Business Owners Beware: Document Loans to Your Company or Else- Trends in Debt vs. Equity

Asset Protection Attorney Alert:

Have you ever loaned money to your own company?  Have you ever loaned money from one company to another?  Do you have written loan agreements in place?  Do your accounting records properly document the amount owed, transfers made, regular payments, and accruals of interest? Courts are coming down on these types of arrangements.

It is all too familiar to see when it comes to small and closely held businesses.  The owner puts some of his or her own personal funds into a company or transfers money from one company to the other to cover expenses for that company.  Most owners don’t think twice about it since they don’t have many other shareholders to consider or seek approval from.   Rarely do we see clients who come in who have entered into those kinds of deals that present documented loan agreements or any kind of records, but they think “it’s my company, so it doesn’t really matter” or “I am not publicly traded with the SEC or a big board of directors watching, so who cares.”  What they may not realize is that it can end up hurting the company or the shareholder down the road and, in some cases, in a pretty drastic fashion.

Several recent court cases have emphasized just how much not documenting loans can hurt a company.  Most of these arise in the bankruptcy context, but can be applied to regular state law claims related to loans, which can affect nearly anyone.  Even a minority shareholder could try to use these principles to his or her advantage to avoid loans the company owes to a majority shareholder.

The cases involve an extension of the bankruptcy court’s powers when it comes to debts.  A bankruptcy court has broad equitable powers under Section 105 of the Bankruptcy Code to make changes to carry out a bankruptcy.  On March 4, 2014, the US Supreme Court in Law v. Siegel issued an opinion that put a few restrictions on the recent expansion of those powers, but the concerns for business owners are still there and it is clear that the bankruptcy court’s use of those powers is still valid.

Since this ruling, a bankruptcy appeals panel has held that Law v. Siegel does not go so far as to ban a bankruptcy judge from recharacterizing debt as equity, which is more relevant for business owners.  The case of In Re: Alternate Fuels, Inc. was decided by the 10th Circuit Bankruptcy Appellate Panel on March 18, 2014 finding that loans by a shareholder to the company were equity and not a loan, despite the ruling in Law v. Siegel.

The facts of other recent cases are similar in that the court eventually converted what was claimed to be debts owed by the company to a shareholder/owner into equity.  The shareholder would put money into a company and then claim the company was required to pay it back and make a claim in the bankruptcy court to get paid back.  The courts have found that some of these so-called “debts” were really equity investments by the owner into the company with little to no value.  In a bankruptcy liquidation, if there are assets available, the assets are distributed according to priority to certain liabilities and if all liabilities are paid, then what remains gets distributed to equity holders/owners.  In a bankruptcy repayment or reorganization, such as is common in Chapter 11, the debt holders get paid off over time, but the equity holders do not receive payments.  When the court says that someone with a debt really invested equity and converts it into equity, they are saying that in most cases, that person is out of luck and will probably not get anything.

The cases look to the elements reviewed by state courts when analyzing whether a transfer of an asset could be considered a fraudulent transfer to avoid creditors.  If there is no transfer for something of reasonably equivalent value and there is no real obligation to pay the loan back, it could be considered fraudulent resulting in the loan not being allowed as a legitimate claim and an unwinding of the transaction.  This could result in a company or shareholder loaning money to another company he or she owns and losing that money.

Additionally, these loans have an impact in the context of asset protection planning.  For example, say John Q. Shareholder owns 2 LLCs: Bad Credit, LLC and Money Maker, LLC.  Bad Credit, LLC defaults on some loans and gets sued by a bank.  The bank gets a judgment against Bad Credit, LLC, but learns that Bad Credit, LLC would frequently pay for expenses of Money Maker, LLC.  Mr. Shareholder saw nothing wrong with this and even used one bank account to receive income and pay expenses for both LLCs.  The bank will go to court and try to collect against Money Maker, LLC and Bad Credit, LLC arguing that they are really not different companies due to the commingling (sharing) of assets.  Mr. Shareholder will try to claim the expenses paid by Money Maker, LLC were just loans to Bad Credit, LLC, but when it comes time to prove they are loans, he fails.  The court decides that the two LLCs with common ownership, similar bank account, and shared expenses are really just one company and the bank can go over both LLCs for the debt.  Or even worse, the bank says that both LLCs are really nothing more than Shareholder’s alter ego and the bank can now collect against Shareholder personally.

So what can be done?

A court is more likely to find a valid and enforceable loan when there is a well drafted written loan agreement in place and it is actually treated like a real loan.  This could be an inter-company loan agreement, promissory note, revolving credit line agreement, or other debt document.  The loan has to be for reasonably equivalent value to what is being provided and actually have terms that could be enforced.  If there are regular payments due, those must be paid and documented.  If there is interest due (which there should be at least some minimum amount provided for), it should be regularly accrued and put on the company’s books or accounting records.  These are just some of the actions that need to be taken to protect those dollars you lent to the company.  The more a court would view the arrangement as similar to what a bank or some other outsider lending money would put into place, the more likely the court would enforce the loan or keep liabilities separated from the owner or other companies.  It is also highly recommended to avoid commingling (sharing) funds or bank accounts between companies or owners, but I realize that the day to day needs of a company may not allow that kind of requirement to be kept.  If you have an LLC or corporation, be sure you have a separate bank account in that company’s name and try not to run any personal expenses through it.

