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

To date, mortgage modification when available involved lowering interest rates and deferring arrearage in order to lower monthly payments but without any reduction of principal toward current market value. Soon, many homeowners will find their mortgage lenders willing to reduce principal balance as part of mortgage modification. The government’s mortgage modification program known as HAMP (Home Affordable Modification Program) issued a Supplemental Directive 10-5 which encourages lenders to offer principal reduction to underwater homeowners. The Directive is effective October, 2010.

Supplemental Directive 10-5 states theat mortgage lenders must evaluate any loans being considered for mortgage modification using an alternative analysis which reduces unpaid principal to a level that helps the homeowner achieve the target monthly payment of 31% of gross monthly income. Principal can be reduced until the loan balance is 115% of current market value.

Mortgage lenders must consider modification of loans on primary residences for people 60 days delinquent in mortgage payments. It helps to understand the guidelines before discussing mortgage modification with your mortgage lender. The HAMP program rules are available on the internet. If you cannot understand the HAMP guidelines you should get help from someone in the real estate business who does understand.

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A few days ago an attorney submitted an interesting question about creditor remedies against general partnership interests. As background, a general partnership is an equal partnership among two or more joint venturers as opposed to a limited partnership which consist of a general partner/manager and limited partner/investors. Florida law permits a creditor to foreclose the interest of a partner in a general partnership. Florida law states that a charging lien is the exclusive creditor remedy against limited partnership interests. The question is whether a creditor can foreclose the interest of a general partner of a limited partnership. In other words, is the creditor remedy determined by the type of interest or the type of partnership?

I’ve come across this question previously. I could not find any Florida court decisions on this issue last time I looked. In my opinion, a creditor cannot foreclose the partnership interest of the general partner in a limited partnership. The reason is that the relevant statutes restrict creditors to a charging lien against the interest of a "partner" in a limited partnership and permit foreclosure of "a partners" interest in a general partnership. The limited partnership creditor section does not distinguish general and limited partnership interest when it makes charging liens the exclusive remedy.

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People with problem mortgages ask me frequently what the mortgage lender and their attorneys will do if they walk away from their upside down home mortgage. What can they do to get a release of liability and what are the chances the lender will pursue a deficiency judgment? These are common questions. This past weekend I got a glimpse into mortgage lender strategies by speaking with an attorney friend named Norman Farquhar who has worked for a large mortgage foreclosure firm in Tampa for two years. He recently left the firm. Norm Farquhar is an experienced real estate litigator. He says he is typically assigned the most contentious and heavily defended foreclosure cases. Over the past two years he said his firm took in about 1,500 new foreclosures each and every month.

I asked Norm how many first mortgage deficiency judgments he or his firm pursued in the past two years. Zero. Not one. None of his clients have ever asked his firm to file for a deficiency. He also said he was unaware of any of his client banks selling deficiency claims to investors. His firm never received any inquiries from investors about purchasing their clients’ deficiency claims. Asked why there has seen no deficiency claims to date, Norm speculates the reasons are first, that the banks and the law firms are still swamped with work(he said his firm is farther under water than the homeowners mortgages) and second, because it is much more difficult and expensive to pursue and collect a mortgage deficiency judgment than it is to foreclose and take back title. Norm says he hopes some banks will pursue more deficiency claims when the market settles down because it would mean more work for attorneys who do what he does.

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Over the years I have received many calls from Georgia residents wanting asset protection help. Other than inviting these caller to move to Florida there was not much else I could advise them to do for protection. I felt bad from these Georgia debtors because Georgia has few asset protection tools. For instance, the Georgia homestead exemption is limited to $10,000 equity. Georgia has no wage garnishment exemption and no tenants by entireties exemption. In Georgia, you have to pay your debts.

To appreciate the impact of the Ohmstead decision (discussed fully in prior post) it is interesting to compare the asset protection status of Florida LLCs to how Georgia law treats a debtor’s LLC interest. In Florida, after Ohmstead, a creditor can use all available creditor remedies to attack a debtor’s LLC membership interest, certainly in the case of single member LLC and probably in the case of multi-member LLCs as well. Under Georgia law, a creditor may get a charging lien and other remedies, but the Georgia statute specifically prohibits a creditor from foreclosing a debtor’s membership interest, The law also specifically prohibits a creditor from participating in LLC management which prohibition seems to stop a creditor from forcing the LLC manager to make distributions which could be subject to a charging lien. Georgia law has better LLC protections than does Florida law after the Ohmstead decision.

I never thought Florida’s asset protection laws could be worse than Georgia, but its happened with respect to LLC interests. It appears that our LLC protection has hit bottom.

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A very skilled and busy mortgage defense attorney told me that he sees some mortgage lenders bypassing foreclosure and suing borrowers directly for default on the underlying mortgage note. When you buy a house you sign a promissory note to evidence the obligation to repay the house loan. The mortgage is a security instrument that gives the lender an interest in the house which he can foreclose if you default. Your personal obligation to the lender is based on the underlying note. A lender has the option to sue you for repayment under the note without foreclosing the mortgage. If the lender sues on the note, you, the borrower, will have a personal judgment against you for your default under the note, and the lender still retains his mortgage security in most jurisdictions. So, why would a lender chose not to foreclose a mortgage on your home and sue you directly on the note.

The mortgage defense attorney and myself came up with some good reasons why mortgage lender should not foreclose a home loan:

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Word of the Florida Supreme Court LLC decision in the Ohmstead case is gradually spreading through the legal community. This is the decision that expressly deprived single member Florida LLCs most asset protection benefits because said creditors are not limited to the restrictive charging lien remedy against debtor’s single member LLC interests. Creditors can use all available remedies including levy and foreclosure of LLC interest in single member LLCs and possibly interests in multi-member LLCs as well. Single member LLC owners have been contacting me and other asset protection attorneys asking what they can do to protect their single member LLC interest. Attorneys have been conferring among themselves looking for alternatives.

What we know now, with certainty, there are several ideas but there is no answer. It will take years before an appellate court will evaluate anyone’s proposed single member LLC fix or alternative.

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I’ve written previously that asset protection planning is not effective against collection by certain federal government agencies. The July 2010 issue of Trust and Estates journal contains an interesting asset protection article titled, Beware of Federal Super Creditors. The article explains the difference between federal and state law jurisdiction in asset protection and collection. The article states that, "state law determines the nature of an interest or the type of rights a person has in an interest, but federal law determines whether that interest is considered a ‘property interest.’" If federal law determines a debtor has an interest in property then the federal super creditors may attach and sell the property regardless of state law exemptions and remedy limits.

The article explains that there are two principal federal super creditors: the IRS and the SEC. Each of these agencies have their own federal collection statutes that supersede the state collection paradigms. The IRS and SEC can ignore statutory asset exemptions such as IRA, pensions, and annuities; they can ignore state property immunity such as tenancy by entireties law; and they are not limited by state collection tools such as charging liens applicable to certain partnerships and limited liability companies.

The authors conclude that the safest asset protection tool against the federal super creditors is an offshore trusts with discretionary distributions to the debtor/beneficiary. Discretionary trusts under some states’ trust statutes may provide protection although there are unresolved issues in the effectiveness of domestic trusts. The article states that federal agencies other than the IRS and SEC must look to state procedure and state law for collecting a judgment.

The Trust and Estates article is not available online so I cannot include a link thereto.

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