Robert Sylvester Kelly, better known as R & B singer R. Kelly, is facing foreclosure on his home in Olympia Fields, Illinois. J.P. Morgan Chase Bank filed the $2.9 million foreclosure suit against R. Kelly last month. It appears that R. Kelly has not lived in the home since early last year. Kelly has not made any mortgage payments on the house since June 2010. The 11,140 square foot home is located near Chicago and was built in 2000. The home includes six full and seven half bathrooms, and a four stall garage.

The foreclosure suit is not the first of Kelly’s legal problems. He was acquitted of producing child pornography in 2008. Additionally, Kelly’s former manager reportedly sued him last month for $1 million in unpaid commissions.

Source:

R. Kelly Facing Foreclosure on Chicago House, https://marquee.blogs.cnn.com/2011/07/13/r-kelly-facing-foreclosure-on-chicago-house/ (accessed July 18, 2011).

One of the many ways creditors can collect on delinquent accounts is by obtaining a judgment against the debtor.  The creditor will typically hire a law firm to sue the delinquent account holder, and in virtually every case, a court will grant a judgment in the creditor’s favor.  Because Minnesota law allows service by mail and default judgments are issued frequently, the process of getting the judgment is relatively easy.

Once the creditor has a judgment, the creditor will utilize the judgment to recover the funds owed by the debtor. Prior to obtaining a judgment, the creditor was limited to collecting via phone calls and mail.  Those collection efforts, while often upsetting to the debtor , do not allow the creditor to collect unless the debtor voluntarily agrees to make payment arrangements.  However, once the creditor has been granted a judgment, the creditor can force the debtor to make involuntary payments. Creditors typically use the following methods to collect on a judgment:

1.       Garnishments.

Once the creditor has the initial judgment, the most common next step is to get a garnishment order.  Once this is granted by the court, the judgment creditor will be able to force the debtor’s payroll to deduct up to 25% of the debtor’s net pay and give it to the creditor until the judgment is satisfied in full. The debtor will be garnished in intervals with occasional breaks in the garnishment.

There are some limitations to this method.  Not all sources of income can be garnished. A creditor cannot for example garnish social security or certain types of pensions. When the debtor is given notice of the pending garnishment, he or she will also receive a notice of exemption to be filled out and returned to the judgment creditor. Typically if a debtor is receiving state aide a creditor will not be able to garnish wages or levy bank accounts even from nonexempt sources. For example, if an individual is working but is also receiving food stamps, the creditor will not be able to garnish the individual’s wages even though the wages are not from a nonexempt source. An individual will need to fill out an exemption form in order to prevent the garnishment. Additionally, if the debtor is self-employed or otherwise receives income through channels other than payroll, a garnishment will be of little use.

2.      Bank Levies

A creditor may also utilize bank levies.  Once the court grants a levy order, the judgment creditor is able to freeze the debtor’s checking or savings account and force the bank to turn over the funds to the creditor. The creditor can take a lump sum of money up to the amount of the judgment.  If the funds in a debtor’s account can be shown to be exclusively from an exempt source such as those mentioned above,  then the debtor may fill out an exemption form and the funds will be returned to the debtor. Also if the funds in the account were not the sole property of the debtor, the debtor may request a hearing to have some portion of the funds refunded to the co-owner of the funds.

3.      Seizures

A judgment creditor can also seize property to satisfy the debt.  The creditor can have a sheriff seize any of the debtor’s property that is not exempt under state law.

A secured creditor is able to repossess any assets secured by the loan without acquiring a judgment. This is most often the case with items such as vehicles (repossession) and real estate (foreclosure).  A creditor can also seize other items such as furniture, jewelry, and electronics that were purchased on credit if a purchase money security agreement is in place. Many creditors such as Best Buy or Goodman Jewelers place a purchase money security clause into most of their contracts. If proceeds from the sale of the seized property are insufficient to cover the amount owed on the delinquent loan, the creditor may still collect on the deficiency balance. The creditor can pursue a judgment for this deficiency balance and then will able to use garnishments and bank levies to collect the remainder of what is owed.

