Preferential Transfer of Antcedent Debt

[Catia]

I have been reading the "Preferential Transfer" posts, and have some questions because it brought up leins on a house. I didn't want to 'hi-jack' that post, because my question focuses an Antecedent Debt (old debt)

What can happen in general if an Unsecured Antecedent Debt was turned into a secured mortgage lein on a property? (Antecedent debt was NOT to an insider). And then a little over a year later I file BK, wanting to use the exemption for my home?

EX: Say I own 2 properties, and was trying to stay afloat, and was not bankrupt yet--1 property has a mortgage, but is in danger of foreclosure, and the other (my residence)does not (it's free and clear), but I can't get a bank loan to pay antecedent debt on it because credit is trashed...

I fully intend to pay the old debt, and the creditor is willing to transfer that debt into a very low interest mortgage to my 'free and clear' property to secure their debt, and also to lower my pymts, making it more affordable, and a proper mortgage is created.

Would I just wait a full year after the mortgage is perfected before filing BK? I do not want to chance an 'avoidance'-because I want to exempt my residence-What if the other property forecloses during this time?

[HHM]

Yours is one of the more tricky Preferential Transfer issues.

But first, let's back up and talk about PT's in general. Many members on this board and debtor's in general are over-concerned about this issue. The usual PT issue: e.g. debtor pays creditor X, an unsecured creditor, but does not pay his other unsecured creditors within 90 days of filing BK. PT's need not be of much concern to debtors because they are NOT involved in PT's in anyway.

If the trustee thinks a PT has occurred, he will send a letter to the creditor requesting the money, if the creditor refuses, then the trustee sues the creditor (note, the debtor is not, and will not be involved, PT issues are solely between the creditor and trustee). ALSO, a creditor cannot come back and object to discharge of a debt based solely on the fact that the payment was ruled a PT, so there is usually no downside to the debtor for having done a PT. The PT in no way effects your overall BK. The problem for debtors and PT is usually personal, because the most frequent type of PT actions are against a debtor's friends or family. But from a strictly legal perspective, a PT action is of little concern to the debtor.

Catia, your situation is a little different. You are not paying the creditor, but you are doing something that is "to their benefit", you are giving this creditor a security interest in real estate in place of their unsecured claim. The same basic rules apply for PT's as do for objectionable charges, PT's made within 90 days of filing, or the debtor was insolvent at the time of making the PT. So, at a minimum, you need to wait 3 months.

However, you ALSO have a general fraud issue. I presume that since you own this home free and clear, you are thinking of using this mechanism to encumber the equity in the home so that you can come within your state's equity exemption...that can be a type of fraud because you are intentionally encumbering an asset that would otherwise be part of the BK estate, and moreover, you are using an old debt to do it. The problem you are going to have is that there really is no legitimate reason for the transaction in the first place. It is not really the PT issue that forced you to wait a year, it is the general fraud issue.

I have to wonder, why not just file chapter 13.

[Catia]

Yikes HHM, the last thing I expected to hear was "general fraud".

The loan thats perfected into a mortgage was always intended to be such. Do the trustees ever allow for personal circumstances to be explained?
We had papers drawn up but not formalized. We didn't know how to get it done, and time and illness interfered. My friend is out of state and we just didn't get it done. It has been a series of loans actually, to cover expenses when I was/am sick, dating back to 2003, and much more in 2007. We needed to perfect in order to cover some general bases, #1, for tax purposes, because the increments are large, and are not "gifts", but a loan, and #2 so that should I drop dead, my friend gets his $$ back via the property, and avoids the hassels of a will.
Really, it is all on the up & up. The only reason I am even considering BK is because I have fallen behind on the mortgage for 1 property (I currently have 3). When that property forecloses, I will end up with a deficiency judgement, as I am in the state of PA.

I am just not able at this point to pull out of the debt as I was before. There is still a chance I can, but that chance is slim.