A little planning can avoid courts turning your loan into worthless equity or making your personal assets vulnerable to creditors.   Avoid these situations altogether with valid legal loan agreements, documented accounting, and segregated accounts and funds, so business owner beware!

Bankruptcy Petition Preparation Company Problems

Many people who think about filing for bankruptcy often want to avoid legal costs and either look to do their case themselves or pay a petition preparation company that charge anywhere from $200 to $500 to prepare the forms. The problem with not at least consulting with a qualified bankruptcy attorney is that you are going into a very complex federal court system. It is not just a matter of a few simple forms.

If your forms and schedules are not done properly with the most up to date forms or they are not filed in compliance with the federal and local rules of procedure, your case can be dismissed within a matter of weeks of filing. Not only will you have to possibly pay the filing fee again to re-file, the court often imposes a ban on re-filing for 6 months. The court can also prohibit re-filing for an even longer time if they think your filing was an abuse of the system.

I have clients come in and end up spending even more money in the long run for me to fix the problems and properly advise them than if they would have just come to me in the first place. Petition preparation companies often give legal advice, even though they are not supposed to. They tell people that they can remove 2nd mortgage or qualify for chapter 7 filing status, only to have the client later learn that they were not properly advised.

Most bankruptcy lawyers will offer free consultations, so even if you don’t hire them, you should at least get some advice before moving forward to be sure you are properly represented.

Chris Barsness, Bankruptcy Lawyer
http://www.bankruptcylawyerla.net

Short sale pitfalls

These days many homeowners are realizing that loan modifications are extremely difficult to obtain, so they try to do a short sale of their home. A short sale is when you sell you home for less than what you owe the bank. The bank has to approve the sale which requires the homeowner to show a financial hardship. People assume that their real estate agent will protect them in the transaction. That is far from the truth. There are different legal issues that arise in the transaction for a short sale.

1) Future personal liability- most bank approval forms say they are agreeing to accept less than what they are owed to approve the sale, but many do not include any representation that they will not sue the homeowner down the road to get the difference between what they received and what they were owed. This means a year or two down the road, the homeowner could be served with a lawsuit when the bank thinks the homeowner may be back on their feet to collect.

2) Fraud- most bank are requiring the homeowner and the buyer to sign contracts stating that they are not engaging in some kind of side transaction. Many homeowners are approached by investors stating that they will rent the home back, sell the home back to the homeowner later, or pay the homeowner to do the short sale. If the homeowner signs this and they do something they stated they were not doing, the homeowner, investor, and real estate agents could face charges of fraud against the bank. The bank would argue that they would not have agreed to the sale if they knew there was a side deal.

Bottom line- check with a local real estate or bankruptcy attorney because a bankruptcy filing may be a better choice to walk away and eliminate personal liability or possible fraud claims.

Los Angeles Bankruptcy Attorney Chris Barsness, Esq.

http://www.bankruptcylawyerla.net

Treasury’s New Attempts To Help Foreclosure & Loan Modification Problems

The Treasury announced more attempts to help borrowers in foreclosure or close to foreclosure including payments toward relocation and short sales, as well as additional help for unemployed borrowers.

It remains to be seen whether these changes will help fix the foreclosure and loan modification problems, including problems facing borrowers going through bankruptcy.

For an overview of these changes, you can read more below:

http://www.nacba.org/files/email/Supp_Dir_10-02.pdf

Banks Sue Homeowners Years After Foreclosure

Other states see the same issues regarding lenders coming after foreclosed homeowners years down the road. See the below article for this happening in Nevada.

http://www.lvrj.com/business/underwater-homeowners-leave-behind-mortgages—but-lenders-can-still-come-calling-87612462.html

Bankruptcy may be the best option to avoid worrying about the banks suing a homeowner after a short sale or foreclosure and no one should assume everything is fine when they walk away from a home.

Beware Of Personal Liability After Foreclosure Or Walk Away

Many people do not realize that they may face personal liability for certain debts if they walk away from their home or let it go to foreclosure. In California, if the 1st lender forecloses with a trustee sale, any other lienholders, such as a 2nd or 3rd mortgage or line of credit may be able to come after the borrower personally.

In fact, reports are that servicing companies are increasing their efforts to come after people who have been foreclosed upon for these personal obligations. Homeowners need to take steps to avoid going through more financial distress after a foreclosure. Often a Chapter 7 bankruptcy liquidation makes sense after a foreclosure to get rid of all other debts and personal liability.

