Mitchell & Culp

Reference Materials for Home Affordable Modification Program (HAMP)

Heather Culp — Thu, 29 Jul 2010 11:52:24 +0000

Although the Home Affordable Modification Program (HAMP) has been widely reported as under-serving those in need, and hat has been our clients’ experience here, if you are considering filing for bankruptcy protection or have already done so, and you have also applied for HAMP, this guide explains policies and procedures related to borrower outreach and communication.

Chapter 13 must be considered for HAMP upon request

According to the American Bankruptcy Institute, “These guidelines, originally proposed in March, greatly increase the attractiveness of chapter 13 as a platform to obtain a mortgage modification under HAMP. Under the new provisions, homeowners in chapter 13 are required to be considered for HAMP upon request. The chapter 13 plan may provide for modified payments at 31 percent of gross income, thus allowing chapter 13 debtors a means to reduce their mortgage to an affordable level.”

We’ve written at great length about mortgage modifications. Mortgage companies and other creditors have legal counsel and you should also.

If you are experiencing financial difficulty, consult a qualified legal professional before taking any action.

Expose on Debt Settlement Company

Heather Culp — Tue, 27 Jul 2010 11:24:18 +0000

We’ve written extensively about the perils of using debt settlement companies here. Before dealing with one of these organizations, do your research.

Chapter 11 May Help Small Businesses Weather Downturn

Heather Culp — Thu, 22 Jul 2010 11:50:38 +0000

Since a good percentage of our bankruptcy clients are small business owners, I keep an eye out for articles on financing.

This article from Christian Science Monitor caught my eye because of the contradictory messages about small business lending. While the federal reserve system is “encouraging” banks to lend to small businesses, banks counter that small businesses simply aren’t asking for loans.

Banks have…been restricted by tightened lending standards, says Bob Seiwart, a senior vice president at the American Bankers Association, who manages the group’s Center for Commercial Banking and Business Lending. “Money is available to viable small businesses,” says Mr. Seiwart. “But the terms will be different than in the past, as they should be reflecting the added risk of lending in today’s economy: rates will be higher and loan terms will be shorter.” Regulators have also started to require that banks maintain a higher level of capital in order to lend. In the current economic climate, the new standards have been difficult to sustain, said Seiwart.

CNNMoney reported, “Loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to bank financial reports submitted to the Federal Financial Institutions Examination Council.”

Chapter 11 for breathing room and restructuring

If you are a business owner who cannot fund operations, consider talking to a qualified bankruptcy attorney. One option that might fit your circumstances is Chapter 11 bankruptcy, which allows for an orderly reorganization. Chapter 11 provides the debtor time and space to reorganize its financial affairs and repay its creditors some or all of the debt owed. It is a vehicle through which debtors can reject or cancel certain leases, contracts, and other debt obligations, and get breathing room to obtain new financing, sell property, or otherwise arrange to repay creditors.

No one wants to file for bankruptcy protection, but it serves an important purpose in re-ordering a troubled economy in a regulated manner.

Get the facts about filing or avoiding bankruptcy by speaking to an experienced bankruptcy attorney. Many will offer you a free initial consultation.

Identity Theft and Bankruptcy

Heather Culp — Wed, 21 Jul 2010 11:22:55 +0000

The kind of identity theft that most often leads to bankruptcy is perpetuated by someone KNOWN to the victim. The usual scenario involves someone knowingly allowing a friend, family member or associate apply for and use credit in his or her name, because the other person isn’t credit worthy but agrees to pay the bills.

Surprise: they don’t.

This video may help you prevent identity fraud.

Financial Strategies to Employ Until the Economy Improves

Heather Culp — Tue, 20 Jul 2010 12:02:41 +0000

The latest report from RealtyTrac concerning foreclosures says, “The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market.”

Based on these numbers, commentators on NPR theorized that it will be the end of 2013 before the foreclosure/REO/inventory problems are worked through, and the housing market can begin to recover.

