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Be Careful When Creating Intercreditor Agreements
When a debtor borrows money from multiple creditors, an intercreditor agreement can be helpful in determining the rights of each creditor. The primary purpose of the agreement is to establish which creditor receives priority in case the borrower defaults on its debts. The higher-priority lender is called the senior creditor, and the other lender is called the junior creditor. In the event of default, the agreement may state that the senior creditor must be repaid in full before the junior creditor can take action on the debt. However, the agreement can also include provisions that will protect the junior creditor in case the senior creditor takes action that impairs the junior creditor's ability to collect on its debt. Depending on the severity of the action, a court can decide to strip the senior creditor of its priority claim on the debt.
The Risks in Working with Debt Settlement Companies
When debtors are worried about their ability to repay their creditors, they become susceptible to people who offer quick fixes. Some debt settlement companies are taking advantage of this by advertising misleading debt relief claims to debtors, such as:
- Being able to eliminate debts in months without bankruptcy;
- Stopping calls from debt collectors;
- Relieving their debts without affecting their credit ratings; and
- Allowing them to continue the same lifestyle with no consequence.
Debt settlement companies tout their services as a win for all parties. The debtor relieves his or her debt, and the creditor receives some compensation for the debt. As a creditor, you know the downside of working with debt settlement companies. They ask debtors to send payments to them instead of you, delaying your reimbursement by years. Once the company has accumulated enough of the debtor’s money, it will come to you with a lower settlement offer than what you may have been able to negotiate directly with the debtor. However, the debtor may have more to lose than you from using a debt settlement company. You can help yourself and your debtors by explaining the drawbacks to them:
Fast-Tracking Foreclosure on Abandoned Properties
When a lender concludes that it must foreclose on a mortgage, it likely wants to get through the process as quickly and smoothly as possible. The sooner the lender can reclaim the property, the sooner it can try to find a new buyer and recuperate the cost from the failed mortgage. However, the foreclosure process does not work quickly. While this is inconvenient for all mortgage lenders, the situation is most dire for those trying to foreclose on an abandoned property. Recognizing this problem, Illinois is one of the few states to have a fast-track foreclosure law.
Foreclosure Process
Illinois is a judicial foreclosure state, meaning the lender must go to court to receive a judgment on the foreclosure. The process includes:
- Filing a foreclosure complaint against the borrower after 120 days of missed payments;
- Giving the borrower 30 days to respond and 90 days to reinstate the mortgage;
Bankruptcy Law Allows Debtors to Continue Retirement Contributions
A Chapter 13 bankruptcy trustee in Illinois recently objected to a debtor’s request to exclude $200 per month from his disposable income in order to contribute to his 401K retirement plan. The trustee questioned the motivation of the decision because the debtor had not made any contributions to the plan in the six months prior to filing for bankruptcy. However, an Illinois bankruptcy court denied the objection, stating that the debtor was within his rights. The ruling shows how bankruptcy courts treat retirement plan contributions as a protected expenditure.
Chapter 13 Plans
As opposed to Chapter 7 bankruptcy, Chapter 13 bankruptcy involves creating a repayment plan instead of liquidating assets. Qualified debtors must submit documents that detail their:
- Creditors and debts owed;
Bank of America Stuck in Debt Collection Dispute with Client
Illinois trial and appellate courts have been going back and forth on a debt collection case between Bank of America and a small business owner. Bank of America is suing the former owner of All About Drapes for the remaining value of an unpaid loan, plus interest and legal fees. The business owner counters that he was induced into signing the loan agreement because the bank falsely claimed that his previous line of credit was expiring. The trial court has twice ruled in favor of Bank of America in a summary judgment, but the appellate court overturned that decision each time.
