Is This Legal?

[biznizman]

WA State

I have a friend getting a divorce and the couple has lots of assets (mostly real property). Unfortunately they purchased most of these a few years ago prior to the economic meltdown. As a result, most of the properties the loan balance is larger than the value of the property. They are trying to settle the divorce and without going into detail (which I don't have anyway), said in a nutshell they've been advised to to transfer the title of the properties into an LLC and then have the LLC file for bankruptcy.

I would be very surprised if this is really possible, but I've been surprised before. As it would seem any bankruptcy court judge could see the history of what happened and see they transferred the titles to obviously get out of the debt while trying to minimize the effect on their personal credit (which is what I'm assuming that is the purpose for doing it that way.)

Anyone familiar with this strategy? Is it possible and how long does it take?

 

[HomeGuru]

WA State

I have a friend getting a divorce and the couple has lots of assets (mostly real property). Unfortunately they purchased most of these a few years ago prior to the economic meltdown. As a result, most of the properties the loan balance is larger than the value of the property. They are trying to settle the divorce and without going into detail (which I don't have anyway), said in a nutshell they've been advised to to transfer the title of the properties into an LLC and then have the LLC file for bankruptcy.

I would be very surprised if this is really possible, but I've been surprised before. As it would seem any bankruptcy court judge could see the history of what happened and see they transferred the titles to obviously get out of the debt while trying to minimize the effect on their personal credit (which is what I'm assuming that is the purpose for doing it that way.)

Anyone familiar with this strategy? Is it possible and how long does it take?

**A: yes it is legal. But the scheme will only buy some time and make them look like crap to the BK Trustee. And the Trustee can void the transactions. And such transfer would be a sham and would not affect any mortgagors. They would still be on the hook and BK would not protect them. Nice try.

 

[latigo]

How could people with enough moxie and credit to have accumulated “lots of” properties through mortgage loans be so confounded naïve as to think that they could escape personal liability on those loans by transferring the properties and assigning the loans to a shell?

If that is the theory, then why bother with an LLC or bankruptcy? Just invent a straw man and turn everything over to a dummy. Geez!

(Understandably HG’s response is nothing but garble, as he doesn’t have a lick of credential to be contributing here.)

But your own analysis of the bankruptcy judge seeing through it isn’t all that sharp either. Because according the scheme the individuals wouldn’t be in bankruptcy court. According to the script only the LLC is to file!

Furthermore, creditors that hold a security interest in property don’t need to resort to the laws permitting the setting aside of a transfer made in fraud creditors. The security interest follows the transfer. Those laws are designed to protect unsecured creditors, not mortgage lenders.

And if find this “someone advised them” business just a wee bit incredulous. I think it is much closer to home.