Beware Short Sales

We hear a lot about short sales these days. A "short sale" is a term that generally means a lender accepts less than what is owed on a mortgage loan and in return releases its mortgage. There's a lot of confusion about the effect of a short sale. Is the borrower free and clear after a short sale, or can the mortgage company still sue her for what wasn't paid in the short sale?

To understand this, you have to know there are two parts to a mortgage loan. The first part is the promissory note. That evidences the debt that was created when the borrower borrowed money from the bank. The second part is the mortgage, or lien (pronounced "lean") on the borrower's house. That is the security for the loan and is what lets the bank foreclose and sell the house if the borrower doesn't pay.

Most borrowers think that when the bank releases its mortgage, which is the point of a short sale, the underlying debt is fully paid. In some cases this is true. But it is possible for the bank to agree to release its collateral (the house) without considering the loan to be fully paid. In that case, the borrower remains liable for the unpaid balance and can be sued.

The lesson is, if you're considering a short sale, make sure that the bank will accept the proceeds of the sale in full satisfaction of the loan.

Blockbuster Headed to Bankruptcy?

The Los Angeles Times reports that Blockbuster, the movie rental giant for the last decade, will file a "pre-planned" Chapter 11 as early as next month.

A pre-planned bankruptcy is one in which most, if not all, of a debtor's creditors agree to the reorganization plan before filing. The debtor is in and out of bankruptcy relatively quickly. In Blockbuster's case, it hopes this will be about five months. The presumed major benefit to Blockbuster will be the ability to shed its most burdensome store leases, those where the retail outlets aren't performing but the company remains saddled with long term leases with landlords. In a Chapter 11, a debtor can reject any unexpired leases, meaning it simply cancels the remaining term. The landlord has an unsecured claim for unpaid and future rents, but since most unsecured creditors receive very little in a reorganization, this is small consoloation to the landlords affected.

Beaten down by changing consumer tastes, Blockbuster, which once the the undisputed leader in DVD rentals, has seen its stock delisted by the New York Stock Exchange. The stock now trades on the OTC (over the counter) market and recently traded at 11 cents/share.

Is the U.S. Housing Market Headed for Collapse?

There are some, and their numbers are growing, who feel the U.S. housing market is headed for collapse. Here are some of the reasons they cite:

• New home sales are at an all-time low.
• Because of this, construction of new homes has all but come to a standstill
• The Mortgage Bankers' Association reports home loan applications are at a 13-year low
• Foreclosures continue to rise. The glut of bank-owned properties further depresses real estate values.
• Because of the number of foreclosures and bank losses, banks are tightening their credit standards to those last seen in the early 1970s, which will further depress the market.
• Home prices are still far above 90% of Americans' ability to purchase a house. The law of supply and demand dictates prices will fall until demand matches supply.
• People need jobs in order to buy houses, and with unemployment near 10%, that isn't happening.
• Bankruptcies continue to rise, up 32% in 2009 over 2008.
• The giant tax credit that artificially pumped up the housing market last year is gone, and the government can't continue to fund it.
• Fannie Mae and Freddie Mac, the "twin pillars" of the housing market, are in total shambles. It's estimated it could take another $5 TRILLION to fix them. But Fannie, Freddie and the VA back over 90% of mortgages.
• The overall U.S. economy is drowning in debt. Consumer, government and business debt is in the neighborhood of 360% of gross domestic product (GDP). This debt bubble is about to burst.

Any way you look at it, the forecast isn't good for the housing industry.

$85 Million in Legal Fees

Chrysler's bankruptcy, which started in April, 2009, has generated nearly $85 million in legal fees and costs, most of it going to its lead attorneys, who billed an average of $500/hour.

Chrysler filed a Chapter 11 reorganization. This same chapter is available to small businesses and even individuals. However, because Chapter 11 has to be able to accommodate the likes of Chrysler and other huge corporations, filing a Chapter 11 isn't a viable option for most people or companies. While it's true that most debtors wouldn't incur $85 million in legal fees, the sheer size of that number for a year's work should demonstrate that bankruptcy isn't cheap.

Second (or Third or Fourth) Marriages Complicate Estate Planning

It's human nature not to be alone. That's why the majority of people who lose a spouse, either through divorce or death, remarry. Second and subsequent marriages complicate estate planning in ways most people never consider before they say "I do." Here are a few of the problems:

Age difference. When one party is significantly older or younger, by 10 or more years, the problems are compounded because of the strong likelihood one party will outlive the other for a significant time period. This is espcially true if the husband is older, since women tend to live longer than men anyway.

Health issues. Many older people suffer significant health issues that have to be addressed as part of the overall estate plan.

Children from prior marriages. This is the one issue most people catch. The possibilities are endless. Husband has children; wife doesn't. Wife has children, husband doesn't. Both have children. The children get along (not only as between parents, but among themselves). The children don't get along. There are minor children. There are children with special needs. You get the picture.

Children vs. new spouse. This is the million dollar question. In virtually every second or subsequent marriage where there are children from a prior marriage there will be a conflict between the new spouse and the children of the prior marriage. The parent's loyalties are divided between his/her new spouse and his/her children.

Pre-Nuptial Agreements. While technically not part of "estate planning" as it is commonly understood, the existence or absence of a pre-nuptial agreement in a second marriage can have a significant estate planning impact. In most states, a surviving spouse has certain rights, called the spouse's pre-emptive share, that may allow her to reject the provisions under a will and claim what she is entitled to under intestacy laws. A properly drafted pre-nuptial agreement can go a long way toward avoiding this.

Attorney Fee Only Plan Not in Good Faith

An attorney and his client came up with a novel, but ultimately unsuccessful, way to file immediately and pay attorneys' fees -- and nothing else.

In In re Buck, 2010 WL 2746217 (Bky.D.Mass. July 9, 2010), the problem for the Bucks was they couldn't pay the attorneys' fee of $2,000 for a Chapter 7 bankruptcy. They wanted immediate relief from the harrassing collection efforts they were subject to, but, understandably, their attorney wouldn't file for them until they paid his fee. So they agreed to file a Chapter 13, which cost $4,000, but those fees would be paid through the plan, at $130/month. This allowed them to file immediately. Sounded like a good plan.

That was until the bankruptcy court determined that the plan was not filed in good faith. It turns out that all of the Bucks' property was exempt and all of their debts were dischargeable in Chapter 7. As a result, no one other than the attorney would have received a distribution under the plan. The bankruptcy judge said that this was not a "good faith" plan, it exposed the debtors to 36 months of payments and delayed their discharge by that same time. As a result, he refused to confirm the plan. The Bucks converted to Chapter 7 and the court ordered that the attorney could not receive fees for either the Chapter 13 or the Chapter 7.