MF Global Trustee turns over confidential emails- or how your attorney client privilege can be lost

In a February 14, 2012 article, "Federal Investigators Gain Access to Thousands of Internal MF Global Documents" the New York Times reports that the trustee for bankrupt MF Global has agreed to partially waive the corporation's attorney client privilege so as to turn over "thousands of internal e-mails and documents to federal investigators, ending a dispute over the privacy of decisions made in the days before the firm collapsed"

This reminds us that many years ago, the United States Supreme Court ruled that a corporation's bankruptcy trustee controls the attorney client privilege and can waive it. This same rationale has been extended to corporations, Limited Liability Companies, and even partnerships. Under limited circumstances, it has been applied to individuals. As a bankruptcy trustee, I used this power more than once to pry open important information, sometimes yielding a treasure trove of information.

Normally, what a person, or the management of a business tells their attorney in private is privileged and protected against disclosure. However, by putting itself into bankruptcy, a business entity enters a "fishbowl", and where a trustee is appointed (routine in Chapter 7 bankruptcies but far less common in Chapter 11) the Trustee becomes the new management, and gains control of the attorney client privilege. Confidential discussions between corporate officers or business partners and their attorney can potentially no longer be private if a trustee so chooses.

That is why we regularly recommend that the individual shareholders, partners or members of a business in trouble retain personal counsel. When we act as counsel for the business, we caution our clients about the potential for otherwise privileged discussions to lose that status.

Steering a business out of financial trouble is rarely simple. Litigation in bankruptcy court is always possible. Disputes with creditors are likely. Experience is essential. For more information about these and related subjects, please visit our websites at http://www.southjerseybankruptcylaw.com or http://www.nv-njlaw.com

Big Banks sending 1099's on debts discharged in bankruptcy even though no taxable income exists

One of the big advantages of a bankruptcy discharge is that it has no tax consequences under federal law. Outside of bankruptcy, whenever a creditor agrees to cancel part of a debt, that becomes income for federal tax purposes. This means the debtor gets a 1099-C and has to pay tax on the amount canceled unless another exemption applies.

When a debt gets canceled as a result of a bankruptcy discharge, there is no federal taxable income. Nor is there any state or local income tax. Under a specific provision of federal law found in Bankruptcy Code section 346(j), states and local governments who have income taxes must give debtors in bankruptcy who receive a discharge the same treatment as under federal law. Under the Supremacy Clause of the U.S. Constitution, states and local governments are bound by federal law. So a bankruptcy discharge cannot result in any taxable income, at state, federal or local level.

But recently, several reports have come in that large banks are sending 1099-C's to people who received a bankruptcy discharge. The form even identifies "bankruptcy" as the basis for discharge. We wonder why this is. I would think that if the IRS examines the form, it should see that the bankruptcy discharge makes the 1099-C inapplicable. But it remains to see if the IRS processing machinery will be so discerning. More likely, if there is not some attachment to the tax return showing the bankruptcy discharge, the result will be generation of needless, distressing and wasteful dunning notices.

UPDATE: Since the original posting, we have learned this is a requirement by the IRS. http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. The IRS instructs that the form needs to be filed even if the person whose debt was canceled need not report the income. It does not apply to debts secured by personal property such as cars or motor vehicles not used in business. It also does not apply where the debt was not actually incurred by the debtor, such as in cases of identity theft. However it does apply in cases of foreclosure.

While we are not tax attorneys, the advantage of having a tax free discharge of income are obvious and can be substantial. For more information about this and related topics, please visit our website, http://www.nv-njlaw.com

IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Debt collectors trying to collect debts after the statute of limitations has expired.

We have received several reports of debt collectors trying to collect debts after the statute of limitations had expired. In a recently reported development, the FTC has imposed record fines on a debt collector for various practices, including trying to collect debts without telling the debtor they could no longer be sued due to the expiration of their state's statute of limitations, and failing to tell them that even a small payment could revive the debt by "resetting the clock". See link to the article in the New York Times:
FTC fines a collector of debt 2.5 million.

Statutes of limitation set time limits by which suit must be brought on a claim. They can arise under either federal or state law, depending on the basis for suit, or "cause of action". What statute of limitations may apply in a particular situation can be complex. It is something for which legal advice is needed. If you are the party with a claim to sue on, you need to file suit before the time expires. If you are the person facing suit, you need to know whether the time has expired.

