It happens too frequently in many types of transactions which definitely have serious potential legal consequences that the parties do not use an attorney–on either side of the table. When the one side is you and the other side is a big corporation that is asking you to sign reams of boilerplate documents (which were actually written by their tall building lawyers) you are obviously at an extreme disadvantage. What bankruptcy lawyers typically see is unfair, unsolicited and unexpected consequences to the little guy.
But what about the situation where both parties are little guys–friends, relatives, small local businesses –that are trying to get the deal done without coughing up any fees to attorneys? People often go to the web to get forms for their dealings. Or, they just put it together themselves based on what they both agree to. Seems fair, seems to be an arms length agreement, and it certainly is a lot cheaper. So what is the problem?
In many cases this is fine. Yet, in some it results in a disaster because a step is missed, proper procedure is not adhered to or the form itself actually is not acceptable at all. For example, I have had bankruptcy clients who received a $12,000 loan from some close friends to settle another court case. The lender wrote up a note with a security clause in it. The collateral was the house. My clients have been regularly paying on the agreement but after 8 months found themselves facing bankruptcy. They had judgments against them creating liens on their house and new lawsuits coming at them–all of which exposed my clients to wage garnishments, levies against bank accounts (with mandatory direct deposits from employers) and risk of losing other property that potentially was not exempt under Iowa exemptions for bankruptcy.
In short, we had to file rather quickly. It turns out, though, that the agreement they signed with their friends not only was not filed within 30 days after execution which is required by law, it also was not in any form acceptable to the court. The lenders at that point had a lawyer draft a mortgage that was in the proper form which they had executed and filed.
We were under a gun to file the bankruptcy for the reasons stated above. Unfortunately, the mortgage according to bankruptcy law was an unperfected (not filed) document which was transformed into a perfected document too close to the bankruptcy filing. This is called a preference, favoring one unsecured creditor over another. The rule is 90 days for ordinary creditors and one year for insiders (such as relatives, partners and very close friends).
When preferences happen the trustee can avoid the “payments” (which in this case is the value of the transfer) and ask the CREDITOR for the money back to spread it out among all the unsecured creditors. So, the lender needs to pay the trustee what my client is paying them. In effect they are an unsecured creditor because they made a mistake of not having the correct form of documents and in not perfecting the filing.
In this case, my clients would have had to wait over a year from the filing of the mortgage to protect against the insider type preference. Under the facts they could not do that or they would have exposed themselves to thousands of dollars in garnishments and levies.
By not having legal advice in the circumstances–saving some money–the loss to the lender will likely be thousands of dollars in negotiating with the trustee. They were penny rich, but pound poor…
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa