Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

An annuity is broadly defined as a contractual right to a payment stream. A bankruptcy debtor sold his business in consideration for a cash down payment and a promissory note providing for the buyer's  minimum payments of $2,000 per month. The sales contract provided that the buyer's  monthly payments could increase if the buyer’s business revenue exceeded a certain amount. The seller subsequently filed Chapter 7 bankruptcy and claimed the buyer’s payment obligation as an exempt annuity pursuent to Sections 222.14 of the Florida Statutes.

The bankruptcy judge said the parties' promissory note is not an exempt annuity because it is a "promissory note." For the debtor to have exempted the buyer’s payments under the annuity exemption, the court stated, the buyer and seller must have intended to create an annuity contract. The court pointed out that the parties agreement is entitled "Promissory Note", that there is no reference to an annuity contract, that the buyer’s payment to debtor does not terminate upon the debtor’s death, and that the debtor is not identified in the sales agreement as a beneficiary of an annuity contract.

The court’s holding in this case is clearly correct; a debtor cannot take a self-described promissory note and call it an exempt annuity in bankruptcy court. But, the holding suggests asset protection planning opportunities for others. Sellers of businesses or real property could gain creditor protection of deferred sales income  by including in the  deferred payment provisions typical annuity features such as contingent death beneficiaries and payment termination after a certain number of years. The sales agreement could state that the buyer would pay the purchase price in the form of a cash down payment and a "private annuity contract" with typical annuity features. If the parties can demonstrate their intent to create an annuity contract rather than a promissory note for a fixed principal amount with interest this case suggests asset protection benefits. In re Holt, Case No. 08-bk-4288

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A caller asked me whether imputed income after a foreclosure on an investment home when the owner had taken the home off the rental market for a year before the foreclosure. I’ve written previously on this about the income tax effect of foreclosure and 1099 debt forgiveness on rental properties. I’ve stated that my own accountant, Mr. Lonnie Young of Lake Mary, Fl, told me that 1099 income on rental property can be offset by investment losses so that foreclosure and debt forgiveness usually will not increase income taxes. This caller was concerned that his removal of the property from the rental market and subsequent vacancy, would disqualify the property as a "rental property."

I posed this question to Mr. Young. Here is a summary of his explanation of the general income tax rules for mortgage foreclosure and his answer to the caller's question. Assume one real estate investor (I’ll call him "Moe") purchases non-income producing property, such as vacant land, and his friend (I’ll call him "Larry") invests in income producing rental property, such as vacant land.. Assume that both Moe and Larry lose their properties at foreclosure sales, that both properties are "upside down" and that both taxpayers receive a 1099 income form from their respective lenders representing imputed income for debt forgiveness.

Mr. Young explained that Moe’s investment in non-income producing property is a capital investment for future appreciation. Moe’s losses in his real estate investment is a "capital loss" which can offset his capital gains for that year, but Moe’s capital loss greater than his capital gain for same year can offset only a small amount ($3,000) of other income in that year, with the balance carried forward to future years.

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People often confuse a fraudulent transfer in asset protection or bankruptcy law with the crime of fraud or common law civil fraud. Common law fraud or criminal fraud are types of "evil fraud." This type of fraud involves intentional deceit or cheating of innocent victims. The fraud involves intent to harm and the victim suffers damages. The judicial remedy is incarceration in the case of criminal fraud and damages in the case of civil common law fraud.

Fraudulent transfers or fraudulent conversions to evade or avoid creditors are reversible because there are Florida statutes which give courts the authority to undo such transfers or conversions and put the property back in the hands of the debtor where it is subject to creditor levy. Fraudulent transfer actions are creditor remedies; they are part of the creditor’s array of tools used to collect judgments. A court may not award a creditor any additional damages for a debtor’s fraudulent transfers or conversions. Certainly, no one ever went to jail for making a fraudulent transfer to protect assets from creditors.