Bankruptcy counseling/asset planning & protection session for strategies

This means that those in precarious financial health should consider a bankruptcy counseling session, whether they intend to file for bankruptcy protection of fight to prevent such a filing. Here’s why:

If you intend to sell your home to take the equity and pay off debts or live on it while you wait for the economy to improve
- You’ll be competing for buyers who expect to name their (low) price for your property
- You most probably will not get the price you hoped for
- You’ll most likely have to wait over 100 days to get a “ratified” contract
If you, like many Americans, feel your employment prospects are fragile, a bankruptcy attorney can help you develop asset planning and protection strategies to employ until the economy returns to better footing (perhaps in 2013). Asset planning refers to either placing assets beyond the reach of creditors, or making the process of reaching assets so difficult for creditors that it will deter collection efforts, or some combination of the two.
- If you consult with an attorney or planning professional before you have significant debt, or while you’re solvent, assets can be moved without concern.
- Unfortunately, we usually see clients when they have incurred significant debt – usually either from business obligations or questionable investments.
If you’ve guaranteed business loans or co-signed debts for others, the strength of the overall economy will bear on whether you can renew loans or how quickly loans will be called when payments are missed. An independent professional can help you assess your risks and help you develop strategies.
The collapse in the real estate market has also created another roadblock to obtaining a small business loan, since many business owners depend on the value of their real estate as collateral for loans.

For more information on bankruptcy counseling, asset planning and protection, or small business loan guarantees search our site.

Small Business Owners, Plan to Stay OUT of Bankruptcy

Richard Mitchell — Wed, 07 Jul 2010 11:43:34 +0000

A recent column in Business Week about small business lending examined the role of the personal guarantee. “Given that most business loans are unsecured, a lender has little recourse, when a loan goes sour, beyond the personal guarantee of principals. And if the principals backing a loan are broke, a personal guarantee is virtually useless.”

The article went on to tell prospective borrowers what to expect: “Even with a blemish-free credit report and high FICO score, borrowers seeking $50,000 or more may be asked to supply up to three years of personal and business tax returns for income verification. This is in addition to financial pro formas and personal guarantees that lenders will otherwise require. Banks want to know that you have the personal resources to backstop unsecured loans.”

Plan your work and work your plan

Too often business people jump through hoops set before them by lenders without taking the exercises seriously from a business planning perspective. I often see a business owner in trouble about two or three years after startup when the SBA loans can’t be serviced. When I start talking to these business owners it amazes me that most don’t know their break-even point.

A business plan helps instill discipline. A business plan also gets business owners out in their businesses taking action instead of sitting behind their desks fretting.

Don’t just take my word for it

Here’s an article on formulating a business plan that claims that those who go through the process of developing a plan are more likely to obtain a loan or investment capital, make a major purchase, grow the company and grow.

The Power of the Automatic Stay

Heather Culp — Fri, 02 Jul 2010 01:44:17 +0000

Firethorne Country Club filed for Chapter 11 in March. In a prime example of the power of the automatic stay, the club’s owners bought some time to reorganize before a creditor could seize operations. A 2 p.m. hearing in federal court on was canceled after Firethorne’s owner’s filed the bankruptcy petition just after 1 p.m.

How the automatic stay works

The automatic stay applies to most creditors and is a statutory injunction that stops harassing telephone calls, lawsuits, foreclosures, garnishments, repossessions and all collection activities, the moment your bankruptcy petition is filed with the bankruptcy court. It places you and your property under the protection of the bankruptcy court and allows time and space for an orderly administration of the bankruptcy estate by a bankruptcy trustee.

The injunction takes effect against your creditors without you or your attorney appearing in court, filing a motion or waiting for an order from the bankruptcy court.
Read more: Firethorne Country Club files bankruptcy – Charlotte Business Journal

Start a Business NOW?

Heather Culp — Tue, 29 Jun 2010 11:56:49 +0000

With so many people un- or under-employed it’s no wonder people who have always wanted to work for themselves are considering doing so now. As bankruptcy lawyers, my partner and I perhaps have a skewed view of the landscape so here’s a good list of questions to ask yourself before venturing out, courtesy of Inc. magazine.

Dipping into the 401-k?

With bank financing so difficult to obtain, people are considering raiding their qualified retirement plans to seed new business ventures. This article from Inc. magazine offers some basics, but of course you should seek competent legal counsel before following the advice in any publication.

One place I can weigh in with certainty is on the question of what you give up with your 401-k, besides the cash itself.

In the event the business does not succeed and you consider filing for bankruptcy protection, you should know that monies in retirement accounts established pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) as well as 401(k) accounts and 403(b) accounts cannot be touched by creditors. This is called “Exempt Property” and is no little matter, especially if you are anywhere near retirement age.

