Debts Related to Rental Properties in Bankruptcy

In previous blogs, I’ve written about the special problems of high-income earners in bankruptcy. Generally, people who make too much money can’t file a Chapter 7 bankruptcy, but, instead, have to qualify for a Chapter 13 bankruptcy. And in some circumstances they may not qualify for a bankruptcy under Chapter 13 of the Bankruptcy Code. One of the important ways to solve this problem is figuring out whether the debtor’s debt is mostly consumer debt (generally household debt), or mostly non-consumer debt (generally debt incurred for profit).

A typical example of consumer debt is a personal credit card charge to buy groceries, while the typical example of a non-consumer debt is a personal guarantee on your business’ line of credit.

High-income earners frequently own rental properties. If so, are the mortgages on those rental properties counted as consumer debts or non-consumer (business) debts in bankruptcy court?

As with so much in law, that depends. In the Tenth Circuit (the federal court region that includes Colorado’s bankruptcy court), there are some court decisions talking about this issue. According to those decisions, if you got the mortgage on a rental home while you were still living there, and then you moved out and rented the house, then that debt probably is a consumer debt. If, however, you purchased the property as a rental investment and have always used it as a rental, it is probably non-consumer debt. If the mortgage was originally a consumer mortgage, but you refinanced to keep the rental business running after you moved out, you may have an argument that it is now a non-consumer debt.

Why does this matter? It matters because mortgages on real property are usually the largest debts that an individual debtor holds. If some or all of this debt is non-consumer in nature, you might be able to file a Chapter 7 bankruptcy even if your income would otherwise push you into a Chapter 13.

This approach is not without risk, however. If you have equity in a rental property, it might be hard to keep that property in a Chapter 7 bankruptcy. A seasoned attorney can analyze your situation and help you plan for a bankruptcy that makes the most sense for you.

This post does not constitute legal advice. If you need legal advice, please contact the bankruptcy attorneys at Underhill & Underhill, P.C. to set up an appointment.

Priority and Your Mechanic’s Lien

If a homeowner has not paid you for your work on the property, you can use a mechanic’s lien to secure payment as a lien against the property. Your lien is only as good as its place in line against the property, however.

Typically, a mechanic’s lien is “junior” to all previously filed liens against the same property. (There are times, of course, when the mechanic’s lien actually is “senior” to the other liens.) I usually see this come up when a homeowner has first or second mortgages pre-dating the mechanic’s lien. If your lien is junior, then you have some problems. If any of the parties holding a senior lien forecloses against the property, they might wipe out your lien entirely. And, before you foreclose your lien, you have to make sure there is enough equity left in the property after these liens to make dealing with the foreclosure worthwhile. Finally, if you do foreclose, you might be stuck having to service the senior liens – pay the mortgages – if you want to keep the property.

Thus, there are times when you have the right to file a mechanic’s lien, but it might not make economic sense to actually sue to foreclose the lien. This is particularly true since 2008, after the housing market crashed and took many people’s equity with it.

Even if your lien is junior to other liens against the propoerty, it still might make sense to record your mechanic’s lien. The lien is an encumbrance on the homeowner’s title to the property. If done properly, a recorded mechanic’s lien typically will prompt title companies to require that the homeowner pay it off before they can convey the property to a new owner or refinance. Title companies will typically ask for payoff figures when they see a live lien on property.

Recording the mechanic’s lien is not the end of the story in keeping your lien “live,” however. If you simply record the lien and do nothing, it may end up unenforceable. I will talk more about that in future blog posts.

This post does not contain legal advice. If you need legal advice, please contact the real estate attorneys at Underhill & Underhill, P.C. to set up a consultation.

Recording Mechanic’s Liens

I have previously talked about what a mechanic’s lien is, and some of the basics in drafting one. Today, I want to discuss how you go about recording a mechanic’s lien. Only when the mechanic’s lien is recorded in the right office, on time, does it become effective. The easiest way to record the lien, of course, is to hire an attorney or other professional to handle the details for you.

