Preferential Transfer and Title Insurance

It has been a long day. Recently, I have been working as a rancher in Norman, Oklahoma. It took me a time to get used to the cowboy hat and boots, but, all in all, I like it. I look cool, plus I am the desired 5' 10", up from my previous 5'5". Nonetheless, despite severe saddle sores and an annoying rattlesnake bite, I have made my way to the computer to write this inspiring article regarding preferential transfers.

First, some arts and crafts:

Lenders lend money to land owners. The land owner will grant a mortgage to the lender as security for such loan. The lender will usually seek 'title insurance' for the purpose of protecting its lien status on the subject property. Title insurance is extremely important to a lender that, among other things, may ultimately be forced to foreclose on the mortgagor. Sadly, bankruptcy is becoming more and more of an issue these days. The bank wants protection. The ALTA Loan Policy (6-17-06) affords a number of 'covered risks' to a lender. In keeping with the title of this article, I will be focusing on covered risk 13 (b). The relevant section reads:

13. The invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured Mortgage upon the Title . . . (b) because the insured Mortgage constitutes a preferential transfer under federal bankruptcy, state insolvency, or similar creditors' rights laws by reason of the failure of its recording in the Public Records (i) to be timely, or (ii) to impart notice of its existence to a purchaser for value or to a judgment or lien creditor.

Objective: This article will enable a title examiner to understand what a bankruptcy trustee is attempting when she moves to avoid a mortgage lien under Section 547 of the bankruptcy code. I will accomplish this by helping the reader digest the preferential transfer statute, discussed below, as it relates to covered risk 13(b). EXAMINERS: If you haven't already done so, attain a copy of the current ALTA Loan Policy jacket and become familiar with its coverages and exclusions. When mortgagors find themselves in financial trouble, the crap will begin to hit-the-fan. At that moment, all parties scramble to protect their positions. The parties include the debtor, the mortgagee (lender), and the title company.

The elements of a preferential transfer are set forth in Section 547 of the bankruptcy code. In particular, Section 547 (b). The bankruptcy trustee will invoke the use of this section, as it is only the bankruptcy trustee or debtor-in-possession that can bring the action.

Section 547(b) reads:

. . . the trustee may avoid any transfer of an interest of the debtor in property--

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made--

(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if--

(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

Now, let me use Mr. Routine to help us untangle the mess.

Section 547(b): The trustee may avoid any transfer of an interest of the debtor in property. Explanation: When Mr. Routine grants a mortgage of his land as security for the bank loan, he has effectively transferred an interest in his land.

Section 547(b)(1): To or for the benefit of a creditor. Explanation: Mr. Routine's granting of a mortgage is for the benefit of the bank. The bank is the creditor.

Section 547(b)(2): For or on account of an antecedent debt owed by the debtor before such transfer was made. Explanation: An antecedent debt is a debt in existence prior to the transfer of the debtor's interest in property. Example: Let's say that Mr. Routine takes a loan from the bank on February 1, 2008. He subsequently grants a mortgage to the bank, in regards to such loan, on April 1, 2008. We would technically say that Mr. Routine had transferred an interest in his land, the granting of the mortgage, on account of the loan received on February 1, the antecedent debt. The loan existed before the actual transfer of Mr. Routine's interest in land. Now, most loans are given in concurrence with the granting of the mortgage. Both are accomplished simultaneously at the same closing. But for preference policy, the transfer of the debtor's interest in property, the granting of the mortgage, is not deemed to be effective until the mortgage is perfected (recorded) in the public records. This is usually some days subsequent to the date of closing. Sensible or not, a loan/mortgage swap may be considered a transfer on account of an antecedent debt. More on this shortly.

Section 547(b)(3): Made while the debtor was insolvent. Explanation: A debtor is insolvent if the debtor cannot pay its debts as they mature. Very simple. The trustee has the benefit of assuming insolvency of the debtor at the time of the transfer in question. It is then up to the debtor to show rebuttable evidence to the contrary; the so-called burden of proof. The reasoning behind this section is prudent: if the debtor, at the moment the questionable transfer is made, is solvent, the debtor would theoretically have had enough money to pay all creditors on time. With solvency there is no preference; it only becomes an issue when it appears that one creditor is being favored over another.

Section 547(b)(4): Made (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, is such creditor at the time of such transfer was an insider. Explanation: Subsection (A) is self-explanatory: was the transfer of an interest of the debtor in property executed within 90 days prior to the filing of the petition. If the answer is yes, then the trustee can proceed with her analysis. However, if the answer is no, the trustee must move to subsection (B) in an attempt to establish transfer to an insider. Briefly, an insider includes a person or entity that has a special advantage or influence over other creditors or the debtor. A family member or business partner can be used as examples. If the trustee is successful in establishing insider preference, then she may lean on subsection (B) to satisfy this element.

Section 547(b)(5): That enables such creditor to receive more than such creditor would have received if - (A) the case were a case under chapter 7 of this title. Explanation: In a chapter 7 proceeding, the trustee will marshall as many non-exempt assets as possible for payment to unsecured creditors. Note, however, that a real estate mortgage, once perfected, secures the loan to its collateral: the homeowner's land. A secured creditor will receive 100 cents on the dollar. As a result, the lender holding a mortgage will not receive more than it would have received if the debtor subsequently files under chapter 7.

IMPORTANT INTERJECTION:

Section 547(e)(2) allows for immunity from a preferential transfer attack. This section allows for a 30 day grace period (or safe-harbor) in which a mortgage must be perfected. If the mortgage is successfully recorded within this time frame, a preferential transfer cannot be established. Section 547(e)(2) permits title companies, functioning efficiently, to avoid preferential transfer claims. If a title operation is negligent in its recording department, a preferential transfer attack is likely to pay a visit to such operation.

