Michigan Collection Law Blog

A recent speaker at the Michigan Institute of Continuing Legal Education had talked about suing on purchased debt. He said that a debt buyer does not have to produce a witness from the originating creditor in order to prove his case at trial. While that may be true, its equally true that most debt buyers do not get enough information to successfully sue on their debts. For example, most debt sellers do not have supporting credit card statements and/or even credit card contracts. Usually, they just sell a spreadsheet of names, addresses, social security numbers and balances due to unsuspecting debt buyers.

Another major fact is that everyone in the industry knows that Asset Acceptance is the proverbial 600 lb gorilla in this business. Asset Acceptance gets first crack at almost all newly charged off debt. They have relationships and contracts with major banks and such. Everything that they reject goes into the open market to eventually be pursued by other asset purchasers.

I was a bit disturbed when this ICLE speaker informed the audience that it is not necessary to produce a witness on behalf of the originating creditor. As an example, the following colloquy could be expected when a debtor’s attorney cross examines the Plaintiff’s witness. You can easily see how a debt buyer’s witness at trial would crumble.

Debtor’s counsel (“DC”): Who do you work for?
Plaintiff’s witness (“PW”): ABC Debt purchasing company.
DC: How much did you purchase this debt for?
PW: $300.
DC: According to your complaint, you state that my client owes you $5,000. Is that true?
PW: Yes.
DC: Because your company purchased the debt, it did not originate this debt, did it?
PW: No.
DC: Do you have any personal knowledge to show that my client incurred this alleged $5,000 debt?
PW: No.
DC: Do you have any signed credit card statements to show that my client incurred this debt?
PW: No.
DC: Do you have any signed agreement between the original creditor and my client to show that my client agreed to pay these charges?
PW: No.
DC: Do you have a breakdown between principal and interest as to how you arrive at the $5,000 balance?
PW: No.
DC: Do you have any proof at all to show that my client incurred these charges other than what you think someone may have told you?
PW: No.
DC: So, to recap, you are testifying that you have no personal knowledge of the alleged debt. no documents to support it,no proof that my client even incurred these charges and no accounting as to how you arrive at that number, right?

What court is going to award a Plaintiff anything on this? All you have is a witness who can testify that he bought something that was allegedly a debt that was owed by a debtor. That witness cannot testify that the debt is actually owed by the debtor or that debtor even had a contract to pay for these debts.

Buying debt, in my opinion, is a con. It is so tempting to purchase a $10,000 for a measly $600. Boy, if someone purchases that debt and collects it all, they stand to make $9,400. Now wake up. If a debtors attorney stands up to a debt purchaser in court, the debtor purchaser usually ends up eating the $600 purchase price plus costs.

We have crushed numerous debt buyers at court in this fashion. Of course, only those debt buyers who thought that they had nothing to lose (because we offered them such low settlements) took us to court.

Frequently, these cases are settled with a demand for documents. There are few firms that are notorious for filing these complaints and then walking away after the first document request.

If you get sued by a debt purchaser, don't sweat it. Hire an attorney and fight it.

An unfortunate part of my job is to have a court officer seize assets from people who refuse to pay the judgments that are placed with us for collection. I don’t like doing this for several reasons. First, I much prefer to work on a payment plan with a debtor and to collect the judgment in a more civilized way. Secondly, I don’t care for the embarrassment or indignity that I cause my fellow human being. Its just not a nice way to treat people. I believe that G-d put all of us on this earth to look after and take care of one another. There is a third reasons why I don’t like to have assets seized…..As you can guess from the title of this post, it involves a 4 letter word……LIEN.

In law school, they taught us the phrase “First in time, first in right.” This means that the first person or entity to record his/its lien is first in line to get paid? Right?.....WRONG….Lets talk about a few kinds of liens and worse yet, competing liens for when your court officer asks for direction. Here it goes.

Rule 1 – You can always take an asset subject to a lien. Just remember that when you take that asset, you must satisfy that lien obligation. I frequently get calls from angry attorneys on behalf of banks stating “I am from Big Firm and my client/bank has a lien on the assets that you took. Tell your court officer to leave them alone.” I respectfully inform my brother counsel that I am going to have my court officer take the property and we can duke out the lien issue in court. Of course this prompts a series of threats for costs and sanctions and such, but you cannot take that kind of talk seriously. I certainly don’t and neither should you. Take the asset and figure out the issues later.

Rule 2 - Unperfected liens are no liens at all. You would be surprised at the number of times a lender or its counsel overlooks the fact that its lien has not been perfected. This may be due to an expired lien or one for which a U.C.C. had not been recorded. They may think they have a lien, but alas, they might be in error.

Lien v Lien…which lien wins?

