A debtor should seriously consider filing for bankruptcy when facing an inability to pay personal bills. Bankruptcy laws don’t take into consideration whether a debtor is current or not current in paying personal bills. A bankruptcy court:

• Does instead consider what the debtor’s income and expenses are to decide whether Chapter 7 or some other chapter should be filed.
• Next is going to see if all assets and creditors have been listed by the debtor.
• Then will send a notice to creditors about the bankruptcy filing.

The trustee is going to decide if there are assets that can be liquidated for the benefit of your creditors. Sixty days will elapse in a Chapter 7 bankruptcy. If nobody objects to the debtor’s bankruptcy, the court will discharge all debts, and creditors won’t be able to seize the debtor’s post-bankruptcy earnings or assets in order to pay down creditor claims.

Whether or not the debtor is current on paying personal bills at the time of filing for bankruptcy is not a factor. That’s why it is so important to talk with a bankruptcy lawyer while still current with bill payments. Doing so makes financial sense for considering whether to file a bankruptcy case or to continue to struggle to pay bills.

If you have questions about whether or not you qualify for bankruptcy, please pick up the phone and call me at 410-484-9000. I’d love to hear from you.

The post Should I File for Maryland Bankruptcy if I Can’t Pay Bills Next Month? appeared first on Baltimore Bankruptcy Lawyer.

When you have filed for bankruptcy, discharge is the desired outcome of that filing and discharge occurs when the debtor does everything they’re supposed to do.  The court enters a discharge once you, as the debtor:

• have confirmed a bankruptcy plan,
• made all of the payments under a plan, or
• when nobody objects to the bankruptcy in a Chapter 7 case,

Once the discharge has been entered:

1. the debtor’s creditors can’t sue them,
2. the debtor’s creditors can’t get judgments, and
3. the debtor’s creditors cannot enforce their rights against the post-bankruptcy earnings of a debtor following discharge.  I’ve called it the “pot of gold at the end of the bankruptcy rainbow.”

Dismissal is something quite different.  Once a person files a bankruptcy case, the court has jurisdiction over that person and their property.  When certain events occur, the court may well decide that it no longer has jurisdiction and the debtor doesn’t belong in bankruptcy.  If the court decides that it no longer has jurisdiction, the case is dismissed.

A dismissal can occur either before or after a discharge.  Dismissal occurring after discharge can end up being a favorable development for the debtor.  While the discharge order will stand, the court no longer has jurisdiction.

If dismissal occurs before discharge, the debtor doesn’t qualify for a discharge; it’s as though you were never in bankruptcy.  In many Chapter 13 cases, the case will be dismissed before a plan is confirmed and before there is a discharge.  Dismissal occurring before discharge usually is not a favorable development for the debtor.  At this point, the debtor must determine what needs to be done before their creditors begin exercising their remedies.

If you have questions about a bankruptcy dismissal or discharge, please pick up the phone and call me at telephone number 410-484-9000.  I’d love to hear from you.

The post How Does a Maryland Bankruptcy Dismissal Differ from a Discharge? appeared first on Baltimore Bankruptcy Lawyer.

When faced with paying your personal Maryland, Delaware, Pennsylvania or Virginia bills, considering whether to invade your IRA or 401(k) may seem to be a worthwhile possibility.

Before you decide to draw down your IRA or your 401(k), you should know that except for the IRS, creditors in in the United States cannot reach your IRA or your 401(k) to satisfy their claims against you. Even if your creditors get a judgment and they begin to seize wages, bank accounts, or other assets, they can’t get your IRA or your 401(k).

It is especially important to remember that your IRA or 401(k) are assets that could make all the difference in the quality of your retirement or your post-bankruptcy financial life. Before you decide to invade that IRA or 401(k), you want to take into account the protected status of these assets and the crucial role they play in your retirement or your post-bankruptcy financial life.

