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Tuesday, August 25, 2015

Negotiating with a Bank: Why do I have to Provide My Financials?

Negotiating with a Bank: Why do I have to Provide My Financials?



 

McGrath & Spielberger logo imageThe attorneys in my Firm represent clients against banks and other creditors on a regular basis. Whether it’s in a civil lawsuit, a foreclosure case, a situation which has not yet reached the litigation stage, or a post-judgment matter, negotiations just about always take place. In most all of these cases, we have a conversation with our client like the one below when the time comes to discuss the settlement offer I’m going to make on behalf of the client.



ME: In order to consider a settlement offer, the bank is requiring you to fill out this financial worksheet return it and to provide records such as your most recent 2 months of bank statements – complete, every single page, even the very last page of the bank statement which essentially says nothing.



CLIENT: Well, I don’t want to do that.



ME: I don’t blame you, I wouldn’t want to do it either.



CLIENT: So I don’t have to do it?



ME: Well, you don’t have to do anything – at least not unless there’s a court order or similar that says you have to do it. There’s no court order here which says you have to provide your financials.



CLIENT: Well that’s good.



ME: I agree.



CLIENT: Why does the bank want this stuff?



ME: Mostly so it can make an informed decision as to whether it makes sense to settle – and at what amount – versus pursuing you through the legal system for the full amount. Also, these creditors want to know if you can pay but don’t want to, or truly cannot pay, at least not right now. Of course, they can come after you for years, sometimes even decades. Also, if no settlement is reached, they want a head start on knowing what there might be for them to collect and where it is.



CLIENT: So if I provide my financials, they might use that information against me.



ME: This is true. I hope it doesn’t come to that, and we’re going to work hard to avoid that.



CLIENT: So what happens if I don’t provide my financials?



ME: If you don’t provide them, the bank is not going to consider any settlement offer and/or will assume that you have plenty of money and can pay the entire amount claimed.



CLIENT: Yes but how can the bank make me provide the financials?



ME: Again, at this stage they can’t “make” you – it’s up to you, you can decide what to provide and what not to provide. This is a voluntary negotiation, and each side can more or less choose to do – or not do – what it wants. That means you can decide not to provide your financials, but the bank can then decide not to negotiate with you.



CLIENT: I need to settle this case.



ME: Unfortunately, then, you probably need to provide your financials.



CLIENT: <sigh> Ok.



ME: Don’t worry, we’ll take a look at everything first, analyze how it may impact the settlement negotiations, and bring you up to speed on that before anything gets sent out – for now it’s confidential and privileged between you and us until and unless you direct us to share it with the bank or anyone else.



       Also, we’ll make sure that what we are send to the other side is done so as part of confidential, privileged, and non-admissible settlement negotiations. That will make it harder for the bank to use it against you later, or limit the ways the bank can use it, if a settlement can’t be reached.



CLIENT: This kind of sucks, but I guess I feel a little bit better about it than I did a few minutes ago.



ME: I wish you weren’t in this situation, but we’ll do what we can do. We can never guarantee how a case will go or what the end result will be – nobody can, and we’re not allowed to do that anyhow – but it’s pretty rare that we can’t get something worked out on behalf of a client.



CLIENT: Ok, I’ll get this financial data back to you later this week. .



ME: Great, thanks. We’ll look it over and get back to you with further advice within a few days of you providing that to us. Hang in there.

Monday, August 24, 2015

Summary Judgment

Motions for summary judgment can result in a case being immediately won or lost, and thus are incredibly important. Attorney Jason McGrath explains motions for summary judgment and summary judgments themselves based on his 19 years of experience as a trial attorney.



https://youtu.be/3sqK5FJes7o

If you are facing a lawsuit in North Carolina please fill out our confidential client intake form for legal assistance.

Wednesday, August 19, 2015

Tax Rates on Ordinary Income for Businesses

Tax Rates on Ordinary Income for Businesses



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article discusses the tax rates for businesses and business owners.



Ordinary Income Tax Rates



For most C corporations that have significant taxable income, the corporate income tax rate is essentially a flat rate of 34-35%.  Corporations with smaller amounts of income enjoy lower rates (15-25%) on their first $75,000 of taxable income.  As you can see below, a very small number of small businesses will receive the lower tax rates of 15 and 25%.



corporate tax ratesAdditionally, certain personal service corporations (i.e., lawyers, accountants, architects, and the like) are not entitled to graduated tax rates but receive a flat rate of 35%.  Individuals pay tax at the graduated rates of 15%, 28%, 31%, 36%, and 39.6%.



With a presidential election fast approaching and presidential hopefuls throwing their hat in the ring, you can expect some campaign talk of tax reform.  On the corporate side, Marco Rubio has talked about tax reform that would lower the tax rate for corporations and passthroughs to 25% (although many of the credits and deductions would be eliminated) and allow businesses to expense the cost of their investments 100% in the year of acquisition.  On individual tax reform, Rubio proposes reducing the number of individual tax brackets from 7 to 2 (15% and 35%), eliminate the standard deduction and replace it with a refundable personal credit, and create a $2,500 child tax credit.



Bag with income taxThe relationships among these tax rates can greatly influence the choice of entity.  At one time the maximum individual tax rate on ordinary income peaked at 70% and the top corporate tax rate was 46%, making forming a C corporation an attractive option to avoid the higher individual tax rates.  The difference in rates prompted most business owners to organize their entities as a corporation rather than a pass-through entity because corporate income was taxed at much lower rates.  During these high individual tax rate times, shareholders that wished to withdraw earnings created tax efficient strategies to avoid the double tax (e.g., owner-employees of a C corporation would distribute profits in the form of salary or fringe benefits, which are tax-deductible by the corporation and the fringe benefits are excludable from income of the employee in most situations).  Shareholders also loaned money or leased property to C corporations and withdrew earnings from the corporation in the form of rent or interest payments that were tax deductible as well.  The IRS began to crack down on these strategies and attacked payments of salary or interest as unreasonable compensation or disguised dividends.  Congress fought back by enacting penalties to patrol against excessive accumulations or avoidance of the individual progressive tax rates.  It wasn't hard for a corporation with good tax planning to justify the payment of reasonable compensation and accumulation of earnings on the basis of reasonable business judgment and thereby avoid constructive dividends and the corporate penalty tax.



Now, individuals and corporations are subject to the same top tax rate and dividends and long-term capital gains are both taxed at relatively low rates, the C corporation earnings accumulation strategy is much less compelling.  The parity in the individual and corporate tax rates, in conjunction with the prospect of two levels of tax when a C corporation is sold, provides a greater incentive to use a pass-through entity instead of a C corporation, particularly if the business intends to distribute its earnings currently, does not have owners who work for the firm, or holds assets that are likely to appreciate in value over a relatively short time frame.  It would not be beneficial to organize a venture that invests in passive assets such as real estate or financial assets to operate as a C corporation because the costs of doing so would be prohibitive in light of the double tax.  In some cases, however, C corporations still offer tax savings, especially for businesses able to pay out most of their earnings as compensation to their high-income owners.



For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."



Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Tuesday, August 18, 2015

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure Related Deficiency Judgments

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure-Related
Deficiency Judgments





As attorneys who handle real estate loan closings, mortgage loan disputes, mortgage loan loss mitigation matters, and foreclosure cases, we are frequently asked questions about recourse versus non-recourse loans, foreclosure-related deficiency balances and related legal judgments, and similar issues. The intent of this short article is to provide some information on these topics from our perspective, keeping in mind that our primary jurisdictions of practice are North Carolina and South Carolina (we also practice in FL, GA, OH, and TN).



Recourse mortgage loans versus non-recourse mortgage loans



Although the terms “recourse mortgage loan” and “non-recourse mortgage loan” are not commonly used in North Carolina, they are common nationwide and are often misused and misunderstood. A recourse loan is one which allows the lender (or whomever later acquires the loan) to foreclose upon violation of the loan terms (assuming that a valid deed of trust or similar is in place) and also allows the creditor the additional recourse of pursuing monetary damages from the borrower and any guarantors, etc. if the foreclosure sale proceeds are not enough to cover what is owed to the creditor.



In contrast, a non-recourse mortgage loan is one in which the creditor does not have the right to pursue the borrower and any other potentially obligated parties for monetary damages. Rather the creditor is limited to foreclosing on the property that serves as collateral for the loan (again assuming that a valid deed of trust or similar is in place).



Regardless of which side you are on, lender or borrower, it is absolutely crucial that you know exactly which type of loan is being contemplated or has been entered into. Recourse loans are more common in residential lending as compared to commercial lending, but not so much that any assumptions should ever be made.



Deficiencies and deficiency judgments



A “deficiency” in the mortgage loan context is related to the concept of recourse versus non-recourse mortgage loans. If the net proceeds from a foreclosure sale are not enough to make the creditor whole, and if the loan was a recourse loan, the creditor would typically be entitled to – or entitled to further seek – monetary damages from the borrower, any guarantors, etc.



The amount that the creditor believes it is legally entitled to still recover is typically called the deficiency. The creditor – whether by a separate, post-foreclosure civil lawsuit (the typical process in North Carolina) or by way of the foreclosure litigation itself (South Carolina) – can seek a judgment which states that it is entitled to that amount. This is typically referred to as a “deficiency judgment”.



We regularly assist clients in matters involving, or potentially involving, deficiencies and deficiency judgments. It’s fundamentally important to understand when the creditor may be able to seek the same, and whether doing so is going to make economic sense; sometimes spending $20,000.00 to possibly recover $50,000.00 simply isn’t worth if it some compromise can be reached. Both creditors and debtors may have good reasons to resolve such issues via settlement, but litigation always looms if not.

Friday, August 14, 2015

Responding to a Lawsuit Complaint

Based on his 19 years as a trial lawyer, Attorney Jason McGrath provides some fundamental and important information with regard to responding to a lawsuit after a defendant has been served with a summons and complaint by a plaintiff. His comments are more specific to North Carolina lawsuits, but have a general application nationwide.



https://www.youtube.com/watch?v=qBzkQaQysDQ

If you are in need of legal assistance with a Lawsuit in North Carolina, South Carolina, Tennessee, Georgia or Florida please fill out our confidential client intake form.

Attorney Termination of an Attorney-Client Relationship in North Carolina

Attorney Termination of an Attorney-Client Relationship in North Carolina



This topic came up again at yesterday's Mecklenburg County Bar Solo & Small Firm Section meeting, and I thought I would this publicize the below email exchange between myself and the North Carolina State Bar (ethics counsel). The below is not intended to be a comprehensive guide on this topic, but should be helpful in handling this often tricky situation. Good luck!

===============================



From: Jason McGrath [mailto:jason@McGrathSpielberger.com]
Sent: Sunday, July 06, 2014 2:31 PM
To: Ethics Advice
Subject: Q regarding cessation of work when client not in compliance with the attorney-client agreement

Good afternoon. I would appreciate your guidance on a very fundamental issue: whether there are any prohibitions on ceasing work if client has failed to pay fees as agreed, or has ceased all communication and stopped participating in the matter for a sufficient time. Briefly:


  1. Written and executed attorney-client agreement (“ACA”).

  2. ACA states that included in client’s duties are: (a) the need to pay the fees as agreed; and (b) the need to actively participate and timely communicate with regard to the case.

  3. ACA states that firm/attorney is not required to continue work, unless otherwise required by court order or the rules of professional conduct, if client does not pay as agreed. and/or does not actively participate and communicate.

  4. Client has not paid as agreed, and reasonable efforts to get Client to do so have failed . ..  AND/OR 4(a) Client has ceased participation and is non-responsive, and reasonable follow up efforts have failed to gain contact or response.



As long as firm/attorney is following the agreed-upon terms of the ACA, and there is no court order, etc. to the contrary, is there any reason that firm/attorney cannot cease work on the file, notifying Client of same, due to Client’s non-compliance?

Thank you!

=====================================================================

RESPONSE FROM NC STATE BAR:

Jason,

Thank you for your inquiry.

You need to follow Rule 1.16(c) and (d).

Rule 1.16 Declining or Terminating Representation



(c) A lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.

(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred. The lawyer may retain papers relating to the client to the extent permitted by other law.

In addition, you should send the client a disengagement letter.

A Disengagement Letter Should:


  • Provide reasonable notice.

  • Identify the matter that is the subject of the letter.

  • Clearly state the position of the firm/lawyer in terminating the employment and the reason for the termination.

  • Affirm the current status of the case and remind the client of any pending deadlines. (Recommendations from malpractice carriers are to be careful with statements about exact dates or deadlines because a misstatement can expose the lawyer to a malpractice claim.)

  • If a matter is in court, explain that the lawyer is filing a motion to withdraw and that the lawyer remains counsel of record unless and until the court allows her to withdraw.

  • Encourage the client to seek other legal counsel as soon as possible.