I was considering BK in order to get a fresh start after the property forecloses, in order to discharge the deficiency judgement and some other small but bothersome debts. I was considering surrendering the other house in BK if it does not sell, it isn't worth much at all. Really, I have little unsecured debt now, but with a deficiency judgement, that will change.
I am NOT even close to elligible for a ch 13. Not even close. I am poverty level now.
Why is it fraud? This is what I do not understand. I have read about people 'converting non exempt assets into exempt assets'--and some of the measures they go to are extreme.
As far as waiting a year before filing, that is because that's about how long it will take for the entire foreclosure to happen (backlogged county), and for a deficiency judgement to occur. I need to wait because there is a chance I will NOT get a deficiency judgement--but one of those 1099's that the new 2007 HR bill covers. If I do not get a deficiency judgement, there is really no reason for me to file BK at all, and I would not.
What I am doing right now is a TON of research just in case. I can't afford an attorney, so I need to know what to expect.

[HHM]

The fact that this lender is a "friend" does not help your situation, it makes the deal "look" more like a scheme than a legitimate transaction.

In any event, the key with "converting non-exempt to exempt" is there must be some rational basis for doing so other than to simply convert...when a person buys a car right before BK with cash sitting around, they need a car for transportation...when a person puts cash into an IRA right before filing, that at least has the appearance of financial planning for retirement. Also, the overarching rule is that the debtor cannot be "too" insolvent at the time, and most of the time we are talking about amounts less than $5,000. You didn't mention how much money we are talking about, but it is probably significant.

I really don't know what to tell you, my sense is the trustee would fight pretty hard to unwind this transaction. The security interst flows too a friend, there is no new value, it is to the detriment of other similarly situated creditors, and encumbers an asset of the BK estate. If you do end up having to file BK, you need to find a way to hire a lawyer, you do not want to go into a BK pro se with this kind of issue lingering out there.

Since you own multiple properties, you may already know...but you should double check whether you really would face a deficiency balance (1) does you state allow DBs (2) are the loans "power of sale" loans for foreclosure, if so, and they exercise the "power of sale", the lender cannot seek a deficiency.

[Catia]

HHM,
I am in PA, so deficiency judgement is on the table. I already KNOW this, this is the WHOLE reason I am even considering BK after the foreclosure. If the lender chooses, they can also 1099 me for the deficiency--it is up to the lender. If I get the 1099, I won't need to file BK. Fact is, I must plan for my future NOW, and find out what I can do IF and When I get the deficiency judgement, rather than waiting til everything is over and then being suprized and unaware of my options.

The thing that stumps me is that I have a bunch of very legal very honest transactions, no legal issue with any of them--but, if I am understanding you correctly, if I file BK--they become under question of fraud??? That boggles the mind.

The 'rational basis' for finally getting to perfect the mortgage formally was because it was always intended to be a mortgage, but was unformal, we had time to get things done for tax purposed so it would not be a "gift" cuz it wasn't, and also, in 2007, I had to borrow more $$ from him for emergency repairs and living expenses, and back property taxes.

Bank records will reflect that the $$ was used not only to pay the mortgage on the prop that is now pre-foreclosing, but also for repairs to various things with the 3 houses plus property taxes. Hell--the bank statements reflect everything, I used my Mac card for all purchases, and wrote checks for back property taxes. There's only 1 transaction that might be questionable for $3,200, and that was for whole house pex plumbing, plus all new gas lines- That's the only questionable transaction I have. And while I do not have a receipt cuz I paid cash--Anyone can look and see it's new plumbing.

Again, I have very very little unsecured debt--maybe $5-7k tops-but a Deficiency judgement will change all of that if it happens. I will not know what will happen as far as deficiency judgement until the foreclosure is final, and then add 6 months to that, because that's how long the law says in PA for deficiency judgement.

I don't understand how nothing I am doing is fraud now, but if I needed to file BK in a year or so then all of my tranactions become fraudulent--everything I have done has been in an effort to pay all creditors.

BTW, the amount that my friend has loaned me totals about $40k, at 4% interest over 30 yrs. We have a legitimate company servicing the mortgage. This was done legitimately in an effort to keep my pymts low, and if I die, he won't have issues getting his $$--i.e. he will get the house without having to go through hoops.