Each County in Colorado has an office called the Clerk and Recorder. This office maintains a list of documents, such as deeds, showing who owns real property within the County. They also keep records of who has an interest in each parcel of property, including liens against real property. They do not record documents by the property address or legal description, because these things can change over time. Instead, they record documents by “Grantor,” the person giving away the property, or the debtor in the case of a lien, and by “Grantee,” the person receiving the property, or the creditor in the case of a lien.

Once your mechanic’s lien is properly drafted and a copy has been timely sent to the property owner, you need to record (or, formally file it) with the Clerk and Recorder. Recording it in the right Clerk and Recorder’s office is essential. To do this, you bring two copies of the lien to the Clerk and Recorder in the County where the property is located. The Clerk will then charge you a nominal recording fee based on the number of pages you are recording, and give you a file-stamped copy of the lien for your records. At that point, the world has notice of your lien against the property.

People frequently make the mistake of filing their lien in the wrong County. If the property is in Arapahoe County, but you recorded your mechanic’s lien in Denver County, the lien is no good. That is because it was filed in a different County than where the property is located. The purpose of the public records system is to give the world notice of interests in real property. No one looking for a lien against the Arapahoe County property will be searching the records of the Clerk and Recorder of Denver County.

Some Counties allow you to record mechanic’s liens by mail, but there are advantages to doing so in person that I will discuss in future blog posts.

This post does not contain legal advice. If you need legal advice, please contact the real estate attorneys at Underhill & Underhill, P.C. to set up a consultation.

New Colorado Roofing Law Prohibits Roofers From Paying or Rebating Customers’ Deductibles

On June 6, 2012, on the eve of the hail season, Governor Hickenlooper signed into law Senate Bill 12-038, nicknamed the Colorado Consumer Protection Residential Roofing Bill. We have written about some of the requirements of this law before.

The new roofing law outlaws a particular sales practice directed to homeowners who would be able to pay for needed roof repairs by making a claim under their property and casualty insurance policy. Virtually all of these policies have a deductible, which the homeowner is responsible for paying. Sometimes, a roofing sales rep offers to help the homeowner with the deductible in order to encourage them to sign up for roofing services.

Under the new law, however, roofers are prohibited from offering to pay, waive or rebate some or all of a homeowner’s deductible in order to get the job. If the insurance company learns that the contractor has made an offer of this nature, it can disqualify the roofer from the job. Then, the homeowner has to start over with a new roofing contractor, and the first roofer has lost the job — and maybe other jobs, too, since the insurance company will be alerted to the roofer’s sales practices.

More information about the Colorado Consumer Protection Residential Roofing law is in last month’s blog and is posted on our website.

This post contains general legal information only, and does not constitute legal advice. If you want to know how to comply with the new law, please contact the business and real estate lawyers at Underhill & Underhill, P.C. for a consultation.

Drafting a Mechanic’s Lien Statement

I have previously talked about some of the basics of mechanic’s lien rights under the Colorado mechanic’s lien statute.  I want now to talk a little bit about some of the concerns involved in drafting the actual lien itself.   This is, of course, all best handled by an attorney who is familiar with the statutory requirements and can keep track of the filing deadlines.

First, you need to determine the total amount the homeowner owes for work you did on the property.  Typically, this is going to have to do with the amount the homeowner owes you per your contract.  Did you agree to do the work for a flat fee?  Are there change orders?   If so, were they approved?  Does the contract allow you to charge more for hidden defects?  Have you provided a final invoice?  These are only a few examples of the questions you need to deal with.  You must get your arms around all of the charges related to the contract before drafting the lien.  Once you record the lien, you might have trouble collecting any different amount later.  And there can be consequences for claiming too high a dollar amount owed.

Next, you need to use the proper form of lien under the Colorado law.  While you can undoubtedly find a form online, your business or real estate lawyer is going to be the best source for this information.  The lien has to be signed and notarized in several places for different purposes at different times, and you have to do all of it right, and in the right order, to protect your right to collect.