  • Summarize the status of any fees and costs collected and outstanding.

  • Explain any remaining charges for legal fees.

  • Include arrangements for transfer of funds on deposit in the trust account.

  • Include arrangements to transfer client file.

  • Suggest that the client keep copies of any documents you have sent them in the matter.



Please let me know if I can assist you further.

 

Assistant Ethics Counsel

North Carolina State Bar

PO Box 25908

Raleigh, NC 27611-5908

919-828-4620, ext. 238

Please be advised that the contents of this message and any reply may be subject to disclosure under North Carolina law. Informal ethics inquiries and advisories communicated via electronic mail are confidential pursuant to Rule 1.6 of the Rules of Professional Conduct. Attorney Client Assistance Program communications and Lawyer Assistance Program client communications via electronic mail are also treated as confidential pursuant to Rule 1.6 of the Rules of Professional Conduct and N.C. Gen. Stat. 84-32.1.

 

Tuesday, August 4, 2015

Employment Tax Considerations in Starting a Business

Employment Tax Considerations in Starting a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article focuses on the employment tax considerations in starting a business.

rain taxesWhen a principal owner of a business is also a service provider, employment taxes can be an influential factor in choosing the legal form for a business.  Employment taxes are imposed in addition to income taxes on employee wages and on net earnings from self-employment.  For instance, half of the employment tax on wages is paid by the employee through withholding and the other half is paid by the employer, which may deduct the tax as a business expense.  A self-employed individual, such as a sole proprietor or a general partner who derives income from a trade or business conducted by a partnership in which he is a partner, must pay a 15.3% rate (12.4% for social security and 2.9% for Medicare) on self-employment income up to a wage base $117,000 in 2014.  Self-employed taxpayers may take an above-the-line deduction for one-half of self-employment tax paid and an additional 2.9% Medicare tax on all income from self-employment.  In 2013, the Medicare tax rate increased to 3.8% for taxpayers with self-employment income above certain thresholds ($250,000 for a joint return, $125,000 for a married filing separate return, and in any other case $200,000).

S corporations are often used by service providers to avoid the uncapped Medicare portion of self-employment taxes.  For example, Architect, a single taxpayer, has $300,000 of net earnings from self employment and no other earned income.  If he is a sole proprietor, his self-employment tax will be $46,800 ($11,400 in Medicare Tax and $37,200 in Social Security Tax) on the entire $300,000.  That does not include amounts that he will pay for federal income tax.  If the Architect incorporates his business using an S corporation which nets the same $300,000 in income and pays Architect a salary of $300,000, he could potentially save $24,300 in self-employment taxes.  When the company pays him a salary the company pays half of the medicare and social security taxes and takes a deduction for those taxes paid.  If the company pays a portion of the income as a dividend or distribution to Architect instead of as a salary you have to be careful.  In cases where little or no compensation is paid and the S corporation distributes a large dividend to its sole owner, the IRS will likely reclassify all or part of the dividend as wages for employment tax purposes.

Employment taxes may also influence the choice between a limited partnership and an LLC.  Limited partners generally are not subject to self-employment tax on their distributive share of partnership income (apart from salary-like guaranteed payments).  The law regarding the treatment of LLC members was uncertain for some time and created an opportunity for tax avoidance by LLC members who were active in the business.  Regulations were recently passed by Congress in February of 2015 that were originally proposed in 1997 that prevents partners and LLC members who provide more than 500 hours of service for their firms in a taxable year from taking advantage of the limited partner exclusion from self-employment tax.

The employment tax regime is not applied uniformly to service providers who are partners, members of LLCs and LLPs, and S corporation shareholders, and in some respects the law is not crystal clear.  This inconsistency and uncertainty has fueled the growth of one-person S corporations.

Medicare Tax on Unearned Income

Beginning in 2013, a Medicare contribution tax of 3.8% was imposed on the less of (1) net investment income, or (2) modified adjusted gross income (adjusted gross income over a threshold amount of $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing separately, or $200,000 for all other taxpayers).  The tax is effectively an additional income tax, raising marginal rates for high-income taxpayers who have unearned income.  Net investment income is broadly defined to include interest income, dividends, annuities, royalties, rents (other than from an active trade or business), capital gains, less allocable deductions, as well as passive income (within the meaning of the passive loss rules of §469) from trade or business activities and income from the type of active securities and commodities trading often conducted by hedge funds.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.