Beware of Undead Debt – Don’t let them reboot the Statute of Limitations

Over the New Year weekend I saw a Wall Street Journal article. It was about certain banks and credit card companies trying to trick people into paying expired debts. Those would be debts so old that they are now barred by the statute of limitations.

In Minnesota the statute of limitations on most obligations is six years. That means anything you haven’t paid on for six years is probably not a debt that can be legally collected. The Wall Street Jounal article describes a plan where people with such expired debt are offered new credit cards, but in exchange for getting the card they are required to pay off some of their old expired debt. The marketing for these new credit cards can be very misleading. A lot of people are signing up for these deals without understanding that the debt they are being asked to pay as a condition of getting the new card is rally old and now bogus.

I see that Yahoo Finance has republished the article or part of it, which you can find here.

Tip if you are sued for expired debt: Last time I checked, in Minnesota a bill collector can still sue you and still get a default judgment for debt which is past the statute of limitations. That’s because the statute of limitations is an affirmative defense that must be raised in a response to the lawsuit. So if you are sued for debt that you think is probably expired, you need a lawyer to help you raise that defense. Properly raised, the statute of limitations is a defense that makes the debt go away – but ONLY if it is properly raised as a defense. I would discourage you from trying to raise the defense yourself. You can try, but it’s complicated and would be easy to mess up.

Mentioned in Lien Strip article – Not exactly a Claim to Fame

Seems I was quoted in an article in yesterday’s Sunday Pioneer Press. The topic was a process called lien stripping. It involves taking a second mortgage in a Chapter 13 case and throwing it in with the unsecured debts. The second mortgage gets treated as if it were a big credit card instead of a mortgage. At least in theory, at the end of the Chapter 13 payment plan, the mortgage is then just gone. This can only be done in a case where the value of the homestead is less than the balance owing on the first mortgage. The bankruptcy court is asked to treat that second mortgage as if it was unsecured, because as a practical matter there is no security.

I say “in theory” in the above paragraph because the situation is that this process is so new – at least here in Minnesota – that nobody knows quite for sure exactly how it should be done. That is still being worked out. For one thing, the case (Fisette) which says we can do it is being appealed. I don’t expect it to be overturned, but that could happen. For another thing, nobody knows for sure how to clear the title of the second mortgage. The mortgage can be gone as a matter of bankruptcy law, but still be a problem as a matter of real estate law. Real estate law is as if it’s on a different planet than bankruptcy law – maybe in a different solar system. There’s a need for adjustments between the two legal systems before lien stripping can be expected to go smoothly. While those adjustments might be in process, they are certainly not completed at this time.

The whole thing is a bit too up in the air for me, and so far I have been reluctant to try doing any of this. I have been explaining it as a possible option, and I have been referring people who are interested to some of the lawyers who have been doing them – such as Mr. Theisen and Mr. Andresen. People like them should be given credit for having the gumption to push for this, particularly Craig Andresen who is the one who has the case on appeal.

This is a developing area and I’m sure to have more to say about it later.

Life Estates and Fraudulent Transfers

Seems I’ve been hearing a lot lately from people who have what they call a remainder interest subject to a life estate. If you search the archives of this blog there should still be an older item there where I called life estates an idea from hell. A life estate is created when someone transfers ownership of real estate – such as a cabin or farm – to some younger relatives, but keeps the right to live there and use the property for the rest of their life. The transfer is done by means of a deed. The person who keeps the right to use the property during their lifetime is said to have a life estate, and the people to whom the rest of the ownership was transferred are said to have a remainder interest. Typically the person with the life estate is a parent, and the people with the remainder are the children. Sometimes the parents will do it without telling their children.

The people who receive the remainder interest usually don’t think much of it because they can’t use the property now, but the law considers it an asset that they own right now. If you need a bankruptcy it can be a big problem. A remainder interest can be bought and sold, and there actually is a market for such things. There are investors out there who buy them. Most of the time the value of the remainder interest is enough so that it becomes impossible to file a Chapter 7. The will trustee claim the remainder interest as an asset for the creditors. It could make a Chapter 13 difficult too.