IMHO, if I were being a fraudulant minded person, I would not have gone through with the mort--IMHO, it shows integrity and effort of me wanting to pay my debts. I guess the trustees don't ask questions of why? If I were being fraudulent, theoretically i could've filed BK last year, and discharged my then 'unsecure' loan with him...


things became financially strained, the house with the mort was put up for sale, and I had an agrmt of sale, but it fell through last minute--and the market is bad. Because the house was for sale, I moved.
When things got rougher, basically, I realized I had to pick 1 place to keep, and get rid of the other properties, as I could not keep up with repairs. They are not selling, are in various states of disrepair, and can't even be rented at this point.

Really, there's no fraud anywhere, just a series of events that have enabled me to stay afloat. Now I cannot remain afloat, and the bills are piling up, I have to let that property foreclose. Why is it that if I need to file BK in a year or so that everything becomes fraudulent? That makes no sense to me. I just want to be able to discharge the deficiency and get a fresh start--isn't that what BK is all about? I just want to keep my home and start anew--

[kkk1]

IANAL but I think you are confused on one point. I don't doubt that to you the transactions do not appear fraudulent. But what HHM is suggesting is that they are going to look to the Trustee as if they are fraudulent. If you don't want the transaction to appear fraudulent to the Trustee, then you are going to have to figure out how that is going to be done. And that will most likely require a lawyer.

BTW, IANAL and when I first read your post my reaction was "that's sounds kinda fishy". So I don't find HHM's perspective shocking.

At the end of the day, it doesn't really matter what you think in BK court. It's what the Trustee thinks. Your job, and your lawyers job, is to help him/her make up their mind in your favor. Righteous indignation about your motives being impinged is not likely to get you very far

[HHM]

Catia, I sympathize with you. The challenge that most people have when contemplating BK and encountering BK fraud is that the word "fraud" is so loaded and has a negative connotation. The thing is, BK fraud is only fraud with a little "f", as compared to regular FRAUD with a big "F".

Lets look at a simple example. The BK code presumes fraud occurred if you make a charge on your credit within 90 days of filing BK that is over $500 and was not for something that you absolutely needed. (lets assume you bought 2 IPODS, one for yourself and one as a gift). And 2 months later you file BK, (for whatever reason), you didn't have any malicious intent, the transaction was legal, but the court presumes it was fraudulent. OR, debtor sells car to a friend but only charged his friend half of what the car was worth (out of friendship). They have a bill of sale, title was property transferred, the friend registered the car properly, etc. But the debtor files BK 4 months later. Guess what, despite everything being on the up and up, the trustee is going to "avoid" that transfer and take the car from the debtor's friend because it was a fraudulent conveyance.

BK fraud does not really require that you really be intending to commit fraud. And you don't have to break any laws to do it, all your paperwork can be on the up and up, but the trustee can still go in undo certain transactions.

I am merely pointing out the pitfalls you face if you go forward as planned. Obviously, I don't know the entire situation...the fact that you have very little unsecured debt, you may get around the preferential payment issue, but there is still the issue of the fraudulent conveyance. If you want to start researching, start googling fraudulent conveyance (there are defenses etc).

I think your "saving" point will be that if you perfect the security interest BEFORE foreclosure of the homes BEGINS, you might be alright. But, what I gather from your post is that you had this loan, you always intended it for be a mortgage, but are now only getting around to actually perfecting the security interest (that is a fact that does not help you, because as you were worried it about, it makes it seem like you took an old unsecured debt and simply turning into a secured debt.).

[Catia]

sigh, that word fraud is still a "F" word no matter. Fraudulent conveyance out of a god's honest transaction that secures me a super low payment. All I hear is a HUGE atty retainer and bill...fact is, I can't afford an attorney--if I had that kind of $$ I'd not be in foreclosure, I'd have paid the mortgage. I'm barely eating.

I thought somewhere along the line if you transferred a property, or changed the status of a transaction, as long as you were outside of a certain time frame you were OK. What about all of those people who refi just before BK? I'm trying to understand the "logic".
It was very smart for me to turn that debt into a low interest home equity loan. That is exactly what it is--And I have receipts for every penny, less 1 $3200 transaction for plumbing.

kkk1--I dunno what trustee is gonna see over a hundred transactions to Lowes and Home Depot as fraudulent, that's how I spent the $$ aside from paying mortgage, utilities and taxes. Fact is, if I were fully audited by a trustee or even the IRS--they would think I needed to get a freakin life--cuz there's nothing else--they'd be bored to tears!