Make sure all of the information on the lien statement is true and accurate!  In the past, I have seen problems where a lien has an incorrect property description or an incorrect owner.  This gives the homeowners arguments they can use to make trouble when you try to foreclose on the lien.  It might even invalidate the lien altogether!

Many times, giving notice of your intent to file a mechanic’s lien prompts the homeowner to make payment.  In future blog posts, I will discuss what can be done if the homeowner does not pay.

This post gives legal information only.  If you need legal advice specific to your situation, please contact us for a consultation.

New Colorado Roofing Law Requires New Contract, May Cause Problems

If you own or operate a roofing company, or work with them, you need to be aware of a new Colorado law just signed into law by Governor Hickenlooper.  The Consumer Protection / Residential Roofing Act now requires roofing contractors in Colorado to operate under written contracts that must include many specific terms.  These terms may already be included in some roofers’ contracts.  But, if the roofing contract does not have these terms, it may not be enforceable.  If you own or operate a roofing company, you may need to re-draft your contracts.  Now.

Even if a roofing company does rewrite its contract to comply with the new law, its problems are not necessarily over.  Some of the new contract provisions may expose roofing companies to new problems and create new opportunities for customers to avoid payment.  For example, roofing contracts must now permit the customer to cancel within seventy-two hours if the insurance company denies the insurance claim, in whole or in part, unless the denial was based on damage that was not reasonably foreseeable.

Roofing companies often get paid by a customer’s insurance company, and often have to submit supplements for work required for code upgrades, profit, and overhead, among other items.  Yet, this new law does not include exceptions for any of these items. So, if an insurance company initially denies a supplemental claim – even just as a negotiating tactic – the customer might now argue the whole contract is void.  We expect that this issue will evolve as collection lawsuits move through the courts.

More information about the new Colorado roofing law can be found on our website.

In the meantime, our firm has developed some strategies to help roofing companies and contractors deal with this new uncertainty.  Like so many other things, a properly drafted contract can help reduce problems.

This post provides general legal information only.  If you need legal advice specific to your situation, or need to re-write your contract to comply with Colorado’s new law, please contact us to set up a consultation.

The Basics of Mechanic’s Liens

We regularly represent contractors in collections against homeowners and commercial developers who do not want to pay their bill.  If your company performed labor or provided materials or services for a construction project or a home improvement job, such as a roof replacement, a remodeling job, or hardscaping, you are probably entitled to a mechanic’s lien.  This is a powerful piece of paper that acts as a lien against the owner’s property if they do not pay.  The mechanic’s lien is similar to the deed of trust (mortgage) against the home or construction project.  You can use a mechanic’s lien to foreclose the property in a lawsuit, similar to how a mortgage company can foreclose a property if the homeowner fails to pay the mortgage.

However, you have to take certain basic steps to protect your lien rights.  To begin with, you should document the last day of work on the job – usually but not always the last day you put hammer to nail on the customer’s house.  A mechanic’s lien has to be recorded (filed) in the Clerk and Recorder’s Office of the appropriate County a specific period of time after this critical date.  A copy also has to be served or mailed, return receipt requested, before you record it so that the owner gets notice of your intent to file the lien before it is recorded.  Finally, the lien is only effective for a certain period of time after the last day of work unless you take additional steps to protect your right to payment.  If you miss any of these deadlines, your lien rights may be lost forever.

There are many other considerations and pitfalls related to your mechanic’s lien rights, and I will address some of them in future blog posts.

This post provides general legal information only.  If you want legal advice for your specific situation, please contact us to set up a consultation.

Collecting from Your Customer’s Insurance Companies

From roofers to chiropractors, many professionals sell services to customers with the understanding that the customer does not have the money to pay today, but will pay once an insurance company gives them an award.  By their very nature, these kind of insurance claims tend to involve a lot of money.  Sometimes, the customer’s temptation to put the money to other purposes is too much.

We have seen many situations where the customer, after getting service, simply decides not to turn over the insurance proceeds. This is particularly true today, where unemployed customers might be desperate to save their homes or cars from repossession, or, they need a new car, a new refrigerator, or a vacation.  When this happens, what can the company do to collect?

