Archive for July, 2009

Unintended Consequences in Estate Planning

Remember yesterday when I discussed talking to your parents about their debt?  I think it’s important for families to start talking.  I also think it may be important for parents to speak to their adult children about debt, especially when you hear what happened to a client of mine.

My client did not know that his parents had gone to an estate planning attorney.  The parents created a life estate in their home, leaving a remainder interest to their adult children.  The life estate gives the parents the right to live in their home until they die, and then upon their death, the home will pass to the children without having to go through probate. The children have what is called a remainder interest.  They do not have the home, but they have a future interest in the home.

This nifty estate planning tool created havoc when one of the parents’ children (my client) filed for chapter 7 bankruptcy protection.  In chapter 7, the unexempt assets of the debtor are sold to pay creditors.  The debtor did not list the asset because he did not know he had an interest in his parent’s home (neither he nor his then attorney asked).  Since it was not known, it was not listed, and since it was not listed, the debtor did not claim it as exempt from liquidation.

The chapter 7 trustee learned about the interest presumably by scouring public records.  When the trustee got wind of the future interest, he asked the court for permission to sell the interest to the highest bidder.  The Bankruptcy Code allows the trustee too sell the debtor’s interest in the property: something the parents did not plan for when they were putting together their estate plan and trying to preserve their home for all of their children.

I will relay how this saga ended another time.  For now, I will say that it ended up costing the debtor a lot of money, and causing the entire family anxiety that they did not need.  If the debtor had told his parents that he was in debt and needed to file bankruptcy, there still would have been issues to resolve.  However, both the debtor and his parents could have been proactive instead of being reactive.  Rather than reacting to the trustee’s attempts to seek an order of sale, they could have taken some time to think through other options before starting the bankruptcy process. These folks never got to that point because no one in the family really talked to each other about what was going on.  The parents did not mention the estate plan, and the debtor did not mention the bankruptcy, or the reasons why bankruptcy protection was needed.

It’s hard for adult parents to admit to their kids that they have financial problems, and for very different reasons, it’s hard for adult kids to have to admit it to their parents.  But actions have consequences.  And as this debtor, his siblings and his elderly parents learned, not talking about it can also have unintended consequences.  Be proactive, and don’t let this happen to you, your kids, or your parents.  Start talking.

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Proactive v. Reactive: Start Talking

It can be difficult to deal with oppressive debt, especially when it can feel that there are no options.  It can leave you feeling embarrassed and vulnerable.  When it comes to older folks, that embarrassment and vulnerability can be heightened for a variety of reasons.  In April 2008, I wrote about that topic: When Parents Are in Debt.  Now, results from a study reported in today’s USA Today reveals that older Americans are “are racking up credit card debt faster than other consumers amid dwindling retirement portfolios and rising medical costs.”  It’s time for us younger folks to be more proactive.

This generation of Americans is the last to either have witnessed the Great Depression of (for now) the 1930s.  They lived most of their lives in the shadow of that time.  It’s been my experience that when an older person is facing bankruptcy, they are not being proactive in dealing with their debt.  Most of the time, it is an adult child or other younger family member that steps up to help them.  They are too embarrassed.  They may tell you it’s none of your business.

It would be really easy for me to simply say “go talk to your parents, tell them that you want to review their finances, and that you want to know what they are spending their money on.”  Real easy, right.  Of course, if I offered that, I’d have to ignore the fact that parents do not want you involved in their personal financial lives, that they probably feel it’s not your place, and it’s none of your business.  It might even provoke a family disagreement (which is a polite way of saying a fight…although families don’t really fight over money, right?).

Let this USA Today article be a starter for you.

Try, “So… mom and dad, I came across this article from USA Today and another at CNN about credit card debt and older Americans, and I want share my concerns with you.”  I also recommend re-reading the April 2008 post about parents in debt to bring yourself up to speed on the issues you might have to deal with when speaking to them.  Reach out to them.  Start talking.

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‘Extend and Pretend’ Doth Not A Modification Make

Today’s editorial in USA Today chides lenders for playing the “extend and pretend” game with mortgage modifications.  The piece is one of the first of what I hope is a larger chorus of supporters of amending the Bankruptcy Code to permit modifications on residences.