When I explain all this to somebody who is unfortunate enough to have one of these things, they often will say “well then I’ll deed it back and get rid of it.” My response to that idea is that it would be considered fraud to do that. There are both state and federal fraudulent transfer statutes that make it possible to undo the transfer when it is for the purpose of hiding an asset from creditors. When it is done in anticipation of a bankruptcy, it might be considered bankruptcy fraud which is actually a felony. Concealing an asset can be grounds for having a bankruptcy case dismissed without a discharge, even though the trustee might recover the asset from whoever it was transferred to first. So you can lose the asset, keep all your debts, and maybe be charged criminally besides. It’s hard to believe it can get that bad but it can.

Before filing a bankruptcy for someone, I often ask them to check with any elderly relatives who might have done one of these arrangements. I need to know for sure that no such property interest exists.

A couple of years ago the Minnesota legislature created a new alternative to the life estate. Now one can do what they call a transfer on death deed. The difference between the deed creating the life estate and the transfer on death deed is that the latter is revocable. It has no effect until the grantor actually dies, so what it really does is create a right to inherit a particular piece of real estate without putting the property through probate. For bankruptcy purposes this new idea scares me. I’m not sure if I trust it. I would want to be sure that it was tested in some court decisions before I rely on it.

At the Bankruptcy Institute Today

You might find it hard to get a hold of me today. I’ll be in classes all day at the Bankruptcy Institute. This is an annual event sponsored by the Minnesota State Bar Association’s Minnesota Continuing Legal Education. I was here all day yesterday too.

The highlights yesterday for me were the case law update and the session on “Advanced Chapter 13 Plan Drafting.” Another good session was the one on business owner bankruptcies. Today so far the best thing has been a joke one of the presenting judges just told: something about how what a judge needs is grey hair so he looks serious and hemorrhoids so he looks concerned.

More later.

Harleys and Bankruptcies Don’t Mix

At least that would be the general rule. All rules of course have exceptions.

I just spoke by phone with a person who needs a bankruptcy. The trouble is that he or she is the owner of a Harley-Davidson motorcycle. It’s not paid for. There’s still a loan on the bike with a monthly payment. The usual story in that situation is that if you want to file a bankruptcy – any kind of bankruptcy – the bike has to go. Sell it or surrender it, but it has to go before we can file.

Most of the time when I explain this to the owner of a Harley, it’s the last I hear from that person.

I just spent a very quiet and peaceful weekend at a campground in southern Minnesota. I found that there happened to be a group of over 100 bikers there, mostly if not all riding Harley-Davidsons. I barely noticed them. They partied and carried on, but in a quiet and respectful way. In fact they were some of the most well behaved people I’ve ever seen. I learned later that they were a group of retired police officers, some from Minnesota and some from Chicago. Most of them were dressed in typical biker attire, including jackets and hats bearing one or more variation of the Harley-Davidson logo. Those bikes were obviously an important part of their social life.

Powerful attachment to a Harley-Davidson motorcycle is a phenomenon I’ve seen repeatedly. Often as with the retired cops it can be a really good thing. But I can’t change the way the bankruptcy trustees view these things. In a bankruptcy case, unless it’s paid for and so old that it’s not worth much, a Harley tends to be an asset that they want to seize or a frivolous expense that they won’t allow or both. It’s just not a good thing for anybody contemplating bankruptcy.

Minnesota 13th in Country in Surplus Lawyers

I took a look this morning at a news digest from the Minnesota State Bar Association. A story that caught my eye was full of charts and graphs comparing the number of lawyers admitted to the bar to practice law compared with the number of job openings. You can see the full story at economicmodeling.com.

For the year 2010 Minnesota had a lawyer surplus of 510, according to the article. Only New York, California, New Jersey, Illinois, Massachusetts, Pennsylvania, Texas, Florida, Maryland Connecticut, and North Carolina had bigger surpluses. The nation as a whole had a lawyer surplus of $27,269.