The insurance company may not help you; it usually has no direct obligation to you, the contractor, doctor, or other professional.  It only has a contract with its customer.  Once it issues a check to the customer, the insurer will typically wash its hands of the situation.  It may not even talk to you at all.

So, what do you do?  You always have options, including suing your customer.  But, it’s best not to have the problem to begin with at all.  Some companies have had an attorney draft their contracts in such a way that there is a remedy under the contract for non-payment.  For example, medical provider’s contracts can require the patients’ attorneys to commit to turning over funds received from an insurance company or face their own liability.  A contract can contain instructions directly from your customers to their insurers regarding your payment.  We also draft contracts for construction contractors that set up a “trust fund” in favor of the contractor.  Remedies need to be set up before you get into trouble.

In future blog posts, I will discuss some of the other big advantages you can garner from proper contract planning, including options to multiply the damages you can recover against recalcitrant customers, or even prevent a customer from dodging your debt by filing a bankruptcy.

This post provides general legal information, but does not constitute legal advice.  If you want legal advice specific to your situation, contact us to set up a consultation.

Court Rules Changed January 1 For Denver Business Litigation Lawyers

We’ve received several questions about the new Civil Access Pilot Project rules for business lawsuits filed in 2012 and 2013 in the Denver metro area (Jefferson, Gilpin, Denver, Adams and Arapahoe Counties). 

The purpose of the Pilot Project is to streamline business lawsuits and minimize gamesmanship.  It is certainly true that business litigation can be expensive.  In the past some disputes were never brought to the courthouse because the cost of going to trial was probably going to be more than the dollar amount at issue in the dispute. 

Part of the expense of a lawsuit comes from the time that lawyers are required to spend complying with court rules for pleadings and motions and the time involved in gathering evidence and talking to witnesses before trial.  Any effort to reduce these costs – that does not benefit one side at the expense of the other – should be explored! 

The new rules are designed to better ensure that all known information relevant to a business dispute comes to light at the earliest possible point after a lawsuit is filed with the court.  The idea is that this will allow the parties, their lawyers and the judge to work together to determine the extent of additional discovery that might be necessary and to better control the rest of the discovery process.

Under the Pilot Project rules, the plaintiff (the party who starts the lawsuit) must put all material facts they know about in their complaint (the document that is filed with the court to start the lawsuit), including the details of their damages (the amount of money they want).  And plaintiffs now must now disclose all of their records immediately after filing their complaint.

The defendant (the party being sued) will now get the benefit of documents and witnesses known to the plaintiff before answering the complaint.  But, defendants now have to file their answer even if they intend to file a motion to dismiss the lawsuit for legal reasons. 

Judges are now supposed to become more involved in case management before trial by having telephone status conferences with the lawyers to deal with procedural disputes more quickly and inexpensively.  Under the old rules, the lawyers had to spend time researching, writing and filing motions and legal briefs with the court. 

The Pilot Project rules also make major changes in pre-trial discovery (the process of getting information from the other side before trial).  Before, the court rules allowed broad discovery; you could ask the other side to give you copies of anything that arguably was relevant to the lawsuit.  The new rules call for “proportionate discovery.”  In other words, you can’t ask for anything and everything you want to see, particularly in smaller cases.  Courts may rule out certain kinds of discovery based on the dollar amount in controversy or for other reasons, and parties are limited to one expert witness per issue. 

People who keep good business and financial records, use well-written contracts that spell out all the details of their agreements, send confirming letters and emails, and keep contemporaneous notes of meetings and phone calls, are likely to get a better result in a business lawsuit than those who rely upon handshake agreements, an ability to testify persuasively at trial, or memory. 

The Pilot Project rules only enhance the value of good contracts, notes, records and written communication! 

If you are in the middle of a business dispute and want to understand your rights and your options, call the business litigation attorneys at Underhill & Underhill, P.C. for knowledgeable and cost-effective legal representation.

This post gives general legal information. We can give legal advice only to those who become our clients.