I wrote more on exempt property and 401-k, life insurance and IRAs as they relate to bankruptcy in earlier posts.

What if your business fails?

I have the greatest admiration for small business owners, and I understand their difficulties both as a bankruptcy attorney and as a small business owner myself. I know how difficult it can be to fund a small business and have seen the traps that so many of our bankruptcy clients felt they had no choice but to fall into. Guaranteeing business debt is always a concern.

Because small business owners generally have few financing options, they often mortgage their homes and personally guarantee the credit card debts of the company. Our clients often assume that the “business credit card” is a debt of the company, because the business name is embossed on the card. Not necessarily. The entity is liable only if it signed the credit agreement as the corporate entity. More often than not, the business name is on the card, but the credit agreement was signed and guaranteed by the owner (personally).

While no budding entrepreneur wants to consider failure, it’s prudent to do so if for no other reason than helping you map out a strategy to prevail against the odds.

Personal Loan Guarantees for Business

Richard Mitchell — Thu, 24 Jun 2010 16:56:29 +0000

After forty years of helping small business owners with their financial difficulties, I wish more of them understood how the personal guarantee can send them into bankruptcy. It’s difficult for self-employed people and small business owners to get capital, and the lack of capital is a big part of the reason business owners file for bankruptcy when their businesses stumble or fall — a vicious cycle for sure.

With the whole economy in upset, few small businesses can get credit and those who do usually succeed in getting a loan because one of the owners has signed a personal guarantee.

Ask yourself these questions

I ran across an article in Inc. magazine earlier this year that I wish all my small business clients had read it before they signed personal guarantees:

Before filling it out, first ask yourself: Would it possible for me to follow through on this promise without greatly affecting my personal life?
“If you’re going to start a business, you’ve got to be willing to lose some money,” Short says. “But don’t lose your entire future, your house and your children’s college education by pledging too much.”
The second question you should ask yourself is: Is this a worthwhile investment? Remember: this business may be your baby, but it is still a business, and decisions made regarding it need to be level-headed and fiscally sound.
“You have to separate emotion from objectivity,” says Chuck Matthews, the executive director of the center for entrepreneurship, education and research at the University of Cincinnati. “The minute you get emotional about it, you’re going to make a bad decision.”

What happens when your business stumbles or falls

The very first thing a client must do when sitting down with me or any attorney is list business liabilities that the owner has personally guaranteed. Small business owners frequently make the mistake of putting everything in the business name but backing everything with a personal guarantee, making it very difficult to split the client from the business.

This fusion of business and personal entities shows up in the language clients use. They say “I did this” instead of “the company did that.” I call this the “I factor.” People with a high I factor have a difficult time making the right business decisions. A business is a business. It exists to pay its owners, not the other way around.

My law partner, Heather Culp, wrote about small business owner “separation issues” last year — a worthwhile read.

If you have signed a personal guarantee for a business loan that you are struggling to pay, seek competent legal counsel immediately. A bankruptcy counseling session can help you understand your legal position.

First “Flipping,” Now “Flopping”

Heather Culp — Mon, 21 Jun 2010 12:02:13 +0000

Bloomberg Business Week published an article on a new scheme for profiting in the real estate market during a time of unprecedented foreclosures. Back during the boom, people “flipped” houses by buying low and selling high. During the bust, that same premise is being used to “flop” houses through the use of short sales.

In flopping, investors or home buyers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit. Someone interviewed in the article observed that investors often use real estate broker opinions, which may rely on drive-by inspections instead of full appraisals, to persuade lenders to sell at a low price.

Let’s not forget the impact of a short sale on the original owner

What the article failed to address was the impact of a short sale on the original homeowner. My partner, Rick Mitchell, and I have written extensively on short sales here. They are usually in the best interests of everyone but the seller for a number of reasons, most notably, debt forgiveness income.

The government, through its Home Affordable Foreclosure Alternatives Program, that month began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who close short sales. The Bloomberg Business Week article quoted data from the National Association of Realtors that 12 percent of existing home sales, or almost 622,000 houses, were short sales in the 12 months through April.

If you are struggling to pay your bills and considering alternatives to bankruptcy, call a qualified bankruptcy practitioner for an expert opinion. Bankruptcy lawyers know how to avoid filing for bankruptcy.