For debtors, the path they traveled which led to a bankruptcy is long and varied.  There were generally many signs along the way that point towards a looming bankruptcy.  For many debtors, the final indicator that a bankruptcy is their best option is a wage garnishment or a bank levy.  Prior to that point, the creditor’s only option had been to accept voluntary payments from the debtor.

With a wage garnishment or a bank levy, the creditor can now force the debtor to make involuntary payments.  It is the involuntary nature of these payments, coupled with the fact that a garnishment is 25% of every paycheck and a bank levy is 100% of the funds on deposit, which often triggers a debtor to file bankruptcy.

When a debtor files for bankruptcy and an involuntary payment has been made to a creditor in the 90 days before filing, it is possible to recover those funds for the debtor as a preferential transfer.  The funds that the creditor obtains by a garnishment or a bank levy are a preference under 11 U.S.C. § 547(b) because the garnishment or levy is a transfer of an interest in the property of the debtor to a creditor made while the debtor was insolvent and within 90 days before the date of filing. This transfer has therefore enabled the creditor to receive more than it ordinarily would not have received but for the transfer.

In order to recover the funds for the debtor, certain requirements must be met.  First, the amount garnished in the 90 days before filing must equal $600.00 or more.  Also the garnishing creditor must have actually cashed the checks from the debtor’s payroll within the 90 days.  Because a garnishment is a two step process (step one: payroll withholds the debtors wages; step two: the money is sent to the creditor), it is possible for a debtor to have had money taken out of his/her pay without that money every reaching the creditor.  It is therefore important for the debtor’s attorney to determine which funds were remitted to the creditor and when.

Any funds still being held by payroll at the time of filing will be returned to the debtor, not because it is a preference, but because it violates the court’s injunction which takes effect at the time of filing.

Second, the debtor must have listed this preference on the Statement of Financial Affairs and on Schedule B and have exempted it on Schedule C of their bankruptcy petition.   In essence, the garnishment is an asset which must be protected using the debtor’s exemptions.  If the debtor does not have room to protect the garnishment under the debtor’s exemptions, the Trustee assigned to the case will be entitled to the returned garnishment. If the funds are taken by the Trustee, the Trustee will then redistribute the funds more fairly amongst all of the debtor’s creditors after paying their own fees.

Third, no objection can have been filed by the creditor in question. If an objection to the dischargeability of the debt in the bankruptcy is raised, that matter must be resolved before a recoupment of the garnished funds can be considered.

Once it is determined that the garnishment is recoverable, a debtor can work with his or her attorney regarding the proper method of recovery.  If the creditor does not return the garnishment voluntarily, a debtor has the option to sue the creditor to return the preference.  Generally, creditors will return the funds voluntarily to the debtor once a demand letter has been sent.  The window of opportunity to file the law suit is only open during the pendency of the bankruptcy.  After that point, the debtor has no legal remedy if the creditor refuses to cooperate and can only hope that the creditor returns the funds voluntarily.

It is important for the debtor’s attorney to understand the timeline associated with a garnishment recovery.  Sending a demand letter before the time limit for the creditor’s objection to be filed has passed, for example, is pre-emptive: the debtor is not yet entitled to that preference.  By the same token, filing a law suit to recover the funds too late can preclude recovery entirely. Also important to note is that a debtor understands his/her rights to the garnishment and the importance of providing his/her attorney promptly with any information that is needed to determine the recoverability of the garnishment.

According to statistics compiled by the Administrative Office of the U.S. Courts, consumer bankruptcy filings for the first half of 2010 are up 15% compared to filings for the first half of last year.

Chapter 7 filings have increased 17 have increased% from last year.

An ABI study also notes that bankruptcy filings for people ages 55 and older have increased.