Still not sure? Read Ruin My Family? The Real Cost of Invading Your IRA or 401(k)

Another consideration for you to take into account in whether or not you want to pay your bills with that money is that the withdrawn money becomes part of your taxable income. As part of your taxable income, you’re going to have to pay taxes on it. If you pull the money out of your IRA or your 401(k), you’re also likely to have to pay a penalty of about 10 percent on the withdrawn amount. This tax penalty is a very big price to pay for invading those funds to pay creditors who could otherwise be discharged in your bankruptcy case.

Many of my clients who could have had a clean bankruptcy case where all their debt was dischargeable found themselves in a much more difficult position because they couldn’t afford to pay the tax on their early retirement account withdrawals and then owed nondischargeable tax debt to the IRS and the state government.

Before you decide to do invade either of these retirement assets, you should definitely consult a bankruptcy attorney to make sure that you don’t dissipate that valuable asset.

If you have questions about whether you should draw down your IRA or 401(k), please pick up the phone and call me at phone number 410-484-9000. I’d love to hear from you.

The post Should I Invade My IRA or 401K to Pay My Current Bills? appeared first on Baltimore Bankruptcy Lawyer.

The gold standard for Chapter 7 bankruptcies is the “no asset” case, when a debtor’s equity in his assets is less than allowed exemptions. Because so many people are way over leveraged, that happens 95% of the time. The “no asset” case is desirable for at least two very good reasons: (1) you get to keep all of your property; and (2) your case gets closed in around 100 days.

On the other hand, in some states where the exemptions are not especially generous, a debtor’s equity in their cash, investments, real estate, furniture and other assets may well exceed the allowed exemptions (this is especially so when a debtor has recently paid off a car that retains significant value). This happens frequently in Maryland, where exemptions are only $12,000 for everything but your house and your retirement accounts.

When a client is “over exempt” we try to identify this issue in the planning phase. The client is usually faced with a choice: make payments in Chapter 13 to buy back this equity from the creditors over time, or bargain with the Chapter 7 trustee to make a payment (or series of payments) to buy back the equity now.

Many clients simply don’t have a choice: with no access to cash, and holding an asset that is illiquid, they really have to face the rigors and commitment of a Chapter 13 case. But for many other clients, a Chapter 7 asset case is definitely the way to go. This is because the Chapter 7 trustee knows that the debtor is usually the best buyer for these assets, and a sale to the debtor, even at a reduced price, beats the unknown question mark of exposing assets to the open market. For this reason, debtors usually can strike a very favorable bargain with the trustee to pay cash to keep the assets. This result beats by a long shot the cost, time commitment and rigidity of Chapter 13 or, even worse, staying out of bankruptcy and letting the creditors pick away at your assets and your property.

For most Chapter 7 trustees, a small asset case is a mixed blessing. Sure it allows them to have a payday more than the $65 they typically receive in a case, but having an estate of say $7,500 requires plenty of notices and administration for creditors who may get only a penny on the dollar. Nevertheless, for the debtor, even when you have to write a check to the trustee you’re receiving a discharge of tens or even hundreds of thousands of dollars in debt.

The post My Assets Exceed My Allowed Exemptions; What Should I Do? appeared first on Baltimore Bankruptcy Lawyer.

Real estate transactions may be very simple or incredibly complex. Further complicating the already intricate process of purchases and sales, creations of subdivisions and problems of zoning is the reality that almost every real estate transaction involves some degree of credit financing. Whether on the commercial side or the consumer side, the financing for even the simplest modern real estate transaction is burdened by detailed documentation that almost always involves hundreds of pages of dense verbiage and tiny fonts. In the rush to close these deals, humans make mistakes.

In refinance transactions, common mistakes may include listing the wrong legal description for the collateral; a defective release of the prior mortgage or deed of trust; or recording late, out of sequence or in the wrong jurisdiction. When a refinancing lender pays an existing lien but makes a mistake that could cost that lender important priority in the real estate, that lender may frequently rely upon the remedy of equitable subrogation to save itself from a total loss.

What is subrogation?