Many attorneys confuse civil/criminal fraud, the "evil fraud", with reversible fraudulent transfers. Some judges confuse the two concepts. An attorney I know sent me an order issued by a federal district court judge which clearly distinguishes fraudulent transfers from common law fraud. This order is not precedent. Nevertheless, readers may find the analysis and cases cited within to be helpful in arguing this issue in their own cases.

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"Can I still do asset protection planning after there is a judgment against me?" A very common question. The answer is "yes" in many cases. Here’s an example from last week’s clients of legitimate and effective post-judgment planning.

This elderly lady had guaranteed her son’s business loan which the son could not repay when the business failed. The business and loan was made in another state with a national bank. The bank just got a judgment against mother and son for several hundred thousand dollars. The mother lived in Florida in a home with a $40,000 remaining mortgage. She had about $60,000 savings in accounts at the same bank that got the judgment. She lived primarily off monthly checks from her deceased husband’s pension and social security.

Here are the post-judgment planning steps she is considering. First, she pays off her remaining mortgage leaving her with about $20,000 at the creditor bank. Paying a homestead mortgage cannot be reversed under Florida law. Next, she’ll move the financial account from the creditor bank to a small bank in Florida; she is not "hiding" the money, but she is removing the money from the "creditor’s doorstep." The mother’s litigation attorney can probably delay discovery of new bank accounts for a few months after judgment.

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One of my asset protection client introduced me to an attorney in Tampa, named Mike, who has a very large and successful practice defending mortgage foreclosures and negotiating mortgage modification. I spoke with Mike and asked him about his client’s experiences during court-ordered mediation with their mortgage lender during foreclosure litigation.

Mike said that mediation in state court proceedings is usually a waste of time for his clients. He listed several reasons why foreclosure mediation infrequently results in successful mortgage modification and foreclosure forbearance. For example, he said that there are so many foreclosure mediation that lenders usually send a foreclosure "clerk" with minimal authority to offer anything other than the lenders "in-the-box" standard modification packages for which, he said, few clients qualify. He said that the lender’s attorney see mediation as a temporary hurdle in their march toward foreclosure judgment and possession of the property. There are so many different state court judges with their own procedures that there is little uniformity how trial court’s treat mediation.

Mike said he is having success in mediation ordered by the appellate court. When an appeal is filed our appellate court (the Fifth District Court) orders almost all foreclosure cases to mediation. No briefs are due until mediation is completed. The attorney says lenders send more senior representatives to appellate mediation and they take more seriously mortgage mediation ordered by an appellate court. Appellate mediation is uniform because there is just one appellate court in our district.

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The Orlando bankruptcy court is preparing to adopt a rule providing for mandatory mediation between homeowners and their mortgage companies to facilitate mortgage modification. Congress rejected a change in the bankruptcy code that would have empowered Chapter 13 debtors to force reduction in their first mortgage principal to their residence’s current fair market value.

This proposed procedural rule will not circumvent the bankruptcy code law and will not force reduction of first mortgage principal. What the Orlando local rule will do is enable Chapter 13 debtors by motion filed with the Orlando bankruptcy court to compel a bank representative with full authority to modify their mortgage to meet with the debtor and an independent mediator to negotiate in good faith a possible modification of the debtor’s first mortgage terms. This bankruptcy rule should make Chapter 13 bankruptcy attractive to homeowners who want to save their homes provided they can obtain a reasonable modification of their mortgage.

The Florida Supreme Court is requiring mediation in state court foreclosure cases. This state court rule is helpful, but the bankruptcy court rule could be better for homeowners. In state court procedures the homeowner has to be in a foreclosure case before having the opportunity to mediate with a bank agent with full authority. The homeowner first has to stop paying the mortgage for at least three months, wait for the bank to file a foreclosure lawsuit, hire a civil attorney to answer the lawsuit, proceed for several months in civil litigation, and then at some point, arrange for a court ordered mediation.

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