This year will mark the first time that have been more than 1.5 million bankruptcy filings in a year since the bankruptcy laws were dramatically changed in 2004.

The Making Home Affordable Program can help homeowners keep their homes even if they have filed a bankruptcy. The HAMP program helps homeowners modify their mortgage to make their payments more affordable.

Some of the requirements for HAMP are:
– Monthly mortgage payments including tax, insurance and association dues which exceeds 31% of the debtors’ gross income
– Ownership of a one- to four-unit home which is the principal residence for the debtor
– The mortgage having been received prior to January 2009
– The amount of the mortgage being equal to or less than $729,750 (on the first mortgage)
– Documented financial hardship
To apply for HAMP, a homeowner must submit an initial packet to their mortgage servicer. This packet must include a completed Request for Modification Affidavit, A completed Tax Authorization Form, and proof of income. These forms can be found at www.MakingHomeAffordable.gov.

When an individual files bankruptcy, the trustee assigned to his/her case will examine payments made to creditors before a case was filed. If the payments to an individual’s creditors meet certain requirements, they are considered preferential payments.

If an individual filing bankruptcy has made preference payments, the trustee administering the case may go after the creditor to whom the payment was made and force the creditor to give the trustee the amount of the payment. The trustee will then take the payment and distribute amongst all of the debtor’s creditors.
Under § 547(b) of the Bankruptcy Code, a “preference” is any transfer made by the debtor that meets the following criteria: (1) the transfer is to or for the benefit of a creditor, (2) the transfer is for or on account of a prior debt owed by the debtor before said transfer was made, (3) the transfer was made while the debtor was insolvent, (4) the transfer was made either 90 days before filing the bankruptcy petition, or one year before the filing of the bankruptcy if the payment was made to an insider, and (5) the transfer enables the creditor to receive more than the creditor would have received either under a Chapter 7 case or if the transfer had not been made at all.

Preferences are most commonly problematic within the context of payments to friends or family. If a transfer is made to a non-insider, the debtor typically is concerned less about the effect on the creditor.

When the preference payment has been made to a friend or family member, there are several ways to handle the situation.
Sometimes a debtor will wait until the preference period has run out before filing their bankruptcy. For example, if a debtor repaid his/her mother in September of 2009, he/she may wish to wait to file his/her case until it has been after a year since the payment was made. If the debtor waits for the preference period to run out, then there will not be an issue in his/her case regarding the payment.

It should be noted that the debtor will want to make certain of when the payment was made. A miscalculation of one day can make the difference in whether a payment is a preference or not.
If the debtor absolutely cannot wait, another option would be to file a Chapter 13 case. Under Chapter 13, as long as the total amount paid by the debtor over the course of the Chapter 13 plan is at least as much as the debtor transferred, then no additional funds need to be paid, and the trustee will not pursue the matter with the transferee.

If a Chapter 13 is not an option, then the trustee who is assigned to the Chapter 7 Bankruptcy will attempt to retrieve the funds. Sometimes the trustee will allow the debtor to stand in the shoes of the individual to whom the preferential payment was made and allow the debtor to pay back the preference on the behalf of the transferee. Most trustees will allow the debtor about five months to pay the preference amount.

When an individual files for bankruptcy, a trustee is assigned to his/her case. It is the trustee’s duty to administer the case. Part of the administration of a bankruptcy case involves an examination of financial transactions occurring before an individual files for bankruptcy. One thing trustees look at is whether a debtor has transferred any property out of his/her name before filing. The trustee is able to look into transactions between a debtor and a family member or close friend that have occurred within six years of filing a bankruptcy.

Many transfers of property which are commonplace outside of a bankruptcy context can be characterized as fraudulent if a debtor files for bankruptcy. If a transfer is considered fraudulent, the trustee is allowed to go back to the individual who received the transferred asset and demand the asset or the fair market value of the asset. If that individual does not return the asset or the value of the asset willingly, the trustee then may sue that individual and get a judgment against that person for the value of the asset or force the person to return the asset. Understandably, many debtors are greatly distressed by this.