Subrogation is a doctrine well known in the insurance world where payment of the claims of another is common. In many instances, after paying on a claim an insurance company will step into the shoes of its insured in order to assert rights against the person or entity that caused the damage to the insured. The insurance company becomes the subrogor and is entitled to all of the rights of its customer who has been paid and may have no longer any interest in pursuing the person who has damaged them.

Similarly, in a real estate refinance transaction a new lender is paying an existing lender. The refinance may occur for many reasons, including to lower the interest rate, cure a default or pull more cash out of the real estate. What’s supposed to happen: the new lender pays the prior lien, the new lender records a mortgage and the paid lender records a release.

But sometimes mistakes happen.

If the sequence doesn’t go the proper way but the new lender pays off the old lien the new lender may invoke the remedy of equitable subrogation to try and set things right. This subrogation is equitable because even if the new lender made a mistake, it would be fair for all the affected parties for the new lender to step into the shoes of lender that had been paid off. This way, the new lender will enjoy all of the rights that were held in the released lien, at least to the extent that the old lender had been paid.

The new lender will have to file a complaint in a court that has jurisdiction over the property in order to obtain the right of equitable subrogation. The parties should expect to have a contested lawsuit, usually between the new lender (or their title insurance company) and some other person with an interest in the property, whether a subsequent lienor or judgment creditor.

The new lender may not prevail in the lawsuit if an intervening equity would be harmed by allowing equitable subrogation. This may happen if another lienholder or property owner would be unfairly affected by the subrogation. Courts will view these disputes on a case by case basis. However, since the facts are usually well known to all parties and not in significant dispute, the courts can generally resolve the issues on motions for summary judgment.

Lenders who are faced with sudden or unexpected priority or recording issues should always consider the remedy of equitable subrogation as a possible solution to their problem.

The post Fix Real Estate Problems With Equitable Subrogation appeared first on Baltimore Bankruptcy Lawyer.

The rule for high income earners is that if their gross income exceeds the state’s median income for the debtor’s family size the debtor will need to fill out the “long form” to determine if the debtor qualifies for Chapter 7. If the resulting monthly net disposable income x 60 exceeds $10,000 or 25% of the debtor’s unsecured claims, the debtor fails the means test and will be forced into a Chapter 13 case. This prospect can be daunting due to the Bankruptcy Code’s rigid interpretation of allowed deductions against provable income.

Issues of median income, the means test and the “long form” only apply to debtors whose liabilities are primarily consumer debts. Upon learning of this limitation, business owners are frequently relieved because they only want to discharge business debts, which dominate their general unsecured liabilities.

Unfortunately, the Bankruptcy Code does not distinguish between debts to be discharged and debts to be paid in determining whether a debtor owes primarily consumer debts. As a result, the business debts the owner has guarantied may be substantially less than the owner’s home mortgage. If so, the owner will not qualify for Chapter 7 and may have difficult choices to make because of the amount of the projected Chapter 13 payment.

The challenge then is to find business debt that can be used to turn the imbalance into the debtor’s favor. If the business was wholly owned the debtor may argue that all the business debt represents a contingent obligation of the debtor, depending upon whether creditors argue that the debtor and his company were merely alter egos of each other. The Bankruptcy Code does not distinguish between contingent, unliquidated, and/or disputed claims and other debts owed. This technique may be sufficient if the defunct company has incurred substantial debt.

Similarly, debts arising from long term leases, franchise agreements and other extended royalty arrangements may give rise to ballooning obligations that, when included in the debtor’s bankruptcy schedules, cause the scales to tip in favor of the debtor being considered other than a person owing primarily consumer debts.

The home mortgage presents special problems for a business owner that is trying to discharge debt from a company gone bad, but that business may have enough hidden liabilities to overcome the consumer debt that would bar the debtor from Chapter 7.

The post The Mortgage and the Business Bankruptcy appeared first on Baltimore Bankruptcy Lawyer.