Here is a good axiom to remember. State, County and Personal Property tax liens generally trump most other liens. Why? Because the statute says so. See MCLA 211.40 et.seq, which says “…All personal taxes levied or assessed for state, county, village, or township taxes are also a first lien, prior, superior, and paramount, on all personal property of the persons assessed…” Hence, State, County and Personal Property tax liens beat out UCC liens and even purchase money mortgages.

UCC v Purchase Money Mortgage. These two liens generally intersect when commercial personal property is installed onto the real estate. For example, the equipment of a cash wash that is hard wired into the electrical systems, vented through the building and plumbed into the real estate. The UCC lien on the car wash equipment generally prevails over the Purchase Money Mortgage.

Blanket Security Liens v Purchase Money Liens. Purchase Money Mortgages generally win over blanket security liens (“all assets acquired…) regardless of the date filed.

UCC Purchase Money v Lien on Title of the Motor Vehicle. A lender has no business trying to perfect a security interest in Michigan by filing a U.C.C. In Michigan, our statutes allow for a lien titles. Hence, if a court officer takes a car and UCC lender cries foul, he will have to tell it to the judge because his security interest in the car is unperfected.

Divorce Liens v Title to Vehicles. This is a great area of concern to collection attorneys. We rely on Secretary of State records to see who owns the lien. However, divorce d ecrees can create a great deal of problems because trump the SOS reports even though these divorce decrees are usually not recorded with SOS. When a divorce decree assigns a vehicle from one spouse to the other, that divorce decree, in and of itself, acts as the transfer document. Neither spouse needs to record that transfer with the Secretary of State. This causes all sorts of problems for court officers and attorneys who seize vehicles. Note that the same is NOT true with respect to real estate. A deed of some sort must be recorded with the Register of Deeds to perfect the transfer.

Conclusion. If your debtor will not cooperate with you to satisfy the judgment that you have obtained against him, you are left with no choice but to seize his assets. When you do so, be careful to do your homework to see what, if any liens, exist against his property.

Steve Harms, one of the giants in the legal debt collection community, spoke at the recent ICLE program. He spoke on the issue of attorney liens. Like us at Nitzkin and Associates, he does a lot of collection work for attorneys. He raised some very interesting points and gave us these tips for collecting fees for other attorneys:

1. Wait 2 years after the last day of service before suing the client. Once the 2 year statute of limitations for malpractice has run, you can sue. Note that malpractice can be used as an offset to the Plaintiff’s bill, it cannot be used as a counterclaim. Some judges do not care for this technique, but that is just tough because the statute of limitations is what it is.

2. Offer your client a discount to pay early. Everyone loves a discount. Remember, you will most likely kill a pile of time pursuing the debt yourself. Alternatively, you will end up paying 1/3 of what your attorney collects if you outsource the collection of this debt. Put your pride aside and make a business decision to recover as much as you can from this debt.

3. Be aggressive about collecting your bills. Remember the squeaky wheel gets the grease. Issue monthly statements. Keep your name and your bill in front of their face on at least a monthly basis and enclose a self addressed stamped envelope. Make it easy for your client to pay.

4. Charge interest on your bills. Make sure that you have a written fee agreement that provides for interest. In fact, for some of you, I would strongly advise, get a written fee agreement. The days of providing legal services on a handshake and expecting to get paid are long gone. People have lawyers today and they are not afraid to use 'em.

5. Make telephone calls to collect. Statistics show that the telephone is still the strongest tool short of litigation to collect a bill. As a corollary, be courteous when calling the client. Allow them to spew off about why they have not paid your bill. People like a forum to be heard. When you call a client for payment, YOU ARE THAT FORUM. Be courteous and listen to what they have to say. When the client is done speaking, circle back to how the two of you can team up to resolve the problem that stands between the two of you. Be flexible and creative and of course, send a confirming email or letter that discusses the agreed upon resolution. If the client wants a break, give it to them.

6. Progress bill – People hate to receive lump sum bills. Send monthly progress bills to the client. Do not let the client get too far ahead of you. I would advise no more than 30 days. If the client has not paid last months bills within 30 days, you should really examine how much more credit you are going to extend to the client.

A recent speaker at the Michigan Institute of Continuing Legal Education had talked about suing on purchased debt. He said that a debt buyer does not have to produce a witness from the originating creditor in order to prove his case at trial. While that may be true, its equally true that most debt buyers do not get enough information to successfully sue on their debts. For example, most debt sellers do not have supporting credit card statements and/or even credit card contracts. Usually, they just sell a spreadsheet of names, addresses, social security numbers and balances due to unsuspecting debt buyers.

Another major fact is that everyone in the industry knows that Asset Acceptance is the proverbial 600 lb gorilla in this business. Asset Acceptance gets first crack at almost all newly charged off debt. They have relationships and contracts with major banks and such. Everything that they reject goes into the open market to eventually be pursued by other asset purchasers.