Now that 547(e)(2) has been disclosed and the main dimension discussed, I can now make the connection between covered risk 13(b) of the loan policy and 547(e)(2). Section 13(b) insures the insured against a preferential attack only if the mortgage is not recorded timely. What this means is this: a valid claim will exist against the loan policy if the title company does not get the mortgage perfected within the 30 day safe-harbor period (547 (e)(2)). In essence, 30 days subsequent to the closing of the loan. Remember, if the mortgage is timely perfected, a preference cannot be established.

Additionally, the ALTA Loan Policy contains exclusions from coverage. I want to draw your attention to Exclusions From Coverage Section 6(b). In short, Section 6(b) excludes from coverage a preferential transfer for any reason not stated in Covered Risk 13(b) of this policy. Explanation: Understanding coverages and exclusions of any policy is essential for completing the full circle and understanding just what risks are being insured. I believe that exclusion Section 6(b) is saying this: "We, as your title insurer, will only assume liability if we are in violation of the safe-harbor rule set forth in Section 547(e)(2) of the bankruptcy code. We assume no liability regarding any provisions of Section 547(b)." In other words, the title company will not be a party to any arguments regarding the debtor's solvency or preference periods concerning the date of the filing of the bankruptcy petition. These are all arguments to be had between the trustee, the debtor, and the lender. Without this reasoning, title companies could not function in any logical manner; they would be defending a tremendous amount of their loan closings.

The elements of a preferential transfer are not very difficult to understand. The trustee has some homework to do before such an avoidance action can be brought. If all the elements of Section 547(b) are established, the trustee must then turn to 547(e)(2) to establish untimely recording. If all this is successfully accomplished, the trustee will be empowered to avoid the transfer of an interest of the debtor in such property. By avoid I mean "wiping out" the transfer of such interest. This makes good business sense, as the trustee is attempting to pay as many creditors as possible through equal distribution of the debtor's non-exempt assets. The trustee in a successful preferential transfer attack wins in two ways. She avoids the lien of the mortgage, and she can also recover pre-petition payments to such lender, as these payments would be considered preferential.

Author Note: I think it is imperative that the reader understand that a preferential transfer, although avoidable, is not illegal. The debtor is attempting to satisfy an obligation to an existing creditor. That's a good thing! Establishment of a preferential transfer simply allows the trustee to pay all creditors on an equal basis: the so-called equal distribution principle.

Title insurance, like any other form of insurance, involves risk. Every property transaction contains risk. Title insurance companies have no part in the contract between a land owner and a bank. For example, as it relates to Section 547, a title company does not have a duty to confirm debtor solvency on the day a loan was given to such debtor. Indeed, an underwriter has one simple demand of its title agent: RECORD THE MORTGAGE, PROPERLY, WITHIN 30 DAYS OF THE CLOSING. In so doing, although the elements of a preferential transfer exist, Section 547(e)(2) will act as an affirmative defense.

dave

Upcoming Articles

Hello and happy pre-holidays to everyone! I wanted to take a moment to advertise some of my upcoming articles.

My next posting will concern preferential transfers. This discussion will encompass preferential transfers and title insurance. I feel this is an important article for me to write on behalf of all title examiners. Preferential transfers arise most often during the administration of a Chapter 7 proceeding. It is the trustee who brings the action of avoidance. Although preferential transfers are typically dealt with by an underwriter, it is important for an examiner to understand the function of preference policy, as seen through the eyes of the bankruptcy court. This is learning for learning's sake, which is at the heart of my writings.

The article following the above will discuss residential v. commercial transactions. I intend to discuss the essence of each transaction as they relate to title examination. This may be helpful to a title examiner considering a move into the commercial arena. Helpful in that it may give the examiner a heads up on what to expect. Additionally, this writing may be useful for smaller business entities considering a move into the commercial market.

I hope you continue to visit this site.

dave

Will Bailout Work?

Hello again. As congressional proceedings continue to unfold, it has been almost impossible to ignore the drama surrounding bankruptcy, bailout, the Big 3, et cetera et cetera. I find it very entertaining and fascinating! It has also allowed for mass basic consumer education.

First, my thoughts on the current bank bailout:

This money was dispersed with the intention of stimulating banks to lend. Well, currently, that hasn't worked. In fact, it appears that most banks are holding the money and refusing loan applications from bad credit risks. Smart? Of course. In my article 'Common Cents' I posited that banks would not lend, at least initially, because of the current market risk.

It has been outlined that interest rates may fall as low as 4.5%. However, this only applies to the resale market. Furthermore, as of today, most purchasers may not meet the qualifications for such a loan. Why? Because they are bad credit risks! And around and around we go.

Michigan, in particular, needs help in the refinance arena. Many troubled homeowners with delinquent loans, or loans on the eve of a foreclosure sale (the 800 pound gorilla), are desperately seeking to refinance at lower rates. However, many of these loans exceed the value of the collateral, which renders zero equity, which renders the refinance applicant unable to qualify. Certainly they will not be able to qualify at 4.5%. And around and around we go. It's like Robert De Niro in Analyze This.

Realistically, the job market in Michigan may not see any significant change for two years or more. So how can there be any immediate help for these homeowners? Well, there has been talk in the media that some of the bailout money should go directly to the middle class, where foreclosures are destroying communities. We will have to wait and see if any of this money is allocated in such a manner, but I don't believe that we will see this. Maybe my idea of dropping all loans to 3% has some merit? No bailout money would be needed for this result, only a banking institution that is willing to share in the disaster it has created. Not likely to happen either!

Rest assured, bankruptcy filings will skyrocket in the coming months. Unfortunately, Chapter 13, used to cure a delinquent home loan, will not be available to people out of work, as Chapter 13 requires wage earnings or other viable means of funding the plan. I suspect that we will start to see more and more wild financing scams, as desperate homeowners throw caution to the wind.

