constitution,J. Howard Marshall,Lyle Denniston,probate court litigation,SCOTUS,trust,trustee

Walking Away From Mortgage(s) Can Hurt You in the Long-Run

This is the original post and content of the Wink & Wink bankruptcy law firm of Denver, Colorado.  The topic is timely here in Michigan as many homeowners and divorcing couples, struggle to keep their homes.

Strategic Default. You Walk Away. “Should you walk away from your underwater mortgage?”

These phrases have been reaching fever pitch in the news media lately because of the continuing economic crisis and its huge toll on house values nationwide. The gist of the idea is that if your house is underwater, chances of you ever regaining the equity you have lost are slim to none. However, the media seems to be silent with regard to the risk of deficiency judgment, which often lurks out there like a predator waiting to attack!

The thought of continuing to pay the debt on your mortgage, knowing that your house is now worth much less than the amount you will be struggling to pay for the next few decades, drives people to look for a way out. This is the reason “strategic default”, which occurs when people stop paying the mortgage, even though they can technically afford to keep paying. Because the housing market is in the dumps and appears unlikely to bounce back anytime soon, ‘strategic default’ is becoming more and more common. So common, in fact, that it has been linked to the recent uptick in consumer spending.

The decision to walk away is definitely a way out from underneath that mortgage. But it does not come without a cost. This is because when you walk away, you aren’t simply leaving the debt behind. Oh, No. In most cases the debt is likely still following you, stalking you. Waiting to pounce. Walking away from your mortgage has consequences in most states, such as Colorado, and they go by the name of a deficiency judgment.

What Is A Deficiency Judgment?

When you take out a mortgage, or two, you are liable on the note or deed for that debt in the amount your contract states. When you stop paying your mortgage (either strategically or because you can no longer keep up with the payments) the end result in most cases is a foreclosure sale of the property. At that foreclosure sale, the property is sold, usually at a loss.

If the property is sold for less than you agreed to pay on the mortgage, you are still liable for the difference—the deficiency—between what you agreed to pay by contract and what the lender received through the foreclosure sale. So, if your mortgage is for $300,000 and the property sells at foreclosure for $250,000, you are still liable for the $50,000 your lender is still owed under your mortgage contract.

When you have two mortgages, a first and a second, what often happens is that the first lender often “bids the note” at the foreclosure sale, which means they purchase the property for the same amount as the note. This means there is no deficiency as to the first mortgage. However, it also leaves the second mortgage lender unfulfilled, and holding a claim against you for the entire amount of the second mortgage. (Don’t forget that all these amounts generally increase as a result of the fees and charges that get tacked on as a result of the foreclosure process. They never miss an opportunity to lop on some fees!)

A deficiency judgment is what happens when one of the lenders to which you owe a deficiency decides to sue you to collect on that amount. After the lawsuit, the amount gets converted into a judgment against you, a deficiency judgment. And in Colorado, where I practice bankruptcy law, the holder of a deficiency judgment can garnish your wages – 25% of your wages, to be exact. That is not a risk to be taken lightly.

How Likely Is A Deficiency Judgment?

You may be thinking “but I haven’t heard of anyone getting sued for a deficiency judgment.” And at this point in time, this is mostly true. But this is changing, see “Lenders Pursue Mortgage Payoffs Long After Owners Default”.  The predators (eh..I mean creditors) are getting hungry!

What is very likely to happen with the huge amounts of deficiency claims lenders are sitting, and that will continue to pile up as the foreclosure rates soar (yes, foreclosures are still spiking, we are far from out of the woods yet) is that lenders will begin to package these debts and sell them to third-party collection agencies, just like the credit card companies. When that starts happening, everyone who though they got out Scott-Free will have to face a painful reality. And they have plenty of time to wait to nail you, too.

In Colorado, they have Six years to wait before they sue you. Six years to sit back and wait to get there ducks in a row, maybe even wait for you to start earning more money, and then Whammo! You’re served a Summons to appear in court and you end up with your wages garnished or your bank account seized to satisfy the judgment.

Bankruptcy Can Shut the Door on a Deficiency Judgment

Bankruptcy generally removes your liability to repay the note on your home. So, whether you file for bankruptcy before or after foreclosure, the lender cannot pursue a deficiency judgment against you. If you file after the deficiency judgment is secured, the bankruptcy can still wipe out your liability for the judgment. It can even stop the garnishment if the lender has proceeded to that level.

All of this means that you should consult a bankruptcy attorney if you are considering defaulting on your mortgage.

For most other people, stopping mortgage payments on an underwater home is not a choice. It is something that the current economic situation has forced them into, and the idea of bankruptcy is likely part of the mix, along with rising credit card debt and stress levels.

However, for the true “Strategic Default”, where the decision to stop paying the mortgage is made even though the money to pay the mortgage is there, bankruptcy is usually the last thing on the radar. Most in this position look at the default as a business decision. They made an investment, it went belly-up, and they are cutting their losses. However, even “strategic” defaulters should take the time to understand their rights.

Bankruptcy can not only shut the door on a possible deficiency judgment, enabling you to move forward without worrying about what lurks behind, it can help you rebuild your credit faster. Think about it – if you walk away from the mortgage without filing for bankruptcy your credit takes a hit (foreclosures stay on your credit report for 7 years) AND you still may be liable for the deficiency, just when you are getting back on your feet and have regained your credit score. If you file for bankruptcy, you get rid of any chance of a deficiency judgment, wipe out any other dischargeable debt you’re struggling with, and start rebuilding your credit from day one.

Additionally, if you plan it correctly you can live in your house rent free until the foreclosure, which in Colorado usually means 8-12 months.

The bottom line is to be prepared, have a plan and explore your options. Walking away without knowing the risks exposes you to what I like to call the stalking predatory of the deficiency judgment. It’s only a matter of time before these debts start being sold to collection agencies, and with those creditors – you need to watch your back!

info@clarkstonlegal.com
http://www.clarkstonlegal.com/

Read more »

Posted in: bankruptcy,Bloomberg,creditors,deficiency judgment,mortgage,short sale,strategic default