This topic is an example of how it pays to have some knowledge of more than one area of the law, since it crosses several borders from one practice area to another.
It has become a fairly common tactic for elderly people to transfer ownership of their home or farm to their children, and to keep a life estate. In other words, the children are given a deed which gives them ownership but provides that as long as the parents live, they retain possession of the property. People do this because besides avoiding probate, they hope it may help keep the property away from the state in the event that the parents wind up in a nursing home receiving Medicaid.
I cannot state more strongly how in my experience this has almost always turned out to be a bad idea. There is a waiting period of several years before it helps with the Medicaid issue, and most folks never wind up on Medicaid anyhow. Meanwhile, this is a non-exempt asset which any creditor with a judgment may be able to attach. Or in the event that one of the children has a bankruptcy or divorce, this is an asset that gets all tied up in those processes.
Just for good measure, if one of the children has a problem with the IRS or the Department of Revenue, this creates a handy asset for the tax men to grab.
My advice to most older people who may be thinking about this: keep your home ownership, keep your dignity; the problems you are about to create may be much worse than the possible aniticpated problem you are trying to solve.
I tell this story with permission from the person to whom it happened. To me it is sad, profound, a sign of the times and just awful – all at once. This sort of thing may have something to do with the fact that I seem to enjoy filing bankruptcies and more or less thumbing my nose at the big banks and credit card companies.
It seems here a few days ago that a woman from Minneapolis, who was behind in her auto loan payments, drove to the gas station and spent over $50 filling her tank with gas. With the prices going up as they have been, this is becoming a more common experience. I know it just happened to me.
Then after going home, and before having a chance to even use that gas, along came some repo guys with a tow truck who hooked up the car and drove away with it. On top of taking the car, they got her full tank of gas!!! How sad. How terrible.
I must admit to having a few unkind thoughts about the repo guys. I can’t help but wonder: by the time the car got to the lender or impound lot or whatever place they were taking it, did it still have the gas in it; or would repo guys be doing a bit of a black market gas business on the side?
Here’s a nasty practice by engaged in by many mortgage lenders which is just coming to light.
Background. Most debtors in bankruptcy have certain things they want to continue paying, such as automobile and mortgage payments. The lenders prefer to have these debts reaffirmed by means of a reaffirmation agreement. Reaffirmation agreements reinstate the loan as if the bankruptcy had not taken place; but even without such an agreement the lender continues to have authority to either foreclose or repossess of the loan in question is not paid.
Under the new law, however, a debtor and the debtor’s attorney have to certify that reaffirming the debt will not create a hardship – otherwise the court will not approve the reaffirmation. This is almost never true, so my policy is that I will not sign such certifications. If I sign it and there is difficulty later, I’m in trouble. Without such a certification, the court will probably not approve the agreement. Bottom line is that in most cases, reaffirming is not an option for most debtors.
My advice is don’t reaffirm, but in most cases do keep paying your mortgages and car loans. Most of the time the lender is glad to take the money and will leave you alone.
Despicable Practice. Several of the mortgage lenders are making it a practice that they accept payments and don’t foreclose in cases where there has been no reaffirmation; but they will not report to the credit agencies that they are receiving payments. So people who are making their payments have credit reports that look as if they are not paying anything. They say “you didn’t reaffirm, so we don’t have to report your payments.”
They are in punishing debtors for not reaffirming while still getting all their money. The debtors in most such cases couldn’t get a reaffirmation approved if they wanted to. This is nasty, and I would like to compile a list of lenders who are doing this and publish that list. If this is happening to you, please leave your comments here with the name of the lender.
This past Monday Governor Pawlenty signed into law a revision to the Minnesota homestead exemption which does two things. First it increases the amount of equity in a homestead which is exempt from the current $200,000 to $300,000. Second, it increases the amount of land which is considered exempt from half an acre for the usual homestead located in a city to 160 acres.
When this new law goes into effect, which should be on August 1st, it should be much easier to claim a homestead as exempt in a bankruptcy or in any proceeding where a creditor is going after a homeowner in this state.
2022 update: Minnesota statutes now exempt homestead equity up to $480,000. This has resulted from incremental adjustments for inflation since the big jump in amount described here.
The Eighth Circuit Court of Appeals just issued a decision today which fixes one of the numerous rules of bankruptcy law that had been wrong for a long time. They actually did something that makes sense.
The rule was that any money in a debtor’s checking account was considered to be an asset of the debtor even if there were outstanding checks that had not yet cleared the bank. In the case of Brown v. Pyatt, U.S. Court of Appeals Case No: 06-3404 from the U.S. Bankruptcy Court for the Eastern District of Missouri – St. Louis, the federal appeals court told the United States Trustee’s office that they can no longer count money in a checking account as an asset if there are outstanding checks that the money is needed to cover.
I consider this a victory for compassion and clear thinking. Up until now, a debtor in bankruptcy, after being lectured by a credit counselor about the need to learn better financial habits, was then told by the trustee that already spent money in a checking account still counted as an asset. It was a stupid rule, and I’m glad to see it apparently gone.
I hope this doesn’t turn out to be an empty victory. The fine print in the decision indicates that the trustee can go after the payees of the checks and recover the money from them. I’m not sure if the trustees will actually go ahead and do that. But lets say one of the checks is for a house payment and the trustee demands repayment from the mortgage company. I would assume that the mortgage company would then claim that the mortgage is a month behind – which puts the debtor back in a tight spot. Even though I like the looks of this decision, I will continue for now to advise clients to avoid having checks out there that have not cleared as of the date of filing. What I’ve been doing is telling them to use money orders instead of writing checks in the week or so prior to filing.
For a rundown on filing bankruptcy in Minnesota, see my site at http://www.mn-bankruptcy.com.