Long before Donald Trump made national headlines for bankrupting his failing Atlantic City casinos, a great but lesser known industrialist named Samuel Insull found himself facing bankruptcy and charges of fraud and embezzlement. Insull had been an important figure in the growth of the national electricity grid and had been the right hand man of Thomas Edison.

By 1883 Thomas Alva Edison had become a national icon after inventing the groundbreaking phonograph and commercializing the electric light bulb. Edison hired 23 year old Samuel Insull to take charge of the great inventor’s campaign to bring power to the world’s great cities. Insull quickly became indispensable to Edison.

What history doesn’t tell us however is that despite Edison’s great fame, he often struggled financially. After Insull joined him the two frequently huddled over the company’s books, mulling over schemes to put off creditors. In matters of finance, Edison deferred to Insull, but Insull himself later said that he himself “knew little or nothing” about the subject. Edison’s assets were tied up in the various companies that supplied Edison Electric. He had no cash and was embarrassed that he could barely meet his household expenses.

Insull’s insight eventually helped Edison recover from near bankruptcy. Insull became the CEO of General Electric, a company Edison had founded. After a merger with a competitor Edison lost control of the company but Insull thrived. Edison’s businesses would have gone on to great success if they followed the growth of the companies that Insull went on to manage after he emerged from under Edison’s shadow. Insull was a better businessman than Edison would ever be.

In the 1890’s Insull moved to Chicago, then a “frontier town.” He acquired generators, an arc light company, coal mines and a steam railroad that provided vertical integration for his ultimate goal: a six thousand square mile regional power network. From The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World (by Randall Stross):

Insull became famous in his own right, even appearing on the cover of Time magazine in 1926. He gave generously to many charities and used his clout to press Chicago’s wealthiest to join him, even if they did not share his color-blind enthusiasm for some causes, including the Chinese YMCA and the education of African doctors. He paid to send a young African American singer on a study tour of Africa and an African American Pullman conductor on a European trip.

Insull put everything he had into the battle against impersonal economic forces far more powerful than he. His personal fortune had increased from around $5 million in 1927 to $150 million in 1929. But his wealth resided entirely in shares of his holding company, the publicly traded Insull Utility Investments. By 1932, those shares were worthless, and he had fallen so far in debt that a banker described him as “too broke to be bankrupt.”

The other investors who also lost everything turned on Insull, and he was eventually indicted for mail fraud, embezzlement and violations of the Bankruptcy Act. Insull’s integrity was ultimately vindicated as he was acquitted in three trials during 1934 and 1935. Insull did not live long after his downfall and disgrace, dying in Paris in 1938.

Insull’s story is a powerful account of how someone in business can appear to do everything right, and still end up in bankruptcy. Much like Donald Trump.

Content for this article was obtained from Stross, Randall E. (2007-03-13).

The post The Sad Bankruptcy of Edison Protégé Samuel Insull appeared first on Baltimore Bankruptcy Lawyer.

On TV, process servers appear as clowns, ice cream vendors or construction workers and after engaging the hero in offhand chatter force papers into his hand announcing “You’ve been served!” The hero looks down with an expression as if his fingers have been forced into a muddy goo and we cut to a commercial.

In real life, clients need never pay for these extravagant masquerades because service is actually fairly easy. Maryland, Delaware, Pennsylvania and Virginia all authorize service upon almost anyone of adult age at the defendant’s usual address.

In Maryland:

Service of process may be made within this State … if the person to be served is an individual, by leaving a copy of the summons, complaint, and all other papers filed with it at the individual’s dwelling house or usual place of abode with a resident of suitable age and discretion.

In Pennsylvania:

Original process may be served upon a defendant who is an adult by handing a copy to the defendant; or by handing a copy at the residence of the defendant to an adult member of the family with whom the defendant resides; but if no adult member of the family is found, then to an adult person in charge of such residence.

In Virginia:

In any action at law or in equity or any other civil proceeding in any court, process, for which no particular mode of service is prescribed, may be served upon natural persons as follows:

By delivering a copy thereof in writing to the party in person; or if the party to be served is not found at his usual place of abode, by delivering a copy of such process and giving information of its purport to any person found there, who is a member of his family, other than a temporary sojourner or guest, and who is of the age of sixteen years or older.