Next, my thoughts on the current Big 3 bailout:

Alright, so they will get some bailout money, as predicted. Then what? That's a very sensible question. Let's take 20 or 30 billion dollars and continue to function, in the short term, as is. Well, the economy does not support people buying cars in December and it will not support people buying cars in January, February, or March either. So, this money is quite likely to be burned up by March 1. Then what? Well, as Congress has stated: "You guys will be back here asking for more money." Of course they will. Then what? Congress will lend more money. And around and around we go. How can we expect different when a Chapter 11 has been put on the bench. All or most of the creditors and contractual parties will continue to want money. With no increase in revenue, how are the Big 3 going to satisfy such obligations? Interesting. As some in Congress have implied: How long will we keep meeting with you and lending to you? 100 or 200 billion more dollars? Keep in mind that a bailout puts Congress in a management position. As many have said, Congress has no place managing a car company. Well, how about bankruptcy? Bankruptcy allows current management to stay in place (termed a "Debtor in Possession"). And, once again, such bankruptcy would not indicate a collapse of the industry, as so many analysts purport. Quite the opposite: It indicates a plan of rebirth.

Close:

If you follow the different experts, or watch the news, it is crystal clear that such experts are split (50-50) on the bankruptcy v. bailout debate. That, to me, indicates that you can't necessarily be wrong no matter what side of the fence you fall on. That's what decisions are: having options to choose from. That's what lends fascination to the current crisis facing this nation.

Mr. Obama indicates that 2.5 million jobs will be created by 2010 through infrastructure work on roads and bridges. That leaves 7.5 million still out in the cold. It also leaves most of the middle aged persons out in the cold. How many men and women, say 35 or older, would be physically fit for, or excited about, rebuilding I-94? It's comical in thought. And how would this impact our universities? Would Bill need that law school degree if all that awaits him is a job rebuilding on-ramps? Creation of jobs is much more profound than simply working on our infrastructure. Sure, it's a good first step, but only a first step. Suggestion: WE MUST REBUILD THE REAL ESTATE INDUSTRY. Everything from home building to the lending process (banks and others) must be changed to fit incomes; incomes that can sustain recessions.

Do I believe that America will regain economic stability and strength? Of course I do. But what inspires me to write of these issues is that these times are so unique to me. I am living the American "nightmare" and I am attempting to capture my point of view while I can; while it is fresh in my mind. Moreover, even if the rest of my life is an economic train wreck, it is of dire importance to me that my two children have an industry, or many industries, that they may flourish in and solidify their own family unit.

I am certain that many people agree with my writings. Conversely, I am certain that many people disagree. Either or, as time goes by, my current articles will enable me to remember and never forget 2008.

dave

Bankruptcy Bashing

I just caught a conversation on CNN that featured Ray Young, the CFO of GM, and Jack Welch, the retired CEO of General Electric. These individuals share opposing views concerning a GM bankruptcy. Mr. Welch favors a bankruptcy administration, while Mr. Young opposes.

No surprise.

In my recent article 'Common Cents', I wrote, in part, of a viewpoint held by those opposing a bankruptcy. To restate, the basic position of those opposed is this: "People won't buy cars from a bankrupt company." What caught my attention during the above discussion was this: Mr. Young stood on the ground that people may not buy cars from a bankrupt company. He seemed to indicate that the mere possibility of a bankruptcy has already negatively affected auto sales across the globe. Mr. Young did not offer any business explanation as to why a bankruptcy would fail, only that consumers would run scared from a bankrupt entity. It appears to me, in my opinion, that GM may be using this supposed consumer fear of purchasing from a bankrupt entity as a tool to leverage Congress. It's crunch time and anything goes. If bankruptcy is such a bad and unreasonable option for GM or other members of the Big 3, then why is it, after massive amounts of analysis, that all the CFO of GM can come up with is supposed consumer fear? I find that very interesting. After all, this is the CFO of GM speaking, not a talk show host.

Following, I want to discuss my views on consumer confidence and company responsibility. Keep in mind that I am an average lower middle class guy with no expertise in finance or the Big 3. Here's a common sense question: Would consumer confidence increase if bailout money were given to an industry that most Americans feel will soon fail? Answer: No. If 70% of Americans believe that the Big 3 should be left to dissolution, how is it that acquiring 34 billion dollars of taxpayer money is going to create a spike in consumer confidence? Another question: If Congress grants bailout money, would it create resentment from the 70% of Americans disfavoring bailout?And wouldn't such resentment decrease sales even further? It begs the logical question: Will GM, or the Big 3, suffer a backlash from American consumers if bailout money is granted? Consumer confidence in the Big 3 has been consistently falling. In my mind, a bailout will not increase consumer confidence. In fact, it may very well foster resentment. Resentment that may take a long time to convert to confidence.

COMPANY RESPONSIBILITY:

The Big 3 can take responsibility for its current situation. File a Chapter 11 reorganization plan and educate the consumer regarding such plan. Most consumers and, sadly, most business entities, misunderstand bankruptcy in its totality. In the confines of Chapter 11, bankruptcy offers a socialized restructuring of the troubled entity. Socialized in the sense that all creditors and parties with a legal connection to the debtor are brought to the table and dealt with in a methodical, well thought out process. An entity or individual in Chapter 11 is attempting a rebirth, if you will. In theory, everyone will be on the same page. Dissimilar to Chapter 11 is Chapter 7. Chapter 7 is usually sought by insolvent debtors with little or no assets. An entity filing Chapter 7 is usually looking to close its doors and dissolve.

I would guess that the Big 3 has hundreds of thousands of marketing and public relations representatives across the globe. Such employees should be reigned in and taught the basics of a Chapter 11 administration, specifically as it relates to the Big 3 scenario. This educational process could be quick, simple, and extremely effective. These marketers could then reenter the field armed with an optimistic and clear vision: "Hey consumer, our Chapter 11 constitutes a responsible 'new beginning'. We, in essence, have begun a brand new business with you in mind."