There’s just one problem with this game of “extend and pretend.” It’s bad for everyone concerned, including the banks. As the number of houses in foreclosure grows, it damages neighborhoods and pushes down home values.

The best thing Congress could do to aid hard-pressed homeowners is to alter bankruptcy law to allow judges to modify troubled mortgages, as they do with virtually all other debts. This common-sense change would give lenders more incentive to make modifications themselves, rather than lose control to a bankruptcy judge.

It’s time to start pressuring Washington about this again.  And this time, we need to be sure that Washington hears from everyone.  Start talking.

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Reactive vs. Proactive

I’ve mentioned that sometimes it’s better to proactive than reactive.  Being proactive is calling a bankruptcy attorney when you sense that the barn out back may be a fire hazard.  Being reactive is calling a bankruptcy attorney when the barn is burning, you can’t remember where you put the garden hose while you wonder if water bill has been paid.

When clients do nothing until faced with a foreclosure notice, they are being reactive… which unfortunately places me in a reactive posture.  After years of doing both, I’m certain that being reactive makes an otherwise average case more difficult and more expensive, because but for a scheduled auction some people would just hope that the finances will get better.  But it’s that auction that pushes some people into finally getting their ‘house in order’, albeit quickly… and hopefully not too late.  And for one of my clients, getting his house in order was what he wanted me to help them with.

After being retained by a reactive client, one of the first things I did was send a letter off to an attorney representing a lender.  I let them know that I was representing the client for a bankruptcy case, and I asked that he please send copies of notices to me so that I may ensure everyone is properly listed on the petition and creditor matrix.  A few weeks later, I received a copy of a notice of scheduled auction which I sent off to my client with note reminding him that his petition needed to be filed before the scheduled auction.  The letter also reminded my client of the documents and information I needed to ensure that the paperwork was properly completed when filed.

About 10 days later, and about 2 weeks before the auction, the lender’s attorney calls me and leaves me a message.  He wants to know if I still plan on filing a petition, since he has to hire an auctioneer, and go through the costs of publishing.  He tells me he wants to avoid all of those costs if my client is going to file bankruptcy. 

That put me into a bit of a predicament. (more…)

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NY AG Seeks to Vacate 100,000 Judgments

Way back in 2005, I wrote about a need to reform our state rules on returns of service.  You’ll find that article here.  In August of 2006, then Mass. Bar Association President Warren Fitzgerald wrote a column in the Boston Globe also calling for reform based on the failure of small claims defendants to get any meaningful notice of a suit being filed against them.  Today we’re learning that in New York, Attorney General Anthony Cuomo has filed suit to vacate over 100,000 judgments that were entered against consumers who were not properly served. (more…)

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Thinking About a Consult?

Today, as I found myself on the phone repeating myself – a lot.  It then occurred to me that I could probably explain how our consult process works here on the website.  In other words, how do you get from reading this website and digesting the information to getting some face-time with a lawyer (i.e., me).

Here’s how.

(more…)

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Feeds

I’ve learned that some readers who have signed up for the RSS fees or email updates may not be receiving new posts as they appear.  We’re working on the issue – and we should have it fixed soon.

-Bill

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Things I Won’t Do

Among the many reasons why I blog on this site is to give people a perspective of me that will help them decide whether I am the right attorney for them.  Sometimes the things I write about concern my legal expertise in bankruptcy, and other times, I blog about my observations about bankruptcy law in this peculiar economic climate.  And occasionally, I can write about real events that may, or may not, help readers understand why sort of an attorney they are getting if they pick up the phone and call.

This week, I received a call from a homeowner from an affluent Massachusetts suburb.  This homeowner was a real estate professional – and I probably do not need to mention that real estate professionals of all shapes and sizes are taking a beating in this economy (and have been for some time).  Like many in that industry, the income was sporadic, and at times nonexistent.  Other than commissions from closings, there is no other source of income.  The homeowner has not been gainfully employed with regular income since 2005.

The home mortgage has not been paid for almost a year and a foreclosure auction has been scheduled sometime next month.  Credit cards have not been paid for at least 18 months.  The homeowner has – like many – been consistently robbing Peter to pay Paul.

