Difference between 2 lawyers

[Slingerland]

Yes, I'm back... not ready to file yet, just considering the option again. I ask everybody's patience while I recap: last year I was looking at an unexpected income tax liability ($10k). I had previously spent a huge amount of money paying the copays for my wife's cancer treatments. And my wife simply loved to spend money.

I have rental houses that are upside down on paper, but they cash flow 33% free and clear. After paying so much on taxes and my wife's medical bills, I was hit with unexpected repairs: two complete air conditioning systems ($5400 each), plus a complete replumb of a rental (the only house I have on a slab.. I'll NEVER own a house on a slab again!)

I found this website (THANK YOU!!!) and read the NOLO books. I asked all of you questions and learned enough to ask good questions.

So, I got to the 90% point of deciding to file. I consulted an attorney (whom I knew from previous employment.) His practice is 100% bankruptcy, and been doing it since 1988. He has argued decisions to the US Court of Appeals and US Supreme Court. In other words, in bankruptcy law he knows his onions from leeks. He also owns rental property.

He gave me a two hour free consult, we went over everything, and he even made some suggestions for future planning. He also encouraged me to download the demo version of Best Case and play with it.

Then at the end of last year, the day job gave me a very unexpected large bonus. In addition my mother offered me a loan with terms I can live with. I've been able to raise my rents 10% this year!

But something is coming up that is concerning me. The HVAC in my house is needing to be replaced. Okay, I can handle that, but it will lower my reserves. And it is looking like my wife's job is in jeopardy. To lose her job would put us right back into the C-13 situation again.

So I decided to seek a bit of legal advice for fine tuning... and I went to a different lawyer. I wanted to see if this one had any different ideas. This attorney is 75% bankruptcy, 25% family law. This attorney did not own rental property. And while most everything he suggested is what I anticipated, his answers for a few things blew my mind.

Folks, this is why you seek the advice of more than one attorney.

The differences came down to three issues: valuation of the rental houses, how to present the rental income and expenses, and the loan from my mother.

The houses are under water but the county tax rolls do NOT reflect it. The county still taxes the houses at their bubble value. (I'm working on the appeal, but it takes time.) Attorney #1 said to present the trustee with a CMA of the houses done by a real estate broker. But Attorney #2 said to just present the tax assessment to the trustee. This is a difference of $45,000 of equity that would have to be exempted or covered by the unsecured payments in the C-13 plan!

Second, presenting the business income. Attorney #1 said to present the trustee with a realistic budget based on rents, vacancies and anticipated repairs. Also present the trustee with a list of rental issues (such as a 15 year old water heater) that would have to be planned for. Attorney #1 insisted the trustee would understand the rental business needed a realsonable amount of reserve in case of emergencies.

Attorney #2 said the trustee wouldn't let me keep more than $200 a month in net rental income, while assuming 100% occupancy and no emergency repairs.

And last, Attorney #1 said that with a notarized promisory note and a history of making payments, we can include my mother's loan in the plan. Attorney #2 doesn't want to try, afraid it will bring in more attention from the trustee.

So bottom line: Attorney #1 will value my rentals at fair market value, Attorney #2 wants to use the tax assessment. That's $45,000 more that I would have to ensure the unsecured creditors get paid.

Attorney #1 will argue the need to let the rentals build up an emergency reserve immediately, while Attorney #2 thinks I should wait for an emergency repair and petition the trustee to reclaim money to pay the repair (I wonder what Attorney #2 thinks the tenant is supposed to do in the meantime?).

Attorney #1 will argue to get my mother's loan into the plan and get her the same payment percentage as the other unsecured creditors. Attorney #2 is not willing to try, already dismissing the idea.

It all came down to personality. Attorney #1 seemed to me to be more agressive and pro-client. Attorney #2 seemed to be more "go with the Trustee and not make waves." And to be blunt, Attorney #1 knows the rental business. Attorney #2 doesn't.

But someting of interest: attorney #1 wants $2000 of his fee paid up front, the rest paid by me in the C-13 plan. Attorney #2 will roll all his billable hours into the plan.

[despritfreya]

I have rental houses that are upside down. . . but they cash flow 33%.

Are you planning on stripping off any wholly unsecured seconds? What about cramming down (to the appraised value) any first mortgages - have you even discussed this with either attny - in the context of a Chapter 13 or a Chapter 11? Are you current? If not current, do your mortgages/deeds of trust contain an assignment of rents clause? If so, have you discussed the cash collateral issues with either attny?

Please answer the above questions so that I can get a feel for where you are going with this.