I was a bit disturbed when this ICLE speaker informed the audience that it is not necessary to produce a witness on behalf of the originating creditor. As an example, the following colloquy could be expected when a debtor’s attorney cross examines the Plaintiff’s witness. You can easily see how a debt buyer’s witness at trial would crumble.

Debtor’s counsel (“DC”): Who do you work for?
Plaintiff’s witness (“PW”): ABC Debt purchasing company.
DC: How much did you purchase this debt for?
PW: $300.
DC: According to your complaint, you state that my client owes you $5,000. Is that true?
PW: Yes.
DC: Because your company purchased the debt, it did not originate this debt, did it?
PW: No.
DC: Do you have any personal knowledge to show that my client incurred $5,000?
PW: No.
DC: Do you have any signed credit card statements to show that my client incurred this debt?
PW: No.
DC: Do you have any signed agreement between Chase and my client to show that he agreed to pay these charges?
PW: No.
DC: Do you have a breakdown between principal and interest as to how you arrive at the $5,000 balance?
PW: No.
DC: So, to recap, you testifying that you have no personal knowledge of the alleged debt. no documents to support it and no accounting as to how you arrive at that number, right?

What court is going to award a Plaintiff anything on this? All you have is a witness who can testify that he bought something that was allegedly a debt that was owed by a debtor. That witness cannot testify that the debt is actually owed by the debtor or that debtor even had a contract to pay for these debts.

Buying debt, in my opinion, is a con. It is so tempting to purchase a $10,000 for a measly $600. Boy, if someone purchases that debt and collects it all, they stand to make $9,400. Now wake up. If a debtors attorney stands up to a debt purchaser in court, the debtor purchaser usually ends up eating the $600 purchase price plus costs. Worse yet, because purchased debt is already in default when acquired by the purchaser, it is governed by the Fair Debt Collection Practices Act. This opens a host of new problems for the debt buyer which I will discuss in subsequent posts.

I am personally sickened by the number of foreclosures that we are experiencing in Michigan. While mortgage foreclosure is at epidemic levels throughout our state, I have decided to do something about it. I may only be one man and my impact may be minimal, but I refuse to do nothing in the face of this housing carnage. Starting with this blog post, I intend to give you, my reader, information about how to stave off foreclosure and work out strategies. I also intend to take on some foreclosure defense cases pro bono. As attorneys in Michigan, we just have to do something. I am hoping some of my sister and brother counsel will step up to the plate with me to keep people in their homes.

My colleague and law school classmate, Jeffrey Weisserman recently spoke about foreclosures at the Institute of Continuing Legal Education recently. Mr. Weisserman was always a brain in law school. He went to work in the real estate department of one of Michigan’s larger and more prestigious law firms. He now works as general counsel to Michigan’s largest foreclosure law firm, Trott and Trott. In his discussion, Mr. Weisserman listed some ideas regarding how one can retain their home in the face of a foreclosure. These include:

Home Retention Programs. Lenders want to keep people in their homes because foreclosures are not only very costly to pursue, but there is a glut of real estate on the market these days and the lender are having a hard time reselling foreclosed properties these days. In a Home Retention Program, lenders may restructure a borrower’s loan if the borrower can put together a feasible plan of repayment. A restructure of the loan may include a reduction in principal or the interest rate. It may also include extending the term of the loan. For example, if you are five years into a 30 year loan, the lender may re-amortize your loan principal for a new 30 year period and thus, lower your monthly payment.

Loss Mitigation Department. Mr. Weisserman advises that if you are in foreclosure, do not talk with the collector. Call the lender directly and ask for its Loss Mitigation Department. This department is in charge of trying to minimize the lender’s losses and may be more willing than you think to restructure a deal with you to keep you in your home. Make sure that you have documents such as tax returns and pay stubs to prove your current financial position. In order to make a deal with a lender, you will need to explain why you got behind in your loan and a feasible plan to show how you can honor a restructure of your loan.

Forbearance Agreements – These agreements generally involve your promise to repay missed payments in exchange for which the lender will not foreclose. These are not used as much today.

Loan Modifications. These are very popular today. This agreement allows a borrower to stay in their home by extending the loan and/or lowering the interest rate. These are used to a great extent with adjustable rate loans that have sky rocketed to the point where people cannot afford the new payments.

Pre-foreclosure short sale. Some lenders will allow a homeowner to sell their home for less is owed on it and will release the mortgage lien upon sale. Lenders do this to avoid the costs associated with a foreclosure. The benefit to homeowners is that this will avoid damaging his credit report with a foreclosure. Homeowners beware…There are tax consequences on such a deal to the extent of forgiveness of the loan.

Deed in lieu of foreclosure. Some lenders will take the deed to the home in lieu of foreclosing on it.