In Delaware:

Upon an individual other than an infant or an incompetent person by delivering a copy of the summons, complaint and affidavit, if any, to that individual personally or by leaving copies thereof at that individual’s dwelling house or usual place of abode with some person of suitable age and discretion then residing therein.

These rules seem fair to the courts and the attorneys who draft the rules because they believe that service of legal papers shouldn’t be a game to see if a plaintiff can successfully force the complaint directly into the hands of the defendant.  Instead, the focus is on whether the service is reasonably likely to alert the defendant that there’s been an action or a proceeding filed against them. If so, the defendant knows that they need to take some steps to protect their legal rights.

Service issues can become difficult when people attempt to evade.  They may see the sheriff coming and refuse to answer the door.  In that event, the plaintiff’s attorney will file an affidavit from the process server that the person seems to be evading service and ask the court to enter an order saying all the plaintiff has to do is certify a mailing to the defendant and post the papers at the defendant’s last known address.  If the court grants that request the defendant will be determined to be served even if they never have the papers placed directly into their hands.

The post Serve A Complaint At The Individual’s Dwelling House Or Usual Place Of Abode With A Resident Of Suitable Age And Discretion appeared first on Baltimore Bankruptcy Lawyer.

The Form 22 system is designed to eliminate the angst of judicial discretion. Confusion has arisen however because BAPCPA’s meme that bankruptcy abuse should be curbed for the benefit of creditors does not always play out consistently amongst the different iterations of Form 22. This divergence of result occurs primarily when Chapter 13 authorizes specific deductions from disposable income that are not accepted in BAPCPAized Chapter 7.

The problem: Side by side comparisons of Forms 22A and 22C prepared by the same debtor[1] may display substantial monthly net income in Chapter 7 but no income, or monthly loss, in Chapter 13. By showing surplus income, the Chapter 7 debtor is now faced with a presumption of abuse, endangering the attempt to obtain a Chapter 7 discharge. Creditors, the Chapter 7 trustee or the Office of the United States Trustee may file a motion to dismiss the Chapter 7 case when the correctly completed Form 22A demonstrates this statutory presumption of abuse. Section 707(b)(1) provides the following procedure upon the finding of abuse:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor’s consent, convert such a case to a case under chapter 11 or 13 of this title, if it finds that the granting of relief would be an abuse of the provisions of this chapter.

The specific provisions allowing for Chapter 13 deductions that tend to cause the greatest difficulty are the 401(k) loan repayment exclusion and child support deductions.

The 401(k) loan repayment issue arises due to Section 1322(f), a mandate that

A plan may not materially alter the terms of a loan described in section 362(b)(19)[2] and any amounts required to repay such loan shall not constitute “disposable income” under section 1325.

The child support problem arises due to Section 1325(b)(2), providing the following exclusion from income:

For purposes of this subsection, the term “disposable income” means current monthly income received by the debtor (other than child support payments, foster care payments, or disability payments for a dependent child made in accordance with applicable nonbankruptcy law to the extent reasonably necessary to be expended for such child) …

Consistent with the requirements of Section 707(b), Form 22A provides no deduction for child support received or repayments due on 401(k) loans.

The Possible Solution: Judicial Discretion or Special Circumstances

When faced with a motion to dismiss the Chapter 7 case due to the presumption of abuse, a debtor may attempt to rebut the presumption, ask the court to exercise its discretion by not dismissing, or may seek to establish that special circumstances exist. Section 707(b)(2)(B) provides the framework for special circumstances:

(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

(ii) In order to establish special circumstances, the debtor shall be required to itemize each additional expense or adjustment of income and to provide—

(I) documentation for such expense or adjustment to income; and

(II) a detailed explanation of the special circumstances that make such expenses or adjustment to income necessary and reasonable.