The differences (between attnys) came down to three issues: valuation of the rental houses, how to present the rental income and expenses, and the loan from my mother.

1. Assuming you do not want to spend big bucks at this time on appraisals, get a Broker’s Price Opinion on each property. That is how you value the property.

2. Typically, to keep investment property you must show that the cost of doing so does not take money away from your unsecured creditors. The cost must either be a wash or produce a net profit. Otherwise, the Trustee is most likely going to require you to surrender the property as keeping it “is not necessary for an effective reorganization” and diverts disposable income away from creditors. Your projections should realistically show a profit. If you do not want the Trustee to question this then look at a Chapter 11 where you are the Trustee and have much more control over this issue.

3. If your mother is a creditor she is listed on Schedule F. She is no different than any other creditor and, assuming she files a timely claim, is paid just like any other creditor.


Des.

[Slingerland]

Good morning, Des! To answer your questions:

The rental houses do not have second mortgages. The current mortgages are 30 year fixed at 5.25%, and I've about 8 years or so into them. I'm not planning a cramdown for two reasons:

1. My understanding is that I would have to completely pay off the mortgages within the 60 month bankruptcy plan. This is not possible.
2. The portion of the mortgage that is crammed down would become an unsecured claim, right? If so, then the mortgage companies would come after my wife (who is not filing.) Keeping my wife apart from this is critical.

"Broker's Price Opinion" is the term I was looking for. I have several friends who are brokers where I live, and they would be glad to give me their price analysis. I would probably ask two (or three) of them, and let the attorney figure out how to present it. Attorney #2 wanted to just give the tax appraisal to the trustee without debating its accuracy.

As far as presenting the rental income to the trustee, I understand what you're saying. They make a profit. I just want to make sure I can work the numbers to rebuild my emergency reserves... keep enough of money held back to handle the periodic vacancies and routine maintenance as well as emergencies such as a roof, or replace a heater, etc. Attorney #1 understands calculating an anticipated 10% vacancy. Attorney #2 wanted to assume all houses would stay 100% occupied for 60 months and nothing would ever break down. To me, Attorney #2 seemed to want to just roll over.

And my mother... Attorney #2 again wanted to just roll over.

The reason I posted is to illustrate what many people here have said: interview more than 1 attorney. In my case, #1 is willing to argue the rentals in my favor. #2 is not. And to be honest, I think one difference between them is that #1 also has rentals and has experienced the life of being a landlord. #2 has not.

In my case, using Attorney #1 will help me keep the houses afloat and handle all emergencies. Also there would be not be $45k of faux "equity" that has to be covered in payments to the unsecured creditors. That's significant!

Thanks again, Des!

[LadyInTheRed]

This is an excellent illustration of why people should interview more than one attorney. I agree that attorney #1 sounds much better. The valuation and debt to mom issues alone show attorney #2 is not willing to do anything that may require a discussion with the trustee, much less put up any fight to support a valid position.

In my case, using Attorney #1 will help me keep the houses afloat and handle all emergencies. Also there would be not be $45k of faux "equity" that has to be covered in payments to the unsecured creditors.

I would change "will" to "may". Attorney #1 may be correct on this issue. But, he cannot guaranty how the judge will rule if the trustee objects to your plan. You should be prepared for the possibility that everything may not go your way, even with an attorney who is willing to put up a good fight.

[HHM]

It sounds to me like the 2 attorney have different experiences dealing with rentals...depending on circumstances, they are BOTH RIGHT.

Although you may not want to hear it, I think attorney 2 is a bit more realistic; he just isn't explaining himself very well. (except on the mother issue, she is a general unsecured creditor, like any other...what I think attorney 2 may be telling you is that...your mother is not HIS client...she is a creditor and her interests conflict with yours. As such, it is not his place to advise or file a proof of claim on behalf of mom.)

The rules in chapter 13 is that all disposable income must be devoted to the plan and that your unsecured creditors cannot be unfairly discriminated. After all, there is no rule in chapter 13 that says you are "allowed" to keep rental properties. So, if the rentals are cash flow positive, not accounting for reserves; it is very tough in a chapter 13 to get get reserves allotted.

The way you describe it, it sounds like attorney 1 is telling you what you want to hear. Attorney 1 is saying there is an "argument,", but how realistic is the argument to succeed. You must fundamentally answer this question; Will your plan payment be more or less by allowing you to budget reserves for your rentals? As DES points out, are the properties and their income potential necessary for the reorganization...probably not unless the rentals are your primary source of income.