If a home did not fetch enough money after sale to pay off the homeowners loan, this left a deficiency balance. Lenders used to write these off but do not do so as much anymore. Hence, if you are considering “walking away” from the property, you must know that even after the foreclosure, the lender may pursue you for a deficiency balance.

Hope Now is a conglomeration of the larger lenders to keep borrowers in their homes. This organization has lenders, mortgage counselors and loan servicers as members. They realize it is in everyone’s best interest to try to identify solutions to keep homeowners in their home. You can check out their services as www.hopenow.com.

Lastly, Mr. Weisserman advises that the best defense to a foreclosure is to be proactive. When you get a foreclosure notice, pick up the phone and call the lender’s loss mitigation department. Try to make a deal as soon as possible. People frequently get to work on restructuring their loan on the day that it goes to sheriff’s sale. By then, it is generally too late to do anything.

My good friend and colleague, Howard Young works for the dark side. He is an asset protection planning attorney. Recently, he spoke at the Institute of Continuing Legal Education Seminar on Debt Collection. He said that he represents wealthy individuals and that if he does his job right, we will collect nothing from his clients. He then gave us ideas and examples of how he advises his clients to protect their assets.

I walked away from that seminar with two concepts that I want to share with you:

1. Discretionary Spendthrift Trusts – This is a trust where someone puts money into a trust for a debtor.

As you may already know, a trust has three parties. The first is a settlor/grantor who gives money or property to someone called a trustee. The second party is the trustee who takes legal title to the property and manages it pursuant to a contract between the settlor/grantor and the trustee. The third party is the beneficiary.

Anyways, these trusts are written to contain language that specifically states that no creditor has a right to reach its assets. These trusts are enforceable and perfectly legal. They are also written to direct the trustee to use his or her discretion to pay bills and debts of the beneficiary. This trust can rent an apartment, own a home and obtain credit cards that it can allow the debtor to use. This is perfectly legal.

A Discretionary Spendthrift trust is used to manage money coming to a debtor from someone else. Examples of such funds are inheritances and gifts. Hence, the trustee has the right to select which debts of the beneficiary he will pay.

Note that the money that is used to settle this trust cannot come from the debtor at a time when the debtor has already incurred a large debt that would otherwise make him insolvent. This is the kind of trust that can be used with the debtor's money only before he incurs such a debt. After he incurs a large judgment, any such transfer of his funds may be viewed as a fraudulent transfer.

2.. Domestic Asset Protection Trust. This is a cool kind of a trust. The language in these trusts sometimes contain a provision that prohibits a distribution made under duress. In one case, a debtor was ordered by a court to direct the trust company to release funds to him to pay a judgment. The debtor said that he could not do so due to the terms of the trust and the local laws of the jurisdiction under which the trust was governed. He was held in contempt and sent to jail for a lengthy time. He appealed stating that it was impossible for him to perform the order issued by the trial court since the express language of the trust prohibited distributions directed by court order. Talk about being between a rock and a hard place.

Alaska was the first U.S. state to adopt laws that allow for trusts similar to those in the Caribbean. It’s a “self-settled” trust where a debtor can set up a trust for himself and make himself the beneficiary. There are now about 12 states that allow this including Delaware. Currently, Michigan is not one such jurisdiction that allows such a self settled trust. But that does not mean that a Michigan debtor cannot set up such a trust under the laws of one of the twelve states that allow such a trust.

However, in order for such a trust to put assets outside of a creditors reach, this sort of trust must be set up before a debtor gets into trouble.Otherwise, any assets transferred to this would be nothing other than a fraudulent transfer.

You can put in all kinds of assets into a trust such as passive assets and even active assets such as a business. This is very helpful because you can still run your business as you wish even though the legal owner of the business is the trust.

There is still a trustee. You are allowed to name your own trust distribution advisor. You name you family member or a good friend. This person tells the trustee when to make distributions to you. You can even veto any distribution made to you. You have to have a qualified trustee in the state in which the trust is settled.

Conclusion.

These trusts represent an amazing set of powers that are retained by the debtor while putting the asset beyond the reach of the creditors. Care must be exercised not only in the drafting of these trust documents, but also with their funding. A trust does not do much for someone unless assets are legally transferred to it at a time when the beneficiary is insolvent.

us. In fact, it will only make even incur larger attorneys' fees.

My advise to my fellow collection attorneys. When taking a creditor's examination, always ask if the debtor is the beneficiary of a trust of any kind. Also ask the debtor if he owns any assets that were transferred into a trust in the previous five years. If the answer is "yes", get a copy of the trust agreement and review to see if the trust is well written or if its weak. If the latter, then attack the trust as a fraudulent transfer or as an alter ego of the beneficiary. I would also subpoena the trustee to find out what role she has in the trust and whether she has any assets in her care and custody that can be attacked.

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Here is AE's chance to savor this moment and say "Priceless."