[HHM]

I thought somewhere along the line if you transferred a property, or changed the status of a transaction, as long as you were outside of a certain time frame you were OK. What about all of those people who refi just before BK? I'm trying to understand the "logic".
It was very smart for me to turn that debt into a low interest home equity loan. That is exactly what it is--And I have receipts for every penny, less 1 $3200 transaction for plumbing.

I know, I know...but the slight difference between what you are doing and a regular refi can make all the difference. The MAIN problem is that you are taking an existing debt and directly turning it into a secured debt. Face it, the mistake here was not giving the security interest from the start.

Also, although I have not gone and re-read all you posts, I don't have a good sense of how you used the money from this friend in the first place?

Like I said above, if you can get the security interest perfected before foreclosure begins on any of your houses, you will probably be ok. Actually, if you were to borrow an additional amount of money from this friend (lets say $10K) as part of rolling his prior loan into a secured interest, that would actually look better for you. Then you have at least some new value you are getting from the friend to justify giving him a security interest where none existed before, and then use that money to pay off your other unsecured debt.

In any event, you need to do research on fraudulent conveyance, there are more elements than simply time, and since we are talking about real estate, the look back period for the trustee can be as much as 4 to 10 years.

[Catia]

OK, I get what you're trying to say.
And for the record, i keep stating--I USED THE LOAN FOR BILLS and HOUSE REAPIR and have receipts to prove--I keep stating this over and over--why does it not get heard??? I USED THE LOAN $$ FOR REPAIRS TO 3 HOUSES AND TO PAY MY MORTGAGE I HAVE ALL RECEIPTS TO PROVE THIS!!! --sorry, but I am a little defensive about this now.

HHM---Also--I am not sure where the dividing line between a "Preferential Transfer" and a "Fraudulent Conveyance" is. They see to be 2 different entities entirely.

I am in Pennsylvania--as far as I understand (and correct me if I am wrong please). PA is a Lein Theory state (as opposed to title theory)--As I understand this--it means--the title (deed) remains in my name, and the creditor holds no right to posession until after a foreclosure--So, their is lein on my title/deed, but ownership was not transferred-deed remains in my name-does this make any difference???

--This is by ALL means a Preferential Transfer--I favored 1 creditor over all and secured their debt.
I need to know how you see it as a conveyance-or as you said 'fraudulent conveyance'-property deed is in MY NAME. This is where I am having difficulty understanding.

I am not, was not "insolvent" at the time...um...I just have no actual cash in hand lol--and my credit is trashed...technically I am not insolvent even now--problem is my $$ is tied up in property. And I am unable to liquidate the property because the market is in a slump.
what I have is this...My residence with a low int mort, 1 investment prop going into FC, and 1 investment prop free and clear

[HHM]

At this point we are going back and forth and I am not sure what I else I can tell you on this fourm.

The bottom line is, trustee's LOVE to undue these types of transactions when there is a good amount of money at stake and what I am telling you is I think the trustee would have a pretty strong argument in their favor, I am not saying that they would win (I don't have all the facts), but I am willing to bet they would fight. All I am trying to do is prepare you, and yes, if BK becomes an eventuality, then you will need a lawyer, no if, ands, or buts about it. Whether the trustee objects to the deal as a PT or a FC, the net result is the same for you, the security interest gets voided and the trustee gets the non-exempt equity. All I am saying is that there is a potentional that your proposed transaction is NOT JUST a PT issue.

[Catia]

I still have some questions, but am not sure how to formulate them. I am still trying to figure out if it is any kind of "conveyance" if my name remains on the title. I did not sell anything. It might be somewhat "encumbered" by a low interest loan for about $40k.
I am trying to understand. Please understand this. The last thing I ever expected to hear brought up about anything I am doing or have done is fraud.
Does it make any difference in re: any type of conveyance issue if I am still the sole title holder??? I know PA has some "peculiar" laws--

[HHM]

A conveyance does not require that you transfer the property out of your name, it merely requires that you put an asset out of the reach of creditors.

The problem is, you REALLY are doing this to defraud, hinder, or delay your creditors (i.e the trustee) [I don't mean that in a negative, moral, way; but legally, that is what it looks like]. After all, in BK, the trustee stands in place of your creditors and the reason you are doing this is to encumber the asset to preserve equity; and furthermore, you are using an antecedent, unsecured debt from a "friend" to do it. That just looks bad.