The biggest trap when considering attorneys is getting suckered in to those that tell you what you want to hear.

[Slingerland]

It sounds to me like the 2 attorney have different experiences dealing with rentals...depending on circumstances, they are BOTH RIGHT.
......
The way you describe it, it sounds like attorney 1 is telling you what you want to hear. Attorney 1 is saying there is an "argument,", but how realistic is the argument to succeed. You must fundamentally answer this question; Will your plan payment be more or less by allowing you to budget reserves for your rentals? As DES points out, are the properties and their income potential necessary for the reorganization...probably not unless the rentals are your primary source of income.

The biggest trap when considering attorneys is getting suckered in to those that tell you what you want to hear.

You're absolutely right (my mistake) I didn't put a lot of detail. Or maybe too much of the wrong detail . To to try and clarify:

Attorney #1 is well known in the real estate/investment community here. He has handled many C-13 plans with "mom-n-pop" rentals and knows his way through the system here. A way to describe him is "reasonably aggressive" in that he pushes for his client where he thinks the trustees will be amenable to reason. He doesn't just demand, he presents the claim with reasonable explanations. And by being a landlord himself, he can present the need for a cash reserve in a way that the trustee will understand.

As example, the valuation of rentals. In my area, if the hosues are clash flow positive but upside down in equity, the trustees DO NOT want to take them back for the bank and sell them. Based on other landlord bankruptcies in my district, the Trustees tend to let the houses to stay with the landlord and be profitable. As such, they listen to reasonable bankruptcy plans where the rentals will show a profit, even if the profit isn't great.

So Attorney #1 will present a broker's analysis of the value of the houses. Based on that value, there is no equity. Therefore the liquidation value of the secured property is much lower, and the plan gives the unsecured creditors a payback percentage above the liquidation percentage.

Attorney #2, while being 75% bankruptcy is also a family practice guy. His experience is more in the post-divorce family bankruptcy (or medical bill family bankruptcy.) He doesn't have a lot of experience with the rental business. The point of discussion involved emergency repairs. Attorney #2 is of the opinion that the trustee would not let me keep (or build up) $3k~4k as an emergency fund for the rentals. When we discussed emergency repairs, he had a "deer in headlights" look in his eyes. My scenario:

1. It's New Years's Eve.
2. It's snowing outside.
3. The heating system has failed. A total replacement is needed.
4. What do we do?

His answer... honest to goodness... was to wait until after the first of the year, set up an appointment with the Trustee and wait for Trustee permission to replace the HVAC unit. (The problem is: what does the tenant do in the meantime?)

So while he has a good reputation, Attorney #2 doesn't have certain business knowledge that would assist my case. And by taking the tax records as his point of value for the hosues, suddently I have $45k of faux equity. Attorney #2 would cause the liquidation percentage to soar, cauing the payment to soar as well if I want to keep the houses.

(My only point of issue with Attorney #1 is that he wants to be paid completely up front. )

And that was the point of my post: we all need to seek the attorney that is best suited for our needs. My bad for muddying the waters!

[Slingerland]

P.S., here are some interesting points of trivia with my plan:

1. I will be using the Federal exemptions.
2. My primary residence has about $2k of equity, so Attorney #1 has advised me to wildcard the cash reserve for the rentals. This gives me an emergency fund for the HVAC scenario above.
3. Attorney #1 and Attorney #2 both told me to plan five years of major upgrades (such as painting, new roofs, etc.) into the plan. One major repair/upgrade a year. Attorney #1 thinks that holding back $250~300 a month would be considered reasonable.
4. Both attorneys told me to make sure the rentals show a profit after the holdback for the major upgrades.
5. The estimated rental income is my responsibility to declare, based on my past experience and vacancy rates. As long as I can demonstrate the past vacancies with reasonable proof (leases, bank deposits, etc.), the trustee should accept my income estimation.
6. The trustees may ask for tax returns, but that only gives them Schedule E. Attorney #1 has said the trustee never asks for anything other than Schedule E. I have queued up previous losses and ongoing depreciation that gives me a taxable loss on the properties, even when they all cash flow positive.

I know a lot of people got into trouble with unprofitable rental real estate during the bubble. Fortunately I'm not one of them . My houses have been profitable, and are a major part of my eventual retirement. My debts came from other problems, and instead of dealing with them at the time, I used the rentals' immediate profits to delay my day of reaconing. Unfortunately I was not saving money from the rentals for their own emergencies, and last year was a fluke in having major repairs across all the houses. So now... ouch...