(iii) The debtor shall attest under oath to the accuracy of any information provided to demonstrate that additional expenses or adjustments to income are required.

(iv) The presumption of abuse may only be rebutted if the additional expenses or adjustments to income referred to in clause (i) cause the product of the debtor’s current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv) of subparagraph (A) when multiplied by 60 to be less than the lesser of—

(I) 25 percent of the debtor’s nonpriority unsecured claims, or $6,000, whichever is greater; or

(II) $10,000.

The Judicial Response

Many debtors faced with a motion to dismiss their Chapter 7 case have asked the court to find that the inconsistency between Forms 22A and 22C in respect of 401(k) loan repayments and child support received permit the court to exercise discretion to deny the motion, or constitute sufficient special circumstances to rebut the presumption of abuse. As may be expected, all courts do not agree on the appropriate result.

Cases denying the motion to dismiss

A leading case denying a motion to dismiss is In Re Skvorecz 369 B.R. 638 (Bankr. D. Colo. 2007), a case dealing with a 401(k) loan repayment case. Faced with the U.S. Trustee’s motion the court ruled:

If the Court were to dismiss the case pursuant to section 707(b), the Debtor could refile his case under Chapter 13 and unsecured creditors would be paid nothing based upon provisions of sections 1322(f) and 1325 and the deference accorded by Congress to 401(k) … loan repayments. Alternatively, if the Court were to convert the case to Chapter 13, “with the Debtor’s consent,” the same result would obtain. If part of the intent of Congress in tying Chapter 7 relief to a means test, was to require a debtor to repay his creditors if he is able to, then it would be nonsensical that the very payments or expenses which tip the calculation so as to create the presumption of abuse, an indication of an ability to repay, are the same payments or expenses that are excepted from “disposable income” in a Chapter 13.

369 B.R. at 644. Refusing to give credence to this “absurd result” the court denied the U.S. Trustee’s motion. Citing the use of the discretionary “may dismiss” language of Section 707(b)(1), the court did not reach the question of whether the divergence between Forms 22A and 22C constituted “special circumstances.”[3] See also In Re Siler 426 B.R. 167 (Bankr.W.D.N.C. 2010) (401(k) loan repayment case):

To use the Means Test to deny Chapter 7 relief to an individual, who could not pay unsecured creditors in Chapter 13 and who, as a matter of clear congressional election would not be required to do so, is absurd and contrary to the purpose of the Means Test.

426 B.R. at 177

Cases supporting denial of motion to dismiss due to “absurd” Chapter 13 result include:

In Re Phillips 417 B.R. 30 (Bankr. S.D. Ohio 2009); In re Latone, 2008 WL 5049460 (Bankr. D.Ariz. 2008); In Re Mravik 399 B.R. 202 (Bankr. E.D. Wis. 2008)

Cases granting the motion to dismiss

A leading case granting a motion to dismiss is In re Castle, 362 B.R. 846 (Bankr. N.D. Ohio 2006). In In re Castle, the debtors argued that the conflicting provisions of § 707(b), where child support payments are not excluded from the disposable income calculation, and § 1325(b), where they are, cancel each other out, and “they should be given the benefit of the doubt, and hence be permitted to proceed with their Chapter 7 case.” 362 B.R. at 850. The court, in rejecting this argument, noted that Congress explicitly allowed the exclusion of child support payments from the disposable income calculation only in Chapter 13:

The Debtors in this matter seek to use the general phrase “special circumstances” in § 707(b)(2)(B)(i) to modify what Congress made explicit; that only in a Chapter 13 case, not a Chapter 7 case, could the term “current monthly income” exclude child support. And where “Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.