Realistically, auto sales may continue to decline, in the short term, regardless of bailout or bankruptcy. An idea for the Big 3: Use this time wisely. Launch a campaign titled 'A New Beginning For The Big 3'. I believe that people will gain respect and confidence in the Big 3 if the Big 3 display an ability to survive these times on their own three feet. People want new cars, new management, and new Big 3 discipline. That is my opinion as a prospective consumer.

dave

Common Cents

I know -- Common Cents, really funny Dave!

Please excuse me, I'm just a simple man singing simple songs on a sad piano.

Common Sense is my sincere title to this article. I have been following the 750 billion dollar bailout like everyone else: through media coverage. One thing strikes me: You really can't go wrong with any analysis or opinion you may have, as every politician and finance expert seems to create their own angle on the current financial crisis.

As part of my continuing education concerning real property title and real property law, I read numerous court cases relative to my topic under study. I most enjoy opinions written by the United States Supreme Court. The reasoning in these decisions, and the styles in which they are written, I find very attractive. But regardless of the court in which a decision is rendered, I find that most decisions are based on common sense. The court, in essence, will prove the common sense theory. Now, in this article I want to have fun helping Congress utilize common sense over our common cents.

This article will encompass (1) bailout; (2) corporate bankruptcy; (3) homeowner mortgage restructuring; and (4) my personal ideas on how to use bailout, or tax money. I want all readers to understand that I am not an expert, nor do I purport to be an expert, on world finance or the complexities of the auto giants (I will refer to them as the 'Big 3'). This article is written with a slant of fun. However, I do hope to spurn some thought from the readers, and maybe some of my opinions would hold water, given the right audience.

Bailout:

A bailout is demonstrated in many different contexts, such as bailing water out of a boat that is sinking, or bailing out a family member that is in severe financial crisis. But, in my mind, there exists a difference between helping out and bailing out. Helping out is when you buy someone groceries, or shovel their walkway after snowfall. Bailing out is when you redeem someone's home subsequent to a foreclosure sale. The difference is in the severity. We, and Congress alike, look to the severity of a situation in deciding how to help, or if we should help at all.

That is where Congress stands today. They consider the banking industry to be in a state of such severity that it dictates a bailout. Congress is saying that, for the good of the people, we can't let this industry fail. Conversely, look at their attitude toward the Big 3. They want to help the auto industry, but they are not sure whether the situation calls for a full blown bailout.

Of course, a bailout is a loan, not a gift. Bailout money must be paid back, but if such entities run amuck with the cash, it is you and I who will be paying this money back. I have a feeling that trying to recover this money from the banking industry would be like trying to tackle Barry Sanders while wearing roller skates; not likely. So therein lies the question facing Congress regarding bailouts: Can we reason the necessity of placing taxpayers at risk? If the reason is logical to Congress, a bailout plan will be offered. If, however, the reasoning is not logical, as seems to be the case with the Big 3, than a bailout option will die on the floor.

Many people in Congress seem to be fixated on replacing board members and executives of key banking institutions as a condition of bailout. They fear that a good portion of the bailout money will go 'up in smoke' if these banks continue to function as is. Well, news flash, the money is already out there, banks are continuing to function as is, and there has been no solid plan for regulating and dealing with such institutions. So, most common sense adults would reason that a good portion of the bailout money is already being wasted. I could be wrong, but it is food for thought.

That is bailout. There is nothing particularly difficult to understand regarding the bailout doctrine, but it is a big role of the dice. And it is Congress rolling the dice with all the citizens tumbling along.

Concerning the Big 3, I believe that in December, when push comes to shove, Congress will offer bailout money. Congress is asking the Big 3 to offer up detailed plans on how they plan to succeed in the future. Of course they will offer up detailed plans! In fact, these plans will be cleverly and beautifully written. Congress knows this, and I believe that this is subtle posturing by Congress to sell the citizens on the bailout. They want us to be confident in the scam.

Let's move on.

Bankruptcy:

The whole world is waiting to learn whether the Big 3 will get its 25 billion dollar loan. In Detroit, it is as exciting as watching the Red Wings play game 7 of the Stanley Cup Finals.

If any or all of the Big 3 companies file for bankruptcy reorganization, it will be under Chapter 11. Chapter 11 is designed for entities seeking to reorganize their financial relations with their various creditors and contractual parties. If the Big 3 are denied bailout money, and it looks as if they may be denied, they will be forced to file. I say forced because the Big 3 themselves indicate such.

There are two camps regarding the Big 3 bankruptcy option: (1) those opposed to a filing, and (2) those in favor of a filing.

There is a consistent statement circling around from those in opposition: "Consumers won't buy cars from a bankrupt company." This statement is the one thing I hear consistently. Others in opposition say that the Big 3 would not survive a bankruptcy. There is no real solid explanation from such people; only a general statement that bankruptcy is not viable.

In comparison, here are two of the most compelling reasons for the Big 3 to file:

(1) Chapter 11 will allow the auto giants to "reject" certain contracts. In Chapter 11 an entity may reject an ongoing contract. This terminates the contract. In doing so, it frees itself from contractual duties. On the other hand, an entity may assume an ongoing contract, in which it maintains its contractual rights and duties. Assumption is much more dangerous, as any breach of an assumed contract will be paid 100 cents on the dollar through the bankruptcy estate. So, some scholars in favor of a Big 3 filing believe that by wiping out substantial contracts, particularly contracts with dealerships, tremendous amounts of cash will be freed up; cash needed to fund the plan.

(2) The bankruptcy filing will keep 25 billion dollars where it belongs: in the original bailout pot of cash.