Whether a transfer is considered fraudulent is determined by the bankruptcy code and surrounding case law. Section 548 of the Bankruptcy Code defines fraudulent transfers as transfers made with [1] “actual intent to hinder, delay, or defraud” a creditor or [2]  a transfer in which the debtor “received less than a reasonably equivalent value in exchange for such transfer…and was insolvent on the date that such transfer…or became insolvent as a result of such transfer…”

Actual Fraud occurs when the debtor transfers property with the intent to hinder, delay, or defraud a creditor.  A debtor may not always disclose the true reasons behind the transfer, and to prove intent the court may look to the circumstances surrounding the transfer.  The badges of fraud that indicate fraud include: the timing of the transfer, the relationship between the debtor and the recipient, the lack of adequate compensation the debtor got for the transfer, and whether or not the debtor maintained control over the asset after transferring title.

A common example of actual fraud is:  A debtor is behind on his credit card payments and realizes that he is on the verge of being sued by his creditors.  He has  hunting land up north that is free and clear and worth $30,000.  He is worried that creditors will sue him and take the land. He transfers title to the property to his brother without having the brother pay him the $30,000 that the land is worth. 

This is actual fraud because the debtor intended to hide property from his creditors.  The trustee has a few options.  He or she can (1) not discharge the debtor’s debts, (2) make the brother pay $30,000 or (3) force the sale of the property.  The trustee will distribute the $30,000 among the creditors to pay a portion of the debt owed to them by the debtors.

Another form of fraud is called “constructive fraud.”  It is constructive rather than actual because there need not be any intent on the part of the debtor.  Constructive fraud occurs when a debtor (1) sells or gives away an asset for less than fair market value (2) at a time when he or she is insolvent.  Fair market value is determined on a case by case basis.  In essence, when the court takes into consideration all factors surrounding the transfer, it is determining if the debtor did not receive proper consideration for the transfer, i.e. whether or not the debtor gave someone a deal or a gift. 

Insolvency is shown by determining that the debtor’s liabilities are greater than his or her assets.  A simple way to conceptualize this is by answering the question: was the debtor able to pay his debts at the time of the transfer?  If the answer is no, the debtor is insolvent.     

A common example of constructive fraud is: A debtor who has not been able to stay current on his credit card bills, has an adult daughter whose car has just broken down.  The debtor gives his daughter his older car worth $3000 to take and use as her own.  The debtor transfers the title to his daughter’s name without having the daughter pay for the car. 

This is constructive fraud because the debtor did not give the car to his daughter intending to hide it from creditors.  Instead, his motives were innocent: he only wanted to help his daughter who was without a car.  However, the trustee can make the daughter (1) pay $3000 to keep the car or (2) force the sale of the car, using the profits to divvy up among the creditors.  

Debtors who file for bankruptcy generally do not want to involve their family or friends in the process and see it as unfair that the trustee can take back property given to them. However, creditors also have rights and sometimes have a right to repayment in a bankruptcy case. 

This aspect of the bankruptcy code is designed to keep individuals who are filing bankruptcy from cheating their creditors by hiding assets. Although this is often not the debtor’s true intention when the transfer occurred, the person filing the bankruptcy may still encounter problems under this section of the bankruptcy code.

It is important for an individual who may consider a bankruptcy to speak to an experienced attorney before any such transfers are made.

Attorney Jeff Bursell from Hoglund, Chwialkowski & Mrozik will be a participant in the annual golf tournament held by Anastasi and Associates.

The tournament will benefit local charities. All donations will go directly to the selected charities. Plus Anastasi and Associates will match every dollar donated.

The proceeds from this event will be donated to Family Pathways and Family Means. Family Pathways is a local, grassroots organization which offers a food shelf, thrift store and senior and youth services. Family Means offers mental health counseling, consumer credit counseling, caregiver support, an employee assistance program and youth enrichment programs.