Case Details
The business owner had originally created an open-ended line of credit with LaSalle Bank. He would borrow money to help him through the winter months — when his business was slow — and paid the bank back at a two percent interest rate. Bank of America purchased LaSalle Bank in 2008, and the business owner began seeing an August 2009 maturity date on his bills. The owner explained to multiple employees at the bank that his line of credit did not have a maturity date. The bank insisted that:
New Regulations Target Payday Loan Industry
The Consumer Financial Protection Bureau has created new regulations meant to protect borrows against risky short-term and long-term loans with balloon payments. Commonly known as payday loans and vehicle title loans, these types of loans are usually issued in storefronts and online to consumers who need immediate cash and have difficulty obtaining a traditional loan. The CFPB claims that creditors who issue these loans use unfair and abusive practices by giving loans that they know consumers will be unable to repay and being overly obtrusive in their collection methods. With the new regulations, the CFPB hopes to make the payday loan industry adhere to some of the standards established in other credit industries.
Which Loans Are Affected
The CFPB says that the rules will apply to two types of loans:
- Short-term loans lasting 45 days or fewer; and
Successor Liability Can Hold Companies Accountable for Debts
A company that has extensive debts has many means by which it can attempt to avoid its creditors. One such way is when a second company purchases the debtor company and its assets. The debtor company often no longer has its own assets that its creditors can claim. Creditors may instead seek compensation from the second company that purchased the debtor company. However, Illinois law presumes that a buyer is not responsible for the debts and liabilities of the company it purchases. Business owners may try to abuse the law by essentially continuing to run a company under another name, while dodging creditors. Fortunately, Illinois courts allow creditors to claim successor liability in order to collect debts from successor companies. The creditor must prove one of four established exceptions that transfer debt liability to a successor company.
Expressed or Implied Transfer of Debt
Using Citation to Discover Assets with Debtors
Creditors who take legal action against uncooperative debtors can view their debt retrieval as happening in two overarching stages. The first stage is receiving a court judgment that quantifies the monetary amount that the debtor owes the creditor. The second stage is retrieving the judgment debt from the debtor. Judgment enforcement of a debt can require further legal measures. Though the debtor is legally obligated to compensate the creditor, the debtor may claim financial hardship in order to delay or deny repayment. Creditors can use a citation to discover assets, which forces the debtor to disclose all of his or her available assets.
Citation of the Debtor
When a creditor files a citation to discover assets, the debtor is given notice of a court date that he or she must attend. At the hearing, the debtor is placed under oath and must answer questions about his or her available assets, including:
Piercing the Corporate Veil to Collect Debt
One of the purposes of forming a corporation is to separate the debt liability of the business from its shareholders. When a corporation defaults on its debts, the creditor is often limited to collecting the debt from the corporation itself. If the corporation has insufficient assets or dissolves, it becomes more difficult to retrieve the full debt. However, courts will allow a creditor to seek compensation from a corporation’s shareholders in certain situations. The practice is called piercing the corporate veil, and its success depends on the type of corporation and how closely the shareholders are connected to it.
Piercing the Veil
Illinois courts are likely to protect shareholders from personal liability in a corporate debt case. When deciding whether to pierce the corporate veil, a court is instructed to consider:
- Whether the shareholders' and corporation’s interests are so closely aligned that there is no longer a distinction between the two; and
Four Ways to Modify a Loan to Avoid Default
When debtors are struggling to pay off loans, creditors often consider loan modification before taking more drastic legal action. Foreclosure and repossession are surer ways to recuperate money or assets from a debtor, but those methods may fail to collect the entire value of the loan. By using loan modification, the debtor still has a chance to fully repay the loan, often with added interest. Creditors are taking a risk when agreeing to a loan modification:
- They are permanently changing the loan agreement in a way that may benefit the debtor; and
- They are trusting that the modification will be enough to help the debtor repay the loan.
In some cases, a loan modification only delays necessary legal action to recover a debt. Creditors must judge whether the debtor is likely to repay the loan and whether the modification is worth the effort. There are several ways to modify a loan in order to assist a debtor:
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