I believe that scholars who fall in the group favoring a bankruptcy share a very pragmatic view. They have no confidence in the Big 3, and believe these companies will fail with or without the bailout loan. So why burden the taxpayers with 25 billion dollars of pure risk? Congress lacks confidence as well. As mentioned, Congress is looking for some magic plan to be set forth by the Big 3. Well, to rehash, you can rest assured that the various management teams of the Big 3 are hard at work drafting a wonderful plan titled 'Pie in the Sky', by the Big 3. Sounds like a rock and roll title doesn't it? We'll have to wait and see if Congress is hungry enough to take a slice of the pie.

My perspective: Force the Big 3 into bankruptcy. Let's see how serious they are about surviving.

Points In Favor:

(1) A Chapter 11 filing keeps 25 billion dollars in the original bailout plan.
(2) Congress has, apart from the bailout money, already earmarked 25 billion dollars to help American car companies create new and competitive designs.This will be a tremendous boost to a reorganization plan, as well as a tremendous boost to consumer confidence.
(3) Outrageous executive expense and buyouts can be reduced or eliminated by the bankruptcy judge.
(4) I believe people will buy cars from a bankrupt company. First of all, consumer anxiety will be eased simply by the amount of advertisement and explanations offered by the Big 3 and the media. Citizens will quickly realize that Chapter 11 is not Chapter 7 and, if anything, I sense citizens will support such reorganization. They will view the reorganization as the Big 3 helping themselves out, instead of the citizens helping the Big 3 out, pursuant to a bailout.

Mortgage Restructuring:

As we know, the real estate market is in shambles. There are numerous reasons for such decline. Everyone in Michigan likes to blame the auto industry failure and its massive layoffs. Although this is part of the reason, bad home loans by bad lenders, coupled with a statewide recession, are the two culprits that strike me as most profound. Regardless of who's to blame, hundreds of thousands of home loans are either delinquent, the so-called troubled loan, or are bound up in foreclosure. The decline in land value has left most homeowners 'upside down'. Their loans exceed the value of the secured collateral. Given this fact, the following events are typical:

(1) The homeowner has no equity.
(2) The sale of the home, at current appraised value, won't satisfy the mortgage debt.
(3) Likely, the homeowner's income has dropped dramatically due to layoff.
(4) The loan soon becomes delinquent, ultimately leading to default and foreclosure.
(5) The homeowner loses his home, his dignity, and, quite possibly, his family. This is devastating stuff.

Now, hand and hand with the bank bailout has been a congressional push for banks to work with 'distressed' mortgagors in an attempt to avoid foreclosure. To date, the banks receiving bailout money have not done anything substantial to assist homeowners.

Supposedly the bailout money was designed to increase investor confidence and get the banks lending again. Whaaaat? For a moment, put yourself in the shoes of a current investor. The economy is bad and predicted to get worse. Would throwing good money after bad make any business sense to an investor? "Yes, let's fire off loans to a layoff rich society and hope for the best." Now seriously, remember common sense? Investors would label it 'business sense.' Check the papers: bank shares are continuing to fall. Doesn't sound like investor confidence to me. What is the bank to do? First, they should fly to a remote location, have a quick board meeting (which would require a serious look on all faces), and decide how the top executives are going to be bought out. Just kidding; or am I? It's a riddle.

Members in Congress have already blown their stack. They complain that the bailout plan was not well thought out, and that the banks are simply doing with the money what they choose. Common sense flash: Did we really expect anything different?

Here's how I see it. Home loans are typically 15 or 30 years, fixed or variable. The accrued interest, through the life of such loan, is astronomical. The bank has a windfall in the end run. Now, let's be reasonable for a second. For discussion, let's say that a bank is charging 12% interest on its loan, secured by a purchase money mortgage. Let's further say that the homeowner's monthly payment on this loan is $1,200.00. What if we re-wrote the loan down to 3% interest? What would happen to the homeowner? Well, first off, the homeowner's mortgage payment would probably drop to around $400.00 monthly. Hmm, that's a savings of $800.00. Wow, maybe this homeowner can now afford medical coverage for his family. Could it be?

On hand two, what would happen to the bank? Remember that this bank has written many a bad loan, as these loans were packaged and sold to investors unknowing. The banks are solely responsible for these bad loans. We can't forget that. Strangely, given our example, I think the bank wins in two ways: (1) they still realize a tremendous amount of earning (considering 3% over 30 years), and (2) delinquencies and foreclosures almost disappear, resulting in safe lending and immense investor confidence. Mr. Obama: Americans are asking for fairness. They understand that a bank will take a profit, but they do not expect the bank to take a windfall. Low and reasonable mortgage payments would allow the banks to sustain tough economic times, such as the times we are now facing. They would sustain because the consumer would sustain. Additionally, bankruptcies would drop dramatically, as many bankruptcies are filed to simply delay foreclosure of the debtor's home.

Remember, I am not an expert in mortgage lending or the economy, but the preceding paragraph strikes me as a reasonable compromise. Additionally, in arguing support of lowering loan interest rates, I would create a model covering a ten year period. We could use 1998 to 2008 as our example. Over this ten year period, how much money did a given bank lose because of costly foreclosure proceedings, coupled with having to receive and sell homes valued at well below the amount of the outstanding loan? Example: The bank forecloses on a home valued at $100,000.00. The bank loan stands at $130,000.00. The bank pays huge legal fees and ultimately sells the home for $90,000.00. All told, this bank, or more appropriately the investors, will lose roughly $50,000.00. Multiply this by tens of thousands of foreclosures over said ten year period. Staggering! Don't you think the bank would like to avoid this scenario? They always speak as if they would, but ultimately commissions and bad lending will win the day. Current executives and board members of such bad lending institutions should be immediately fired and the real culprits thrown in jail. Common sense tells us this, but it is not likely to happen. One thing must happen: Strict guidelines need to be developed and followed. Many, if not all the top executives, need to be removed. There exist many, many business and finance experts who would be more than willing to take the wheel. Congress, bring these individuals off the bench!!!

