Foreclosure: Notice of Sale

The Code of Virginia provides specific guidance as to giving notice of a foreclosure sale.

§55-59.1 requires that the written notice of sale contain the time, date and place of the proposed sale, as well as either (i) the instrument number, or, deed book and page number, of the instrument of appointment filed pursuant to §55-59-59 (appointment of substitute trustee), or, (ii) a copy of the executed and notarized appointment of substitute trustee. Personal delivery or mailing a copy of the advertisement by certified or registered mail is sufficient.

§55-59.1 requires the trustee to send written notice of the time, date and place of the sale to (i) the present owner of the property … (ii) any subordinate lienholder … (iii) any assignee of such note … (iv) any condominium unit owner’s association that has filed a lien … (v) any property owner’s association that has filed a lien … (vi) any proprietary lessees’ association that has filed a lien.

It is important to know that in addition to the notice required by statute, the note or the deed of trust may contain additional notice requirements. Accordingly, the trustee should examine both of these documents.

§55-59 provides that the notice can be sent by either the trustee or the lender.

Real Estate: The Virginia Property Owners’ Association Act – Memorandums of Lien

The Virginia Property Owners’ Association Act specifically provides for remedies outside of the more common remedy of filing suit for the amount owed and receiving a judgment. A memorandum of lien to a holder of a credit line deed of trust under the Act is given in the same fashion as if the association’s lien were a judgment. Under the Act, the association can file for and perfect a lien against the homeowner that is prior to all other subsequent liens and encumbrances except real estate tax liens, liens and encumbrances recorded prior to the recordation of the declaration, and sums unpaid on and owing under any mortgage or deed of trust recorded prior to perfection of this lien.

To perfect the memorandum of lien, the association must file with the clerk of the circuit court in the county or city in which the development is situated a memorandum verified by the oath of the principal officer of the association or another officer provided for in the declaration. The memorandum must be filed within 12 months from the first assessment became due and payable. Additionally, prior to filing a memorandum of lien, a written notice must be sent to the property owner by certified mail, at the owner’s last known address, informing the owner that the lien will be filed in the circuit court clerk’s office at least 10 days before the actual filing date of the lien. The memorandum must name the development, describe the lot, name the person(s) constituting the owners of the lot, list the amount of unpaid assessments currently due or past due relative to such lot together with the date when each fell due, list the date of issuance of the memorandum, name the association with a name and address of the contact for the person to contact to arrange for payment or release of the lien, and state that the association is obtaining a lien in accordance with the provisions of the Virginia Property Owners’ Association act as set forth in Chapter 26 (section 55-508 et seq.) of Title 55.

The Act provides that a judgment or decree in this action must include, without limitation, reimbursement for costs and reasonable attorney’s fees for the prevailing party. Also, if the association prevails, it may also recover interest at the legal rate for the sums secured by the lien from the time each sum became due and payable. If the owner then satisfies the debt, the lien must be released, and failure to release the lien results in a penalty.

Once a lien has been perfected, the association must enforce the lien within 36 months from the time when the memorandum of lien was recorded. This time period cannot be extended.

Bankruptcy: ERISA Funds, the Bankruptcy Estate and Homestead Exemptions

In the case of Philips v. Bottoms Judge Payne of the United States District Court at Richmond, Virginia, upheld a Bankruptcy Court ruling that the Virginia homestead exemption, Virginia Code §34-34, was not preempted by ERISA, and that the bankruptcy trustee could claim a portion of an individual retirement account (IRA) not funded by the debtor’s funds from an ERISA-qualified plan.

In Phillips it was disputed that the IRA was not an ERISA-qualified plan. However, because the debtors used funds from an ERISA-qualified plan to create the IRA, the debtors contended that the exemption applicable to an ERISA-qualified plan exempted the IRA because it was created by funds having their origin in such a plan. The Bankruptcy Court held that the IRA was property of the bankrupt estate and that Virginia Code §34-34 was not preempted by ERISA. The Court further held that the debtor’s claimed exemption should be allowed in the amount of $21,532.

In the Bankruptcy Court the trustee sought to thwart the claim that the IRA funds were partially exempt by arguing that Virginia Code §34-34 was preempted by ERISA and therefore was not available to protect any part of the IRA from the claims of creditors. The Bankruptcy Court allowed $21,532 of the $48,858 in interest in the IRA because the parties had agreed that if an exemption was allowable at all, that was the correct amount.

The District Court, in its review, found that although the federal bankruptcy provisions permitted exemption of a payment under a pension to the extent reasonably necessary for the support of the debtor and any dependent, Virginia had enacted an alternative exemption provision, found in Virginia Code §34-34. The state provision, like the federal one it replaced, limited the exemption of retirement benefits. However, rather than limiting the exemption to the extent reasonably necessary for the support of the debtor and his dependents, the Virginia law provided instead that the exemption should not apply to the extent that the interest of the individual in the retirement plan would provides annual benefit in excess of $17,500. The District Court concluded that given the legislative intent underlying the Bankruptcy Code, it was logical to conclude that the limit on pension plan exemptions was Virginia’s attempt to set an exemption level appropriate for the Commonwealth, precisely as was envisioned by Congress when it revised the Bankruptcy Code.

The District Court affirmed the Bankruptcy Court’s decisions that the debtor’s interest in the IRA was part of the bankruptcy estate and that Virginia Code §34-34, even if theoretically preempted by §514(a) of ERISA, was saved from preemption by §514(d) of ERISA.

Collections: The IRS Can Be Helpful in Commercial Collections

Can you imagine using the IRS to help in collections? I can! I have an interesting technique that I have recommended for over twenty two years – I first ran an article on this in the May, 1992 (the 4th Edition) of Creditor’s News! Since recently others have also begun recommending this technique I thought that I would review it again.

After a sufficient amount of time has passed to consider a commercial credit account "uncollectible," the creditor should consider writing off the debt as a potentially tax-deductible bad debt. The creditor's loss may then become the debtor's gain and, as such, may be reported to the IRS on Form 1099 as income to that debtor.

Before actually writing off the debt, attempts should be made to contact the debtor and advise him of the intended action. If you do not have the debtor's social security number, try including a W-9 form with your letter. This could evoke some favorable response.

I have a form letter that I recently revised to accomplish all of this. The letter (written from the perspective of the creditor itself) advises the debtor that his account is seriously past due despite repeated attempts to make arrangements for payment. The debtor is further advised that unless the debt is paid in full within fifteen (15) days from the date of the letter, the creditor will, at its option, report the loss to the IRS on their form 1099c. This reporting will result in taxable income to the debtor (reference IRS Regulation S1.61-12). This reporting will result in an IRS audit risk to the debtor, as the IRS routinely runs computer matches of the 1099’s filed against tax returns actually filed to insure that all income is reported; there are severe penalties if not. The letter further states that the creditor is demanding the debtor’s tax identification information; the debtor is asked to do so within fifteen (15) days. The debtor must provide this information to the creditor under penalty of federal law. I recommend that you send with the letter a copy of the IRS form W-9 evidencing the unpaid debt, and advise the debtor that if you do not receive the W-9, the creditor will, at its option, file an IRS form 1099c incomplete. This will further increase the debtor’s chances of an audit.

Many debtors will wish to resolve the debt as a result of these actions. After all, who wants the IRS checking them out?