There is no equity in the property; the house is under water.  The house also has an estimate market value of more than $575,000.

As the mortgage has not been paid, the only bankruptcy alternative for this debtor would be a chapter 13 (the homeowners debt did not exceed the Section 109(e) cap).  However, for a chapter 13 to work, the homeowner needs income.  And a chapter 13 is not a quick, cheap and easy process – unlike most chapter 7 cases.  We could also explore requesting a modification of the mortgage, but a back-up plan – i.e., a chapter 13 filing – would be prudent if the modification was not approved, or if the lender refused to reschedule the auction pending the modification request.

I then asked an important question: “What do you have for cash on hand?  How much money do you have now?”

The question is important because the answer tells me much.  Since the mortgage has not been paid, I assume – or hope – that a homeowner has put some money aside to bring the mortgage current.  In other words, they have taken some money as a “housing payment” and segregated it – either in a separate account, or in the same account with the discipline to not spend it.  I also ask because it is important for me to gauge whether the homeowner will be able to afford chapter13 – not only in terms of fees and costs, but in terms of regular monthly payments to creditors and the chapter 13 trustee that in most cases, must begin shortly after the case is filed.

The debtor responded: about “$1,100.” Without missing a beat, the caller then offered assurances that money would come in the future, and that the homeowner could make it work.  I declined representation.  Here’s why.

(more…)

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Property Insurance and Chapter 13

If you’re thinking about Chapter 13, it’s important for you to know that your real property (real estate) must be insured.  Increasingly, I am finding that homeowners are allowing their policies to lapse.  This poses a problem – especially for debtors who wait until the last minute to file.

If real estate is not insured, this will pose problems for any debtor hoping to reap the benefits of Chapter 13.  It’s also important to know that not only is insurance required, but a Massachusetts Local Bankruptcy Court rule mandates that evidence of insurance be filed with the Bankruptcy Court along with the petition.  If it is not filed, the Court can dismiss the case.

Sometimes, the mortgage payment also includes an amount that’s held in escrow for taxes and insurance.  When a homeowner stops making monthly mortgage payments, the lender may – or may not – continue paying taxes and insurance.  If the lender doesn’t pay the insurance, the lender will obtain Force Place insurance.  This policy protects the lender.  It does not protect the homeowner, the homeowner’s family, or the contents of the home and it is not acceptable for Chapter 13 purposes.

If you’re contemplating a Chapter 13 – check on the homeowner’s insurance. Be sure it is current and up to date.  Be sure that the premiums are paid.  Be sure that any special riders that you want are included, such as special protections for jewelry, electronics, and other items.  Keep those documents handy and in a safe place – because you will need them if you’re thinking about filing Chapter 13.  The time to do this is now, not on the eve of a foreclosure auction – which will only cause delay, increase anxiety and perhaps even be more expensive.

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July 4, 2009

On February 9, 1775 the English Parliament declared Massachusetts to be in a state of rebellion.  Several weeks later, on March 23rd, Virginia lawyer Patrick Henry attended a meeting of the colony’s House of Delegates held at St. John’s Church in Richmond.

According to The American manual, Mr. Henry “rose with a majesty unusual to him in an (introduction), and with all that self-possession by which he was so invariably distinguished” said the following:

No man thinks more highly than I do of the patriotism, as well as abilities, of the very worthy gentlemen who have just addressed the House. But different men often see the same subject in different lights; and, therefore, I hope that it will not be thought disrespectful to those gentlemen, if, entertaining as I do opinions of a character very opposite to theirs, I shall speak forth my sentiments freely and without reserve.

This is no time for ceremony. The question before the House is one of awful moment to this country. For my own part I consider it as nothing less than a question of freedom or slavery; and in proportion to the magnitude of the subject ought to be the freedom of the debate. It is only in this way that we can hope to arrive at truth, and fulfill the great responsibility which we hold to God and our country. Should I keep back my opinions at such a time, through fear of giving offense, I should consider myself as guilty of treason towards my country, and of an act of disloyalty towards the majesty of heaven, which I revere above all earthly kings.