I remember an interesting conversation I had with my father-in-law regarding a loan he took out back in the 1960's. In those days, loan applications were highly formal and very stringent. The bank performed due diligence. The collateral for the loan was accurately appraised, and the chances of the mortgagor slipping into default were very low, because they qualified for the loan. Compare that to today's lending market, which throws loans at anyone breathing, as long as there is a commission to recover. Lesson: Mortgage lenders need to get back to the 1960's philosophy. I would love to own my own Cessna Citation Jet, but guess what? I can't afford the payments. It is what it is and we can't have everything we desire.

My suggestion: Put a 90 day freeze on all loans, whether delinquent or in good standing. During this period, the bank must restructure and write down its loans using 3% as the ceiling. The results would be dramatic, as money would begin flowing back to the bank at a consistent and steady rate.

New Ideas:

The following are my ideas. Humor me, as I would like to have some fun with them for a moment.

Right now, in this country, delinquent and defaulted credit cards total approximately 700 billion dollars. Hey Congress, I want to propose a bill. We'll call it the Phillips Act of 2009. Here is my proposal:

(1) Pay off all existing credit cards, whether delinquent, defaulted, or current.

O.K. -- After this payoff, Congress would have shuffled out roughly 750 billion dollars. Sound familiar?

(2) Make future extension of unsecured credit illegal, effective immediately. Unsecured credit will be viewed as against public policy. Remember, this will not affect home loans, as home loans are secured transactions.

(3) Such 750 billion dollars will be recouped within a 5 year period by reallocating taxpayer money away from outrageous oversees expense and ridiculous space exploration. The cost to the American families will be zero.

Reasoning: We, as a nation, throw hundreds of billions of dollars down the drain every year. This is common sense and is often discussed by Congress, other politicians, and business people. We pay taxes blindly, with a trust that such moneys will be spent wisely. Not true, and we know this. I realize that not all citizens have credit card debt, but with an understanding that huge piles of our tax money are wasted, don't you think the American people would support tax money earmarked to wipe out the credit card disease? The abolishment of credit card debts, coupled with reasonable and affordable home loans, would enable most families to comfortably survive on normal income. Debit cards would suffice. Bankruptcy filings would dramatically fall, and consumer obligations would be met. Indeed, entire communities could be saved, and the overall attitude of the nation would greatly improve.

The preceding section may seem crazy or even funny, but think for a second. Use common sense. Our government spends unbelievable amounts of money outside of our borders. We all know this and we all complain of this. Politicians bitch about this every day you turn on the news. Do you think most citizens would have a problem with grounding a space shuttle if the result were healthier financial positions for our families?

I hope Dave Ramsey, a financial expert that I read and enjoy, would be proud of this article. Credit cards need to go, and stuffing tax money into the proper envelopes would offer immediate and common sense relief to our country.

In Closing:

It seems that our government is concerned primarily with helping other nations and exploring universes outside of our own. We are in a bad situation and we are angry, frustrated, and scared. I'm convinced that if a psychiatrist, psychologist, or social therapist were sitting in a room with the United States, represented by our glorious flag, they might tell the U.S., "You must learn to love yourself before you can learn to love others." Believe me, the citizens of this country, on the whole, are reaching out for such teachings.

dave

Upcoming

I am sure that most of you have been, to varying degrees, following the $700 billion dollar bailout. Media coverage of this event in saturating!

Many companies are seeking a portion of the $700 billion dollar pie, as they arrogantly posit that they are entitled to such relief. There has been much talk encompassing the proposed bailout of the 'Big Three'.

My next article will be written in the classic compare and contrast style. I will take a shot at comparing and contrasting corporate bankruptcies, corporate dissolutions, and corporate bailouts. Theoretically there is a proper time for each proceeding. But in real time, when a portion of $700 billion dollars is on the table, proper proceedings may fail due to the avalanche of greed and the never ending display of knee-jerk reactions that often lead to the wrong decision. A decision to choose between bankruptcy and bailout should be left in the soft and gentle hands of business and finance experts, not in the calloused hands of politicians.

I do not have expert knowledge regarding corporate bailouts, nor expert knowledge regarding worldwide finance. But, I do have common sense and the ability to analyze. Each of us is struggling to make sense of what is happening in today's economy. In a struggle to understand, people will utilize their common sense first. It is sort of like putting on a coat when the weather turns cold. It is instinctive.

I believe that common sense is the cornerstone of decision making. I hope that such common sense will be utilized when this immense amount of money is distributed. If it is being distributed for the sole purpose of enabling people to 'borrow' more money, it will fail.

What the hell, let's open up this blog.

dave

Bankruptcy - Chapter 13

In furtherance of my recent article concerning Chapter 7, today I will discuss Chapter 13 of the bankruptcy code. Now, these articles are designed to give the reader a general understanding of bankruptcy law and how these laws may affect real property of the debtor. The topics that can spin off of a general bankruptcy article are endless.

Author Note: At its creation I had named this blog site 'Title Town'. My intention was to post writings dealing with specific title issues. It was to be informative and instructional, as best seen through the eyes of an examiner. Well, what has happened is that I have strayed a bit off course. I have written many informative articles, but have not given much instruction to the examiner who may be viewing this site. As I displayed in my writing on 'fundamentals', I think it is time I get back to the fundamentals and consider these articles through the eyes of the title examiner. So, from this point forward, when applicable, I will conclude each writing with a section labeled The Examiner's Perspective. Please understand, the advice I give you in the perspective section should be addressed with your particular underwriter, as your underwriter may direct you differently. Nonetheless, this section will give you, the examiner, a solid basis for attacking a particular issue affecting your commitment. These articles are based on my knowledge and opinions. A workplace can strip you of many things, but don't ever let it strip you of your opinions and common sense. Opinions lead to ideas, ideas lead to creation, creation leads to knowledge. In the words of Geoffrey Fieger, "If you don't stand for something, you end up standing for nothing at all."