I will focus here on the common situation, where a collector is trying to collect a money debt arising under a credit card or other "installment loan". In New Jersey, suit on such a claim needs to be filed within 6 years of the date the "cause of action accrued". And with a credit card or installment loan, the time begins running when each payment is due. Therefore, if the last payment you made was due 5 years ago, then the creditor has another year to file suit on the unpaid balance. Laws in other states will vary. Caution: this is only an example. A shorter or longer time limitation might apply to other kinds of claims. Generally the time to bring suits seeking money for personal injuries is much shorter. Always seek legal advice promptly.

Note that the statute of limitations applies only if the creditor has not already sued and gotten a judgment. Even if a suit is filed on the debt, it is up to the defendant being sued to raise the statute of limitations as a defense and/or seek dismissal of the suit. If that is not done, the defense could be waived. Of course, if a creditor files suit or tries to collect on a debt that is not enforceable in court, that could give you a right to sue under other law. But it is up to you to act to assert and protect your rights.

Anyone facing debt collection needs to be aware of statutes of limitation. If it has been a long time since your last missed payment was due, you should be very cautious and should seek legal advice.

If you enter into a payment arrangement or a "settlement agreement" to pay even a small part of the balance due, you may end up starting the clock running all over again on a debt that otherwise might not be collectible in court.

Although collectors and collection attorneys do try to collect old debts, under some circumstances this could give rise to a liability claim against them.

If a collector contacts you or you are being sued and you think you might have a basis to challenge the debt, make a written demand for proof, including signed documents and a payment history. Even better, see a qualified attorney for further advice and help.

For more about this subject and other aspects of obtaining debt relief please visit our website at http://www.nv-njlaw.com.

Forcing insurance on homeowners-the continuing saga of "force placed" insurance-an update

We have previously commented on misconceptions about force-placed insurance (where mortgage lenders buy expensive insurance for themselves to protect their interest in a borrower's home). http://njbankruptcyblog.blogspot.com/2011/03/force-placed-insurance-when-your.html. The New York Times has updated us on the use and abuse of the lender's right to maintain insurance in two recent articles:
"How to Handle Force-placed Insurance"
 http://www.nytimes.com/2012/01/21/your-money/home-insurance/how-to-handle-force-placed-insurance-wealth-matters.html?_r=1.
"Hazard Insurance with its own perils"
 http://www.nytimes.com/2012/01/22/business/hazard-insurance-with-its-own-perils-fair-game.html?_r=1

Disputes over force placed insurance have been going on for some time. In our November 11, 2011 posting, we reviewed In re Taylor, 655 F.3d 274 (3d Cir. 2011), involving a dispute with a mortgage lender which had added the cost of forced placed insurance to mortgage arrears. http://njbankruptcyblog.blogspot.com/2011/11/third-circuit-issues-warning-to-lawyers.html.

These articles point out the cozy relationships that existed in some cases between the mortgage servicers and the insurers who provide the high cost force-placed insurance. That insurance is a profit center; its high cost and lack of protection makes it an especially bad deal  for the borrower. The lender is justified in keeping the property insured, and if the borrower lets the existing coverage lapse, the lender has no choice.

However, we have seen cases where the lender is collecting and escrowing for the insurance premiums. When the loan goes into default, the lender lets the existing policy lapse and buys force-placed insurance at higher cost. This would be justified if the property has been vacated (because most homeowners policies require continued occupancy). If the property is still occupied, however, common sense would dictate that the lender keep the existing policy in place with its lower premiums that buyer higher cost replacement coverage. I have not heard a good response for not doing so where the borrower continues to occupy the home.

In any event, what the author of the first article reminds us is that a lot of these abuses can be nipped in the bud. Do not ignore notices that tell you your regular homeowners insurance is being canceled. It is easier and less expensive to pay the premium for such insurance yourself than to fight with the lender later over the added monthly cost of force-placed insurance that does not even protect you. On the other hand, if the lender is acting wrongly (note that they have the right to buy such insurance when they need to), it is time to see an attorney and to take legal action. Class actions against some lenders for such practices have already gotten underway.

But again, prevention is the best cure. Who wants the stress and expense of battling with the lender even if they win. At the same time, make noise and let the lender, your attorney, your legislative representatives, and anyone else who will listen know what is happening.

The system of home mortgage lending is malfunctioning if not already broken. Borrowers need not put up with abuses, but need to be proactive, savvy and attentive. Prompt legal advice on what to do when a mortgage goes into default is an important first step.

For more help with these and related topics, see our website at http://www.nv-njlaw.com.