Honestly, if you were doing a conventional equity mortgage, you would probably be ok, but the fact that you are using a below market interest rate from a friend makes it appear as a sham deal to merely encumber an asset to keep it out of the reach of creditors/trustee.

[Catia]

I want to state something, because now I feel incredible defensive, in an arena of hundreds of people reading daily.

My loan with my friend is not to hinder-I used a NATIONAL COMPANY for filing and servicing-it was to GUARANTEE PAYMENT to HIM no matter what. Meaning, if I die, my family won't skrew him out of his $$. I have Multiple Sclerosis, and they already took an inheritance due me, so legally, it was the smartest thing to do, stronger than a will.
My friend was, outside of utilities and $1k worth of credit cards--THE ONLY UNSECURED DEBT I HAD--Originally my loan was for a period of 10 yrs, because the amount was low...In 2007 I needed more $$, due to emergencies, now it is about 40,000, and we needed to spread it out due to that amount. Also I have a life long medical condition, so this allows less strain on me.
Just because money is not lent by a bank does not mean fraud is involved. Banks make HUGE amounts of $$ off of people-Why not allow a generous friend to make some $$??? He will never sell my loan, and he will allow me forbearance if I am too sick--

And FYI-Not only are my pymts reported to national credit reporting agencies, BUT -my interest RATE is not below what the minimum is...fact it--it is EXACTLY the federal minimum, USING the federal charts--it is something around 4%, maybe 4.3% somewhere around there--it had to be completely on cuz otherwise I'd have had to do the gift tax.

I wanted to get this out of the way--there are many alternatives to using banks, COMPLETELY LEGAL alternatives-and looking to the future-seeing what's happening with foreclosures-this I believe will become more of the norm--banks are not willing to work with a person the way family or a friend will--A bank does not care if I am sick-I am dehumanized and turned into a mere NOTE in a system of checks and balances-they compound charges, adds exhorbinant fees, then forecloses if you can't catch up due to the penalities--By using a LEGAL alternative, I have eliminated the ridiculous fees, and have added a level of comfort no bank could ever give me. And, I can still deduct the interest on my taxes. Yes--it is legal, no fraud.

I have stated many times, I have very little unsecured debt--less than $5000 in unsecured debt. I am only considering BK because I MIGHT have a deficiency balance after the foreclosure of 1 of the 3 properties, and that changes the situation. There was no fraud with the mortgage.

I do appreciate you sharing your knowledge and telling me what to look for. I am disappointed and frustrated that now I have to figure out this whole new concept that I might be in danger of...

I have found the posts I have read from you very informative, and am disappointed it has taken this turn, but I guess I've got to learn these terms in order to protect myself, and to know what they might be looking for or accuse me of.

[HHM]

Um, HHM, so far I've really appreciated all of your info, but I really feel it is inappropriate to make an assumption and flat out tell me that "REALLY did do this to defraud"...

I apologize for that. I edited my previous post to clarify. I did not mean in the "moral" sense that you were trying to defraud creditors, I meant it from a strict legal sense in that your actions appear to satisfy the elements required to prove a fraudulent conveyance or a preferential transfer. I understand you are not really trying to commit fraud. But what I have been saying and preparing you for is that the way you have done this deal LOOKS like it. The court isn't really going to care about your "intentions", the trustee does not need to prove you actually intended to defraud.

The bottom line, you have some bad facts and you have a few good facts. The line between planning and fraud is fuzzy, but given the amount of money involved and the "bad" facts you have going against you, I think a trustee would fight to unwind this deal.

I am not sure how the servicing issue cuts, I frankly think it is of little consequence, in the end, the loan is between you and your friend. I understand you had good intentions, but BK courts are littered with litigation over debtors good intentions (and the debtors usually lose).

As I pointed out earlier, civil fraud does not require that you commit a crime or even do anything ILLEGAL, and in bankruptcy, it doesn't even necessarily require you to be dishonest.

I think you will be alright, but I was simply trying to make the point that you are probably ON the fuzzy line between fraud and planning when it comes to BK, and there is enough at stake for a trustee to make an issue of it.