Writing this blog has been a great experience for me. I never quite understood how difficult it is to write, especially in the area of technical writing. In reviewing my past articles, I can see some gaping holes; topics I should have covered, or connections I should have made for the reader. I write these blogs quickly, usually allotting myself one or two hours.

Dan Nichols is a very good friend. He is a business expert and runs a company specializing in helping individuals create and maintain their own entities. If you, the reader, have designs of creating your own business, it is well worth your time to contact Dan. He can be reached at: dan@businesslaunchexpert.com. Dan was actually the creator of this site. He knew I had a lot of information stored in my head, and he wanted me to share this information with others. He walked me through the blog process, step by step. I did not even know what a blog was. I have consulted with Dan frequently regarding these writings. He has helped me to avoid writer's block. He let me know that there is no such thing as a perfect writing. The writer will always find holes or fault in their own work. They will continually change and amend an otherwise competent article. His advice: It isn't perfect, and it won't be perfect, so just write it and move on. It is the imperfection that actually makes the writing perfect. Imperfection leads to questions, questions lead to discussion, discussion to answers. Welcome to my maddening mind!!

O.K. Chapter 13 - -

Chapter 13 is a bankruptcy proceeding that is designed to enable a debtor to pay its creditors over a three to five year span. Chapter 13 is in contrast to Chapter 7. As discussed previously, Chapter 7 is pure liquidation, while Chapter 13 allows the debtor to reorganize its financial relations with its various creditors. This is why Chapter 13, as well as Chapter 11, are termed reorganizations.

Qualifications: Chapter 13 may only be sought by individual wage earners; business entities are not eligible for Chapter 13 and must seek their reorganization via Chapter 11. Additionally, there is a cap on the amount of debt, both secured and unsecured, that a debtor may not exceed. If the debt limit is exceeded, the wage earner will have to seek reorganizational relief via Chapter 11. These debt limits frequently change, so I will not disclose exact figures. Suffice it to say, the combined secured and unsecured limit is roughly one million dollars, so 99.99% of normal wage earners will qualify under Chapter 13.

Chapter 13 may only be filed voluntarily by a debtor. Involuntary filings do not exist under Chapter 13 of the code. This is in response to a comment left by a reader of my last article. There, he/she indicated that bankruptcy filings may be voluntary, by the debtor, or involuntary, by a qualified group of creditors. This is true under Chapter 7, not Chapter 13.

Chapter 13 is typically filed by a normal wage earner who owns a home and simply wants some breathing space to deal with its creditors. It often is filed by the homeowner who is in arrears on its mortgage payments. Reason: the owner fears foreclosure, so they beat the bank to the punch by filing a petition for relief under Chapter 13. The filing of a Chapter 13 petition is extremely useful to a homeowner in arrears. First off, the filing grants the debtor the benefit of the 'automatic stay'. The automatic stay will prevent, at least initially, the foreclosure of the home. The filing will also allow the homeowner to cure its loan. What is cure? Let's say the homeowner is three months in arrears. They can catch up on the delinquent three months through the course of the Chapter 13 administration; generally 3 to 5 years. Note: The homeowner must be careful at this stage in dealing with the bank. If it appears that the debtor is simply playing games and stalling for time, the bank may move for 'relief from stay' and proceed to foreclose on its security. Remember, the bank is secured, which means it gets 100 cents on the dollar. Bankruptcy will not remove a secured lien, save for unique circumstances. A secured lien holder stands unaffected by the bankruptcy filing. The secured party, usually the bank, waits for the dust to settle, and then determines if it should move for relief from stay. The debtor and the debtor's attorney should play nice at this stage, or the bank may drop the hammer and move for such relief.

Shortly after the petition for relief under Chapter 13 is filed, the debtor must propose a reorganization plan. Simply, this plan shows how the debtor plans on paying its creditors. Proper funding is at the heart of a Chapter 13 plan. This funding must be realistic; usually the debtor's steady income. However, funding may also come from sources other than income, such as the sale of property. In any case, the judge wants to see that the debtor has the necessary funding to support the plan and that it is likely to succeed. If the judge sees the proverbial 'pie in the sky', the plan will not be confirmed.

Next, a 341 meeting is scheduled. This is the same as in Chapter 7. All creditors will be afforded a chance to review the reorganization plan and file any relevant objections. If all goes well, the plan will be confirmed by the court.

Following confirmation, payments pursuant to the plan will be made to the trustee, who then distributes payments to the various creditors until the plan is completed. The trustee administers the estate. All the debtor has to do is furnish the money to the trustee at the scheduled time. Note: The debtor will not receive the Chapter 13 discharge until the plan is fully completed.

Why is Chapter 13 sought by a debtor? I have already mentioned one reason, to avoid foreclosure. At the heart of the determination is this: How many non-exempt assets does the debtor have? If there are numerous non-exempt assets, or non-exempt assets that are special to the debtor, Chapter 13 can be utilized, as long as the unsecured creditors are paid adequately. Another reason is non-dischargeable claims. A debtor cannot file under Chapter 7 to avoid non-dischargeable claims, such as federal tax liens. Chapter 13 will typically allow the debtor to pay such claims throughout the administration of the Chapter 13 plan, with the benefit of reduced or eliminated interest regarding such non-dischargeable claims. These are all issues that a debtor's attorney will discuss with the debtor when selecting a chapter.

