Monthly Archives: August 2007

Real Estate Closings and Trust Funds

Evidently, in Georgia real estate closings are routinely handled by lawyers who use their trust accounts as the escrow.  Last month a large mortgage company in Georgia, HomeBanc, filed for bankruptcy.  In doing so it bounced 134 checks written to attorneys acting as closing agents.  Those attorneys had already deposited the checks into their trust accounts and immediately  disbursed funds at closing.  Needless, to say, they were each left holding a very large bag.

Most real estate closings are funded by wire transfer, but HomeBanc was a huge lender in Atlanta who figured out that there was money to be made on the float.  According to the article the attorneys in question have found ways to cover the overdrafts — either with home equity loans on their own homes or with a claim on their errors and ommissions policies.  How’s that for a solution?  The bright side is that the Bankruptcy Court is giving them some relief.  The loans in question are being assigned to the attorneys who will then be able to sell them for whatever they can get for them or service them themselves.
Real estate work (well actually title work, but close enough)  was once described to me as 20 years of utter boredom followed by 15 minutes of sheer panic.  I think I will stay out of it.


Exchanging Credit Card Debt for Tax Debt

I really hate to say I told you so — ok, no I don’t. Several months ago I warned that the recent change in regulations requiring the reporting of debt forgiveness to the IRS was going to result in people exchanging freely dischargeable credit card debt for non-dischargeable tax debt. Lots of people called me Chicken Little.

You see, there is an exception to the requirement that forgiveness of debt is taxable as gross income. That exception is for debt discharged in a Bankruptcy or forgiven while the taxpayer is insolvent. However, that exception defines insolvency as having more debts than assets — and it doesn’t say anything about excluding exempt assets.

Early this year the U.S. Tax Court entered a summary opinion finding that the exempt value of the tax payers’ homestead was included in adding up their assets for purposes of the Tax Code’s insolvency test. The Tax Court found that this couple who cut deals with their credit card companies and paid a substantial amount on their debts did not qualify as insolvent, because of their exempt homestead equity.

The couple were clearly insolvent for purposes of the Bankruptcy Code. If they had filed for bankruptcy, they would have discharged the total liability to the credit card companies. Instead, they tried to do the better thing — and exchanged freely dischargeable credit card debt for non-dischargeable tax debt.

This is not a published tax opinion, and I hate to splash this poor couple’s name across the blogosphere, so I am not linking to the opinion. If you have need for it, contact me by email.


Understanding the New Financial News

I have tried not to spend all summer blogging on financial happenings involving mortgage-backed securities. The net result of that, of course, is that I spent the summer not blogging.

Anyway, if you have been watching, or reading, the news and getting confused by tranches, CDO’s, sub-prime messes, credit crunches, Countrywide or just what the FLIP is going on, read this. has done an amazing job of explaining the impossibly dense in understandable language and in such a way, that even fear itself starts to make some sense.

Now, if you will excuse me, I smell a surge of Bankruptcy filings on the wind. . . .