See the report out today on CNBC:

http://www.cnbc.com/id/15840232?video=1439003187&play=1

Chris Barsness

http://www.bankruptcylawyerla.net

Bankruptcy & Short Sales Better Option Than Modification

The recent announcement by President Obama of incentives to homeowners of $1,500 for selling their home in a short sale is just further evidence that lenders are unwilling or unable to complete realistic loan modifications. The President is realizing that lenders would rather take a short sale loss and move on than deal with modifications.

Many homeowners get emotionally attached to their homes, but they need to be realistic. If you are in a position where you cannot afford the existing payment and are severely behind in payments, it is unlikely a loan modification is going to help. With only 66,000 modifications in 2009 under the Obama HAM program nationwide, it seems unlikely that anything is going to get better.

Once homeowners realize that they may not be able to save their home and realistically think about moving on, they can properly evaluate all possible options. Many homeowners end up losing their homes during a modification review and end up with personal liability on 2nd or 3rd mortgages. Bankruptcy can be a useful tool to resolve some of these issues. It can be used to remove 2nd liens and bring a homeowner current on back owed payments.

The other options are short sales or deeds in lieu of foreclosure. Homeowners should consult with a local real estate or bankruptcy lawyer to be sure they are protecting their finances moving forward.

Chris Barsness

http://www.bankruptcylawyerla.net

Eliminate 2nd and 3rd mortgage, reduce principal

Many homeowners are pounding their heads against a wall trying to get lenders to work to get them current or give them some form of loan modification. Many of these homeowners have been taking out of credit cards, personal loans, or other sources just to survive. However, many lenders look at large amounts of other debt negatively when considering your total debt to income ratio in a modification. These homeowners don’t realize that a loan modification is not going to suddenly save them from the brink.

Often times a bankruptcy filing is a better option. It can eliminate the other credit card debts, personal loans, 2nd mortgages, and 3rd mortgages. It all depends upon the type of filing under what chapter of the Bankruptcy Code, but it is even possible to force principal reduction in some cases. Although there have been attempts at federal legislation over the last year to allow bankruptcy judges to force modification of terms of mortgages on principal residences, they are always defeated. There are ways to eliminate 2nd mortgages even on principal residences in some cases.

Homeowners needs to look at all their options and not delaying because your lender will move a foreclosure forward no matter how seemingly nice them seem on the phone.

For more information, contact us or view our website.
888-881-6591
http://www.bankruptcylawyerla.net/BankruptcyServices.htm

Loan Modifications Slow – Bankruptcy Better Option to Save Your Home

The Obama administration released figures at the end of last week indicating that only 32,000 homeowners have entered into final loan modifications under the HAM program this year. That is out of the several million homeowners that are likely eligible. These results show that lenders are slow or unwilling to finalize modifications to save homeowners. Lenders are putting homeowners in 3 month trial plans that are lasting 6 months and not leading to final modifications.

A Chapter 13 bankruptcy can result in elimination of 2nd mortgages and other debts and allowing homeowners to keep their homes. A Chapter 7 can still allow homeowners to keep their homes as well through reaffirmation agreements. The additional bonus is that the bankruptcy puts a stop on foreclosure or eviction proceedings, resulting in additional time for the banks to get their acts together and start finalizing modifications. Homeowners without this protection are relying on lenders telling them they will hold off on selling the home, but that is not a legally binding agreement. I get new clients who tell me their lender said they were working with them and not to worry, only to get an eviction notice stating their home has already been sold.

Now is the time to take action. Do not rely on a customer service rep telling you not to worry, they won’t sell your house, because they will. You will never hear from that person again and they are not about to help you find a new place to live.

For a free consultation with an actual attorney and not a paralegal or assistant, call us today. 888-881-6591.

http://www.loanlawyermodification.com

California Homeowners – Beware Loan Mod Advance Fees

No matter how a company or lawyer tries to justify some up front fee to help with a loan modification, whether they call it a progress payment, or break up their “services” into sections, it still is going to get them into legal hot water.

The law is very clear and was intended to make sure homeowners do not pay anything until the service has been performed. Many people charge a large fee to do a forensic loan audit or compile documents and review possible qualification for modification programs. They then claim they will do the loan modification for free or low cost (to avoid being guilty of Civil Code Section 2944.7, subjecting them to up to 6 months in jail).

Do not pay large fees for a loan audit or other alleged services or education about modification/foreclosure. The claims that they have some special knowledge or that they will find legal violations that will make the lender roll over and give you what you want are completely false!

The process is not that complicated and there are free services through HUD and others that can help guide a homeowner through the process. Our firm put together a do it yourself guide for $99 that can help homeowners try to save their home through a modification without huge fees.

There are times when certain laws are violated or homeowners have legal rights and claims against lenders and servicing companies; however, this requires a licensed attorney to review and without an actual lawsuit pending, most lenders will pay no attention to claiming they violated TILA, RESPA, or any other laws.

For more information on our do it yourself loan modification 101 guide, visit our website.
http://www.loanlawyermodification.com