Managing our expectations-how we got into this mess and how we will get out

I was recently discussing with a friend what caused so many people to get themselves into financial trouble and why many people have trouble coming to grips with their situation and how to dig out of it. One of the reasons, I believe, is that too many people people created too-high expectations of what standard of living they should enjoy, while too few sat down to run the numbers, to see what they could afford.

A major factor, I believe, is our tendency to compare ourselves to those around us. As this recent article in the New York Times shows, our perception of reward and danger is shaped by what we expect of ourselves and the world. http://www.nytimes.com/2012/01/14/your-money/the-importance-of-setting-expectations-whether-high-or-low.html. And a lot of the ups and downs of the national financial psyche can, I think, be explained by our individual and collective inability to manage our expectations.

We tend to measure our social and personal standing in the community by what the people around us are doing, saying or thinking. When everyone was spending money on new cars, new houses, and other trappings of success, that raised the bar for those of us who measured ourselves against others. It did not matter that those people were running up mortgage or credit card debt to spend beyond their means. We had to do as well....

This of course creates a self-fulfilling feedback loop. We spend and buy because others are doing so. More money goes around, and the expanding money flow creates jobs and apparent well-being. But if the spending is fueled by increasing debt, as it was until 2008, the appearance is an illusion that sooner or later has to come to an end.

I believe we are now in the negative flip side of that ever-upwards-spiralling loop of expectations. This started with  the crash of harsh reality, when things start going wrong. Small things at first, but then worry sets in, then fear.  Instead of everyone expecting that the real estate market and the stock market will go up forever, now we fear the worst, and expect that the future will be just as bad as we think the present is, or worse.

Neither our inflated view of the ever better future, or our current expectation of doom is rational. For the past few years since 2008, the smart money has been sitting on the sidelines waiting for fire-sale bargains. That may be ending, but I believe far too few people are ready to invest in people and projects that, viewed outside the lens of expectations, make a lot of sense. We have, in a word, become too fearful for our own good.

The problem was (and still is in my view) that so few people learned to manage their expectations. So few individuals know how to do simple financial planning or care to keep a basic budget, to see what they could afford. Even today, so few people I see and so few business owners I counsel can really tell me what they have to spend to survive. We suffer from a studied blindness to simple personal finance. That has gotten many into trouble and until that changes, the root problem remains.

The key to managing expectations is found in the article I refer to above. Hope for the best, but plan for the worst. Maintain a positive outlook, but one tempered by and grounded in objective facts. Make decisions based on an objective non-emotional assessment of the present, but with a positive outlook. Be grounded in the real numbers that a budget, or cash flow projection shows.  Actively market and sell to new customers. Look for new opportunities. Remember that the past is not prologue to the future and every day is a new day. Above all, remember that things go in cycles.

We help people and businesses every day to get relief from debt, and to take back control of their business and personal financial lives. For more information, please visit our website at http://www.nv-njlaw.com

Creditors and debt collectors continuing to violate borrower rights?

In a recent New York Times editorial http://www.nytimes.com/2012/01/08/business/mortgage-servicing-horror-stories-fair-game.html?_r=1 columnist Gretchen Morganstern discusses deceptive practices, abuses and violations of law by mortgage processers, most specifically Lender Processing Services. She also notes that a proposed global settlement with various banks has been stalled, possibly because state regulators were too quick to give them a pass.

Of late, law firms handling foreclosures appear to have become much more careful in handling these cases. This of course has slowed the rate and which foreclosures can be completed.

While it can be argued that punishing the banks for past misbehavior doesnt help us out of the current mess, the counter argument is that with more attention to legal obligations and less on the bottom line, maybe the problem would not be as bad as it now is.

The lawsuits came about because certain parties did not follow the law in their dealings with borrowers or loan applicants. But the problem may be more general and widespread.

Of late, we have seen increased numbers of cases where creditors have illegally harassed our clients, trying to collect debts that were discharged in bankruptcy, or trying to collect money while a bankruptcy is ongoing. The circumstances indicate that these are not innocent mistakes, but a wilful refusal to abide by a bankruptcy discharge or the automatic stay which protects borrowers in bankruptcy and protects the legal process has serious consequences.

Anyone who has experienced this sort of misbehavior should not let it slide. If too many people do that, it only encourages more violations of other peoples' rights. The law provides potent remedies against such violations by creditors and debt collectors.

If you have further questions about this topic, we invite you to visit our website at http://www.nv-njlaw.com/bankruptcy-credit/