Interesting enough, our neighbor Wisconsin actually had a lawyer deficit of 14. In other words, Wisconsin had 14 more job openings than there were new lawyers to fill them. The only other state with a deficit was Nebraska. Nebraska’s deficit was only three, however; pretty close to break even.

Whenever I get a call from my Alma mater, the University of Minnesota Law School, asking for a financial donation, I have had to ask myself whether I feel that Minnesota really needs more lawyers. The answer to that question for me has always been in the negative. This article seems to confirm that.

Two pro se cases not heard last Thursday

I was at the Federal Courthouse in Minneapolis last Thursday for a meeting of creditors. The room was full and I was planning for a long wait with my client.

To my surprise the trustee – who is the person who runs such proceedings – stood up and asked two apparently married couples to leave. These individuals were there without a lawyer and were obviously pro se – or in other words representing themselves. From the words that were exchanged it sounded as if they had gone to some sort of a non-lawyer document preparation service.

Apparently whoever they had gone to had neglected to tell them that they were supposed to provide a copy of their most recent tax return to the trustee well in advance of the date of the meeting of creditors.

I expect that those parties will be allowed to provide their tax returns to the trustee and reschedule their meeting of creditors – which those who know me know I often call the “hearing,” because that word is a good one to describe what happens. I can’t help but wonder what else might be wrong with those bankruptcy filings.

I’ve been concerned for some time that some of these document preparation outfits are dangerous. If you search this blog I believe you’ll find something from a while back where I was carrying on about such a service located in India which had contacted me and wanted to essentially use my name.

My Ten Seconds (or less) of Fame

My wife Karen, our two dogs Ben and Jerry and I went camping this past weekend at Jay Cooke State Park just south of Duluth. We were minding our own business Saturday morning. I was drinking coffee and having some Cheerios. Ben and Jerry had taken up residence on Karen’s lap. Then along came a crew from WDIO TV Channel 10 in Duluth.

They were interviewing folks on the subject of the impending state park shutdown – a side effect of the impending state government shutdown. The story was their lead story on the 10 pm news that night. The video is posted at the WDIO web site. The TV guys spent several hours at the park that day, but the story is edited down to two minutes.

Here’s a link to the video if you would like to watch

Spike in Traffic to my Web Site

I’ve been noticing for a few years now that the volume of phone calls and the traffic to my web site seem to ebb and flow with the news about the economy. The trends I notice in my incoming traffic seem to run in advance of the news by anywhere between a couple of weeks and a couple of months.

I wasn’t surprised recently to see that the unemployment rate is back up to 9.1%, real estate prices dropped another 10%, and jobless claims are over 400,000 per week. I wasn’t surprised to hear that we have 1.9 million less jobs now than we had when the “stimulus” program was announced. I wasn’t surprised because earlier this spring I was noticing a spike in my phone calls. I told a couple of friends that it reminded me of the spike in calls I had in early 2007.

Now I am noticing a spike in the traffic to my web site. This morning I took a look at the Google Analytics for mn-bankruptcy.com. Compared to last week, traffic is up 22.9%. Compared to last year, traffic is up 22.68%. The number of visitors on Tuesday this week, June 14th, was 117. That’s the highest for one day since January 24th. My best guess would be that something is shifting with the economy again. Downward.

I don’t need or want it to get any worse. I’m already very busy.

Cleaning up mistakes of low-cost services

I have been reading a discussion this morning on a bankruptcy lawyer listserve. The topic which has captured my attention is how badly some of the document preparation services can fowl up a bankruptcy case. It is not unusual to be told his or her fee is too high; and then a few months later that same person, who filed using a document preparation service, is back asking to have something fixed.

My policy has been that I don’t like to jump in and try to fix something that someone else has screwed up. I fear the risk of malpractice for one thing. Although someone else broke it, once I start trying to fix it the responsibility could rub off on me. I did recently, however, give in to a plea to help with the amendment of some documents. I’m soft hearted, it looked like a simple problem to fix, but I probably still should not have. The case could have had other problems besides the one I was asked to help with. Then what?

Beware of anyone who tells you: There’s nothing involved but filling out a bunch of forms, only takes a few minutes, no need to waste valuable money and time.