Why is Chapter 13 better for unsecured creditors, as compared to Chapter 7? Well, the answer should strike the reader as obvious. A creditor is typically paid more via Chapter 13 than they would receive via Chapter 7. Many times, the debtor's creditors are paid 100% through the administration of the plan. Even if the creditors are paid 10% or 20%, it beats a goose egg, which is exactly what they will receive in a typical Chapter 7 case. Interestingly, a creditor does not have grounds to object to a Chapter 13 plan, as long as that creditor receives as much as it would have received through Chapter 7. Considering most Chapter 7 filings are 'no asset' filings, this is not a very tough standard. However, as discussed in the previous paragraph, if the debtor has significant non-exempt assets, the chances of the creditor being paid in full will increase substantially. Ultimately, the judge will look to the debtor's debts, its assets, and the proposed funding of the plan to determine if all creditors are being paid adequately. This determination, coupled with the 341 meeting, afford the creditor ample protection.

Conversion: As discussed in my previous article, a debtor may convert from Chapter 13 to Chapter 7 if the confirmed plan runs amuck. This conversion can be devastating if the debtor has completed most of its plan. I will save conversion for the topic of a later article. Remember, approximately 2/3 of Chapter 13 plans will fail.

The Examiner's Perspective:

You are sitting with your file. A search of the records discloses that the property owner is bound up in a Chapter 13. What do you do? Well, let's look at two of the most probable circumstances. First, the homeowner is attempting to refinance, which means the lender will be the proposed insured. Second, the homeowner is attempting to sell, which means the purchaser will be the proposed insured. Mental gymnastics.

PROCEDURE FOR REFINANCE:

1) First off, confirm that the homeowner is, in fact, the debtor. Social security numbers are the best confirmation. Do not guess at this stage. If you erroneously show a homeowner in bankruptcy on Schedule A, you risk an enraged party.

2) Show the bankruptcy estate as vesting on Schedule A. Example of vesting line: Dave Spender, Chapter 13 debtor, being United States Bankruptcy Court Case No. 08-1234. Note: Individual debtors are not to be termed "debtor in possession". A debtor in possession is found when you have a business entity involved in Chapter 11.

3) As your first requirement, ask for an order from the bankruptcy court approving the proposed refinance transaction. You may hear a lot of title people say that you need either the order of abandonment, or proof that the home is exempt from the Chapter 13 case. The trustee may, during the confirmation of the proposed reorganization plan, determine that the home has no equity. The bankruptcy lingo is "no equity, not necessary for an effective reorganization." If this is found, the trustee will have no use for the home and may simply abandon it, similar to Chapter 7. Additionally, if the homeowner claims the home as exempt, and there is not a timely objection to the claimed exemption, the home may be considered exempt from the Chapter 13 case. It is also possible that the homeowner will attempt to refinance after confirmation of the Chapter 13 plan. If the home was not previously removed from the bankruptcy case, the rules would require notice to all existing creditors and an opportunity for each creditor to be heard regarding such refinancing. So you see, this can cause a tangled mess. Remember that the bankruptcy court controls the bankruptcy case. As such, it is not necessary to guess here or rely on taking a risk. Simply ask the court or the trustee for approval of the refinance as planned. The end result is sound: 1) you have court confirmation that there will not be a creditor attack, and 2) the lender, your insured, will be able to safely foreclose in the case of default. It has always been my position that many gray areas exist during the ongoing administration of a bankruptcy estate. The bankruptcy court has the authority to control all assets of the case. The court is also in the best position to understand the financial position of the debtor. Title companies are not positioned nor empowered to police the bankruptcy court. As such, you can cut out risk and time by simply asking for bankruptcy court approval of your transaction. I have read countless reorganization plans, especially plans filed by entities under Chapter 11. The plan usually discloses conditions upon conditions. The plan under Chapter 11 and Chapter 13 may change. Remember, Chapter 13 is a 3 to 5 year process. The financial condition, or the assets of the debtor, may change periodically. I have studied underwriter positions on various bankruptcy issues. Most underwriters seem to share my view that an ongoing bankruptcy estate can be dangerous. After offering numerous requirements and exceptions, and forcing the examiner to overwrite a commitment, most underwriters want the same thing: The order from the bankruptcy court.

PROCEDURE FOR SALE:

Note: It is not likely that a Chapter 13 debtor will be attempting to sell its property, as most Chapter 13 filings are designed to enable the debtor to keep his home. That being said, if the debtor owns additional property, say non-homestead, he may be attempting to sell the property as a means of funding his Chapter 13 plan. You are most likely to see this scenario at the onset of the Chapter 13 case, before confirmation of the plan.

1) As your first requirement, ask for an order from the bankruptcy court approving the proposed sale transaction.

2) Next, ask for an order confirming sale. This order will demonstrate that the court has looked at the sale price and is on board.

All reasoning is the same as discussed above.

FINALLY: Whether you are preparing a refinance or sale commitment, make sure you ascertain how the home is to be titled. This will be determined by the court. In other words, if the home is properly abandoned or exempt, the home will re-vest in the individual. However, if the home is to remain in the jurisdiction of the bankruptcy court, the bankruptcy estate will remain in title and the trustee will sign all necessary documents.

All property of a debtor becomes property of the bankruptcy estate at the moment a petition for relief if filed. Whether that asset will be exempt or abandoned is a matter of bankruptcy procedure. Property must go into the estate before it can come out. So, if a debtor fails to disclose real property on its list of assets, it is possible that the bankruptcy estate, although closed, will be reopened to administer that undisclosed asset. So, again, be very careful when dealing with a current or recent bankruptcy. Do not let a third party tell you that the property was exempt or abandoned. Confirm that the property was properly administered. This will require due diligence on the part of the examiner; the good examiner.

Bankruptcy brings all interests to the table. It is the intent of the bankruptcy court to offer equal distribution to all unsecured creditors. Many things can go wrong along the way and many lines can become blurred, so it is my advice to let the bankruptcy court guide your transaction. Don't let the tail wag the dog.

Later on dude -

dave