Id. at 851.[4]

Cases disregarding potential Chapter 13 result in dismissing Chapter 7 cases include:

In Re Smith, 388 B.R. 885 (Bankr. C.D.Ill. 6-20-2008) (401(k) loan repayment case); In re Johns, 342 B.R. 626, 629 (Bankr. E.D.Okla. 2006)

As of the date of these materials (April 11, 2013) the author could identify no Maryland court and no court above the bankruptcy court level that has addressed the specific issue whether a court should consider a Chapter 13 result in determining a motion to dismiss for abuse under Section 707(b)(2). However, the 9^th Circuit has ruled that the repayment of 401(k) loans is not a special circumstance allowing a debtor to overcome the presumption of abuse. See In Re Egebjerg, 574 F.3d 1045 (9th Cir. 2009).

The post If Creditors Will Get Nothing In A Chapter 13 Bankruptcy, Can I Still File Chapter 7 Even If I Don’t Qualify? appeared first on Baltimore Bankruptcy Lawyer.

People are busy. Children may be sitting at the table or waiting in daycare. The settlement officer may have three or four more closings that day. Documents may need to have some changes that are handwritten and initialed. Besides, most borrowers (or their spouses or children or parents) really want that home or car or business loan, so they are eager to sign or feel pressured to sign.

If, after the settlement, all goes well no one will likely ever read these documents. But what if there is a default or a dispute and the borrower doesn’t want to be bound to the terms of the deal. Is there an escape?

The likely answer is almost certainly that the borrower will be stuck with the documents he or she signed. The universal rule is that a person who executes a document is legally obligated to read it before executing it. In most states, a person’s signature does not even have to be legible and the person signing does not even have to be literate in order to be bound by an executed legal document. As long as the beneficiary of that document can prove that the person actually signed, the courts will enforce the document. If the person seeking to escape the deal claims illiteracy, they will be deemed to have asked that the document be read to them before signing.

Of course, there are defenses to written documents, although they are hard to establish. The primary defenses are fraud, duress and mutual mistake.

Fraud

Many unhappy borrowers attempt to assert that they were induced into signing by promises from the other party that something was going to happen other than what the documents provide. This is an argument that is almost always bound to fail because most legal documents contain an integration clause or a merger clause. According to Nolo.com:

This is a provision in a contract stating that the contract represents the full and final agreement of the parties and supersedes any other agreements, oral or written, on the same subject. The purpose of an integration clause is to prevent one party from later claiming that what the parties actually agreed to was different from what was written in the contract.

Unhappy parties sometimes fare better by claiming that they were fraudulently induced into signing a contract because the other party never had any intent to actually carry through with the terms of the deal. This is more common in contracts to provide goods or services than in debtor/creditor transactions.

Fraudulent inducement is extremely difficult to prove because the unhappy party needs to show a specific fraudulent intent on the other party. Fraud may be impossible to establish, especially when the other party is a lender who has fully performed at the beginning of the deal by advancing money, and is now only waiting to be repaid.

Duress

To establish duress, a party must show that the other party committed a wrongful threat while the complaining party was overwhelmed by fear and precluded from using free will or judgment. This defense usually requires that a person show they were physically intimidated into signing a document. The claim that someone in default of a contract was forced to sign a settlement document because the lender threatened to foreclose on their home or seize their bank accounts will almost never succeed if the other party was authorized by the contract or the law to take those actions.

Mutual Mistake

A mistake is an error that causes one party or both parties to enter into a contract without understanding the obligations or results. When only one party has a mistake that will usually be insufficient to negate the deal. However when both parties make a mistake this is the defense that is most likely to enable a party to escape their obligations. The perfect example is when a contractor agrees to dig a foundation for a set price, but it turns out that an unusually large boulder resides in the ground that would require a much more expensive process for excavation. Unless the contract specifically assigns that risk to one party or the other the court may say that both parties were mistaken as to the condition of the ground, and therefore the contractor is relieved of his duties. Mistake is a very fact-intensive defense that will require a court to understand what both parties to the contract believed at the time the deal was signed.

Contract defenses are hard to prove. Even in the most confusing circumstances a signed document will almost always stand up in court. This is why it’s important to understand all of the terms of anything you sign before you put the ink to the paper.

The post Signed Documents Will Be Enforced Without A Good Defense appeared first on Baltimore Bankruptcy Lawyer.