Florida Asset Protection Law Blog | Attorney Jon Alper

The Wall Street Journal published a comprehensive, front page article on mortgage deficiency judgments. The article, written by Jessica Silver-Greenberg,  seemed to be consistent with facts I have observed in my practice. The author made many comments and points which are consistent with what I have previously written in this blog about mortgage deficiency judgments. The article reports that:

Lender sue for loan shortfalls in a small minority of cases when deficiencies are legally and economically available;

Although deficiency suits are still rate, the number of deficiency suits is gradually increasing. The article states, for example, that in Lee County there has been a 34 % annual increase in deficiency suits.

Credit unions and smaller banks are most aggressive pursuers of deficiency claims and account for most of the increase. The article states that the biggest banks are still reluctant to pursue deficiencies.

 

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A reader emailed me to following question: “Can a married couple both claim head of household exemption from wage garnishment if they life together, but where each spouse supports different dependents who are children of a previous marriage.”

I have not seen a case on this issue, but I think the answer is that each spouse can claim the exemption from wage garnishment. Head of household does not refer to a physical house as much as it refers to a family unit. A debtor can claim head of household exemption if he supports a dependent who lives a different address. Only one person can claim head of household in each “household.” I think two people can reside in the same property, and be married to one another, but each spouse can still be the head of separate families which relate to their respective prior marriages.
 

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One of my asset protection clients owns two adjoining properties in the count. He built his residence on one property which is subject to a mortgage. The mortgage is upside down. He uses the adjoining property to operate a business. He is considering walking away from the home mortgage and letting the house go to foreclosure. He wants to know if a deficiency judgment would attach to the adjoining second property used commercially

Currently, both properties are protected from the client’s judgment creditors under the homestead exemption. First, both properties are part of his 160 acre homestead allowance. Homestead covers up to 160 of contiguous property. The second parcel is part of the homestead because it is contiguous even through it is otherwise identified for title and tax purposes as a distinct parcel.

Debtor’s may use part of their homestead for commercial purposes if the homestead is situated in the county rather than in a municipality. The 160 acre homestead allowance contemplates that debtors located outside of cities may often use part of their land to make a living from ventures such as farming activities which require large land area. Homestead protection is designed to protect the debtor’s family. The large acreage allowance provides the debtor’s family not only a roof but also the land necessary to support the family financially. Commercial use is contemplated, not prohibited for rural homesteads.

If the debtor leases the second property to a third party who then uses the property for a similar business there debtor would lose homestead protection. There is a difference between the debtor conducting his own business, on one hand, and on the other, leasing the property for income.

 

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Many asset protection clients own once-valuable properties which are currently upside down. If a creditor gets and records a judgment the creditor will establish a subordinate lien on the property. The judgment creditor is unlikely to foreclose the judgment when the property has no equity. However, if and when the real estate market recovers and the property’s value comes back the creditor’s lien eventually will be “in the money.” Even though an improved real estate market will enable the debtor to sell the property and payoff the mortgage all the money over and above the mortgage will go to the judgment creditor’s subordinated lien. The debtor will never see any money from this property.

If the debtor conveys title of the property to his spouse, a friend, or a newly formed LLC the judgment creditor’s lien will not attach, and and the new transferee can sell the property at some point free and clear of the judgment lien.  The judgment creditor might try to  reverse the debtor’s transfer as a fraudulent transfer intended to evade the creditor’s judgment even where there the debtor had no  equity in the property at the time of the transfer. Can there be a fraudulent transfer of zero value?

Based upon the definitions in in the fraudulent transfer statutes (Section 726.102 ) I believe that the transfer of a property which is upside down at the time of the transfer cannot be reversed as a fraudulent transfer. The statutes define a “transfer” as the disposition or parting with “an asset.” The statute then defines “assets” as any property of the debtor but  not including the debtor's property to the extent encumbered by a valid lien. Therefore, real estate encumbered by a valid mortgage in excess of property value is not an “asset” for purposes of fraudulent transfer analysis.  

 

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Blog readers know that I am not a big fan of short sales. One reason is that my experiences with my legal clients is that lenders usually will not release owners from personal liability in most (I did not say “all”) short sales. The owner/debtor will work hard to find a short sale buyer and still live with the treat that the lender may come after him personally for a deficiency claim.

I met a real estate broker who assures me that he has great success negotiating liability releases in the course of short sales. This guy is not a lawyer; he is a real estate broker, but he owns and operates a relatively large real estate sales force. This gentlemen states that he is able to negotiate full releases of liability in approximately 75% of short sale transactions.

I am not going to disclose his full name because of confidentiality concerns. His first name is Jason. His office is in Orlando.  His phone number is 407-467-5631 begin_of_the_skype_highlighting            407-467-5631      end_of_the_skype_highlighting. He has authorized me to provide his contact information.  I receive no “referral” fees if you hire him, but I am always interested in providing names of people who might provide a non-legal solution to upside down homeowners.
 

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The protected Florida homestead includes up to 160 acres of contiguous property. Consider a  debtor who owns several parcels with separate legal descriptions. The parcels can be divided and sold separately. All the parcels are geographically touching, or contiguous. The debtor owns and resides in a house on just on of the several parcels. In that case, all of the debtor’s land is protected by his homestead exemption.

Last week a client described his ownership of a half acre lot on which he resided. In front of his house runs a street which is owned by his homeowners community. Across the street is a vacant lot adjoining a lake. The lake is owned by 10 people as tenants in common. Each of the ten owners is entitled to use the vacant lot for lake access only. The deed to the access lot provides that none of the owners can sell, assign, or encumber  their 1/10 interest without also selling their home. The client wants to know if his interest in the lake access lot is protected as homestead.

 

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Many people seeking asset protection of their personal assets are self-employed and support themselves with salary and distributions from their own business Many of these self-employed individuals have concluded that their business cannot survive and are resigned to winding down and closing their business.  The owner is concerned about personal liability because he and or his spouse personally guaranteed business debt.

A very common question is whether the business owner can pay himself from the business even though his business will not be able to pay his creditors. I have seen recently several court cases dealing with debtors who paid themselves salary and distributions from a failing business. In my opinion the general answer is one of common sense.

A business owner may pay himself a reasonable salary for operating his business even though his business is in financial difficulty and may not pay business debts. The salary must be reasonable and comparable what the business would pay an unrelated employee for the same work. You cannot increase salary to deplete the business bank account prior closing the business and defaulting on  business debt.  The business owner should consider decreasing his personal compensation as business revenues decline to show good faith toward his creditors..

Unfortunately, many business owners give into the impulse to grab all the money they can for themselves before the business closes. I find that some times the motive is greed, and some times the motive is financial survival after the business revenue flow stops. Whatever the explanation, if you drain money from your insolvent business you may cause recipients of the money to become defendants in fraudulent transfer lawsuits and you may jeopardize your ability to discharge personal debts in bankruptcy should bankruptcy become necessary.

 

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