(Revised 01/03 ML #2833)
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(N.D.A.C. Sections 75-02-02.1-30 and 75-02-02.1-32(5))
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For various reasons, but usually because an applicant or recipient has sold property with a contract to receive a series of payments, rather than one payment, an applicant or recipient may own contractual rights to receive money payments. Such contractual rights are available assets subject to the asset limits. If the applicant or recipient has sold real property or a mobile home, and received in return a promise of payments of money at a later date, usually to be made periodically, and an attendant promise to return the property if the payments are not made, the arrangement is usually called a "contract for deed". The essential feature of the contract for deed is the right to receive future payments, usually coupled with a right to get the property back if the payments are not made. Contractual rights to receive money payments also arise out of other types of transactions. The valuable contract document may be called a note, accounts receivable, mortgage, or by some other name.
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Some contracts may have been entered into when interest rates were lower, or because a low interest rate or no interest may have been charged in a transaction between relatives. The contract may not be saleable or negotiable at face value. That is not to say that such contractual rights have no value. A proper valuation may be made by a process called "discounting", which will take into account the changes in the interest rates. The discounted value may be determined through a formula described in 75-02-02.1-32(5)(b)(1) or a request for a valuation, accompanied by the contract documents, may be sent to the Legal Advisory Unit. SFN 880, "Contractual Right to Receive Money Payments Valuation Request" (Appendix S) should be used when requesting a valuation. The request must indicate if the payments on the contract are current. If the payments are not current, the request must indicate the amount of each payment made and time each such payment was made.
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In some cases, the price and terms of a contract for deed may, in combination, be extremely favorable to the buyer. If the sale is made with a minimal down payment, low interest rates, a long payment period, or a combination of any of those factors, the effect may be a transfer for less than adequate consideration. In such cases, the valuation must also indicate the market value of the property sold as of the date of sale and the value of the contractual rights immediately after the sale.
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There is a presumption that the holder's interest in contractual rights to receive money payments, including, but not limited to, the seller's interest in a long-term contract for the sale of real or personal property, promissory notes, trust deeds, mortgages, and accounts receivable, is saleable without working an undue hardship. This presumption may be rebutted by evidence demonstrating that the contractual rights are not saleable without working an undue hardship.
When offering contractual rights for sale, they must first be offered to co-owners, joint owners, or occupiers. If no buyer is secured, the contract must be offered for sale by public advertisement. The following content is acceptable as a means of demonstrating a good faith effort to sell a contract for deed:
Example 1: Offered at 75% of value.
For Sale: Seller's interest in contract for deed. Secured by W 2 of Sec. 65-13-120. Remaining principal of $18,000, plus interest at 5.5%, is due in annual installments on Nov. 1, 2000 through 2004. Will consider offers which exceed $12,250. Call 555-3333 or write Box 12, Tampa Gazette, Tampa, ND 58990.
Example 2: Offered at 100% of value.
For Sale: Seller's interest in contract for deed. Secured by W 2 of Sec. 65-13-120. Remaining principal of $18,000, plus interest at 5.5%, is due in annual installments on Nov. 1, 2000 through 2004. This seller’s interest is offered at $16,334. Call 555-3333 or write Box 12, Tampa Gazette, Tampa, ND 58990.
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If an asset is sold in exchange for a contractual right to receive money payments, the principal payments received constitute a converted asset. (The interest portion of the payments is considered unearned income.)
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Some contractual rights may be written so the lender has the right to demand payment at any time. If so, the note is considered a demand note and can be called in at any time. If a note is written so the lender does not have the right to demand payment but the note is in default, it also becomes a demand note. Contractual rights may or may not have collateral or security to guarantee payment.
While the lender may have the right to demand payment, there are situations where the debt is not collectable and is not secured. In these situations, the debt has no collectable value. An applicant or recipient can establish that a note has no collectable value because:
- The debtor is judgment proof. A debtor is judgment proof when money judgments have been secured and not satisfied. An applicant or recipient may show a debt has no value as long as a money judgment obtained by any creditor (including the applicant or recipient) has been on file in a county in which the debtor lives, or owns property, for at least 60 days and has not been satisfied; or
- The applicant or recipient verifies the debt is uncollectable due to a statute of limitations. A satisfactory verification includes an attorney’s letter identifying the statute and facts that make a debt uncollectable due to a statute of limitations.
Applicants and recipients should be encouraged not to forgive debts that have been determined to be uncollectible. Such debts could have a future value if the debtor ever accrues assets. At each annual redetermination, determine whether the judgments are still on file or whether the debtor has any change in assets.