Mr. President, it is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren, till she transforms us into beasts. Is this the part of wise men, engaged in a great and arduous struggle for liberty? Are we disposed to be of the number of those who, having eyes, see not, and having ears, hear not, the things which so nearly concern their temporal salvation?

For my part, whatever anguish of spirit it may cost, I am willing to know the whole truth — to know the worst and to provide for it. I have but one lamp by which my feet are guided; and that is the lamp of experience. I know of no way of judging of the future but by the past. And judging by the past, I wish to know what there has been in the conduct of the British ministry for the last ten years, to justify those hopes with which gentlemen have been pleased to solace themselves and the House?

Is it that insidious smile with which our petition has been lately received? Trust it not, sir; it will prove a snare to your feet. Suffer not yourselves to be betrayed with a kiss. Ask yourselves how this gracious reception of our petition comports with these warlike preparations which cover our waters and darken our land. Are fleets and armies necessary to a work of love and reconciliation? Have we shown ourselves so unwilling to be reconciled that force must be called in to win back our love? Let us not deceive ourselves, sir. These are the implements of war and subjugation — the last arguments to which kings resort. I ask gentlemen, sir, what means this martial array, if its purpose be not to force us to submission? Can gentlemen assign any other possible motives for it? Has Great Britain any enemy, in this quarter of the world, to call for all this accumulation of navies and armies?

No, sir, she has none. They are meant for us; they can be meant for no other. They are sent over to bind and rivet upon us those chains which the British ministry have been so long forging. And what have we to oppose to them? Shall we try argument? Sir, we have been trying that for the last ten years. Have we anything new to offer on the subject? Nothing.

We have held the subject up in every light of which it is capable; but it has been all in vain. Shall we resort to entreaty and humble supplication? What terms shall we find which have not been already exhausted? Let us not, I beseech you, sir, deceive ourselves longer.

Sir, we have done everything that could be done to avert the storm which is now coming on. We have petitioned; we have remonstrated; we have supplicated; we have prostrated ourselves before the throne, and have implored its interposition to arrest the tyrannical hands of the ministry and Parliament.

Our petitions have been slighted; our remonstrances have produced additional violence and insult; our supplications have been disregarded; and we have been spurned, with contempt, from the foot of the throne. In vain, after these things, may we indulge the fond hope of peace and reconciliation. There is no longer any room for hope.

If we wish to be free — if we mean to preserve inviolate those inestimable privileges for which we have been so long contending — if we mean not basely to abandon the noble struggle in which we have been so long engaged, and which we have pledged ourselves never to abandon until the glorious object of our contest shall be obtained, we must fight! I repeat it, sir, we must fight! An appeal to arms and to the God of Hosts is all that is left us!

They tell us, sir, that we are weak — unable to cope with so formidable an adversary. But when shall we be stronger? Will it be the next week, or the next year? Will it be when we are totally disarmed, and when a British guard shall be stationed in every house? Shall we gather strength by irresolution and inaction? Shall we acquire the means of effectual resistance, by lying supinely on our backs, and hugging the delusive phantom of hope, until our enemies shall have bound us hand and foot?

Sir, we are not weak, if we make a proper use of the means which the God of nature hath placed in our power. Three millions of people, armed in the holy cause of liberty, and in such a country as that which we possess, are invincible by any force which our enemy can send against us. Besides, sir, we shall not fight our battles alone. There is a just God who presides over the destinies of nations, and who will raise up friends to fight our battles for us.

The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave. Besides, sir, we have no election. If we were base enough to desire it, it is now too late to retire from the contest. There is no retreat but in submission and slavery! Our chains are forged! Their clanking may be heard on the plains of Boston! The war is inevitable — and let it come! I repeat it, sir, let it come!

It is in vain, sir, to extenuate the matter. Gentlemen may cry, “Peace! Peace!” — but there is no peace. The war is actually begun! The next gale that sweeps from the north will bring to our ears the clash of resounding arms! Our brethren are already in the field! Why stand we here idle? What is it that gentlemen wish? What would they have? Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? Forbid it, Almighty God! I know not what course others may take; but as for me, give me liberty, or give me death!

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