Bankruptcy

Joe Paterno Conveys Home to Wife For $1, “Love and Affection”

For topical reasons, I have had no reason to post about the despicable Penn St. child abuse scandal on this blog. Until now — when I came across an interesting New York Times article on Joe Paterno’s recent real estate activity. The Times reports that this summer “Joe Pa.” transferred title to his State College home to his wife for $1 and “love and affection.” Some say the transfer was intended to avoid the inevitable fallout from the Penn St. child abuse scandal and legal action brought by victims of the scandal. Joe Paterno’s attorney, however, says that this transfer was part of the Paternos’ long standing estate plan.

Fraudulent Transfers

The debate centers over what’s known legally as a fraudulent transfers. Fraudulent transfers are property conveyances made with the specific intent to place the property outside the reach of creditors, or made where “the debtor received less than a reasonably equivalent value in exchange for the transfer and made it while insolvent.” The latter definition, in plain English, means the owner was broke and received less than market value for the sale of the property. Fraudulent transfers can be undone by the courts so creditors can tap into a home’s equity to satisfy legal judgments.

In Joe Paterno’s case, the $1.00 stated consideration for the transfer to his wife typically raises a red flag as a potential fraudulent transfer. If Paterno can prove that the transfer was indeed made as part of a legitimate estate plan, then he could avoid a fraudulent transfer determination. If the transfer is determined to be fraudulent so as to avoid liability for the child abuse scandal, the transfer to his wife can be undone by his creditors with the help of the court. And this is true even if Joe were to file bankruptcy. Moreover, the look-back period for fraudulent transfers is rather long–as long as 4 years under the Massachusetts Uniform Fraudulent Transfer Act, and even up to 10 years in the case of conveyances into trusts (where the debtor holds the beneficial interest) under 2005 bankruptcy law amendments.

Also, fraudulent transfers are typically excluded from coverage under owner’s title insurance policies. So if you purchased a property which later becomes the subject of a fraudulent transfer lawsuit, you may be on your own, which is a scary proposition.

Asset Protection, Homesteads and More

There’s nothing wrong or illegal about protecting your assets for the future. There are a myriad of legal and safe methods from protecting your property. But, if you wait until there is a problem, it’s usually too late to fix it. The same is true for asset protection planning. Simply put, do it as early as possible, well before creditors are chasing you down.

The first choice should almost always be to declare homestead protection on your principal residence. We’ve written about the new, enhanced Massachusetts homestead protection quite a bit. In a nutshell, a homestead will protect up to $500,000 in equity from most creditors. It’s a relatively simply form recorded with the county registry of deeds.

For more sophisticated asset protection devices such as trusts, family limited partnerships, LLC’s, and even offshore vehicles, I would recommend a reputable estate planning attorney. My friends at Pabian & Russell in Boston are a good place to start.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. Please contact him if you need legal assistance purchasing residential or commercial real estate.

 

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During this Great Recession, we’ve been closely covering the foreclosure crisis from a real estate law perspective. I am not a bankruptcy attorney, and don’t claim to be. So I thought: why don’t we have an experienced bankruptcy attorney guest blog about the interplay between foreclosure and bankruptcy? Attorney Matthew P. Trask, a partner with Kelsey & Trask, P.C. in Natick, MA, was kind enough to do just that. Matt writes an awesome bankruptcy law blog, Don’t Go Alone. Welcome, Attorney Trask!

The Bankruptcy Automatic Stay, A Valuable Last Resort

Thanks Rich. It’s great to be here.

On September 13, 2011, CNBC reported that foreclosures owned by Bank of America surged more than 200%. “August traditionally is a high month for foreclosure actions, so part of the increase might be seasonal,” says RealtyTrac’s Rick Sharga. “[The increase is attributable to] any number of reasons – but with 3.5 million delinquent loans, this had to happen sooner or later.”

Continuing economic troubles coupled with high unemployment means that many homeowners are more than 90 days past due on their mortgage payments, setting the stage for the lender to take back title to the property, a legal process known as foreclosure. Oftentimes, consumers aren’t just behind on mortgage payments but other consumer debts, such as credit cards, medical bills, and even taxes. In addition to foreclosure, consumers who have fallen behind on debt may also face lawsuits, wage garnishments or asset seizures as creditors move to seek payment.

If you are between a rock and a financial hard place, bankruptcy may be an option to eliminate or catch up on past-due debt, and give you time to reorganize your finances. Additionally, bankruptcy law protects debtors as soon as a case is filed. Immediately upon filing bankruptcy, the U.S. Bankruptcy Code, 11 U.S.C. § 362(a), dictates that no creditor may take any judicial or non-judicial collection efforts against the debtor or the debtor’s property. This is called the Automatic Stay.

The Automatic Stay means that a pending foreclosure of your home, collection calls, wage garnishments, asset seizure or lawsuits must immediately cease until either the bankruptcy is completed, or the creditor obtains specific permission from the bankruptcy court. The benefit of the automatic stay is that it creates additional time for the debtor to deal with logistical issues associated with the bankruptcy, housing, cash flow or simply gives a debtor “breathing room” to work with their bankruptcy and real estate attorneys to protect their assets, eliminate debt, without the risk of losing property or assets during that time. Any creditor who ignores the automatic stay is subject to significant penalties by the bankruptcy court.

In the case of a debtor who wishes to keep his or her home, but has fallen behind on payments and facing an imminent foreclosure, the Automatic Stay, coupled with a Chapter 13 Bankruptcy can stop the foreclosure in many cases. Filing a Chapter 13 Bankruptcy petition creates the opportunity for repayment of the arrears over a period of between three and five years, and, in certain instances, completely discharges a home equity line or second mortgage if the value of the property is less than the balance on the primary mortgage.

Even if a debtor has previously modified their mortgage, and the terms of the modification appear to waive the debtor’s automatic stay protections, Emergency Standing Order 10-2 effectively voids any provision of any loan modification or forbearance agreement which states that upon default of the lender, the benefits of the automatic stay are waived. Prior to Emergency Standing Order 10-2, if a modification included such a waiver, the bank or mortgage lender could proceed with a foreclosure or other collection actions despite the filing of a Chapter 7 or Chapter 13 bankruptcy.

In summary, the automatic stay is a powerful tool available to individuals seeking bankruptcy protection, and is often key to any financial reorganization. If you have questions about how the bankruptcy code, including the automatic stay, may help brighten your financial future, speak to an attorney. Bankruptcy is a complex and technical process, but, if done correctly, can protect your assets and give you a fresh financial start.

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Attorney Matthew P. Trask is a partner with Kelsey & Trask, P.C., and represents business and consumer debtors and creditors before the United States Bankruptcy Court, District of Massachusetts.  Kelsey & Trask, P.C. is a debt relief agency, helping clients file for relief under the U.S. Bankruptcy Code.

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I recently came across a very provocative and interesting idea to address the foreclosure and bankruptcy crisis: a new Chapter M for Mortgage bankruptcy. As described on FireDogLake:

“Prof. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity.

We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.

And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.”

Any solution which can simultaneously address banks’ unwillingness to offer loan modifications to otherwise qualified distressed homeowners and the litany of title problems created in the wake of cases like U.S. Bank v. Ibanez should be seriously considered. The recent foreclosure legislation proposed by Secretary of State Bill Galvin and Attorney General Martha Coakley contains mandates following these ideas. Galvin’s would create a special court to deal with Ibanez issues, and Coakley’s requires loan modifications for certain sub-prime loans before foreclosure.

We certainly need out of the box thinking to deal with these problems. What are your thoughts?

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