Senior needs bankruptcy relief. But Chapter 7 or 13? 

Senior needs bankruptcy  relief. But Chapter 7 or 13? 

THE client is 74. Her husband passed away two years ago. Her only source of income is social security of $2,000 a month, which was her husband’s social security. Her own social security was $1,500 a month. So how come she only has $2,000 of social security and not $2,000 plus $1,500?

Because when you are married to each other, the widow or widower, gets to keep only the higher of the two. Since her social security was $1,500 and her husband’s social security was $2,000, when her husband died, she got to keep the $2,000. However, her own social security disappears! Sad but true — it sucks. That’s the unfair way that it works.

The client and her deceased husband owned a house with $100,000 of equity. It had a fair market value of $450,000 and a first mortgage balance of $350,000. The mortgage payment was $1,600 a month. So you can see immediately that there’s a problem. Since client inherits the higher social security benefit of $2,000 but loses her own social security benefit of $1,500, after paying the mortgage of $1,600, there’s only $400 left for expenses. The other problem is the client owes $40,000 of credit cards. She needs $1,300 a month of minimum payments to keep these cards current.

Well obviously, she wanted to keep living in the house. So right after husband died, she tried to get a reverse mortgage. A reverse mortgage pays off the balance of your mortgage like a refinance, but unlike a refinance, she would not have to pay a monthly mortgage payment. She gets to live in the house until she dies. The balance of the mortgage gets bigger every month because even though she doesn’t have to pay the monthly mortgage, the unpaid mortgage payment is added to the outstanding balance of the loan. If she actually did get a reverse mortgage, she would not have to pay $1,600 a month for mortgage, she can pay zero every month and she can live in the house until she dies.

The problem of getting a reverse mortgage is that there is a maximum limit that it will pay off. That maximum limit is about $300,000. Since client owes $350,000, she is over by $50,000. This is resolved by paying down the $350,000 to $300,000. In other words, she has to get $50,000 from somewhere then pay down the mortgage to $300,000. After that, the reverse mortgage will pay off the $300,000. It is quite easily done when you are able to get $50,000 from somewhere, however, it is impossible to do when you have no sources to resort to. The client was not able to produce $50,000 so she couldn’t get a reverse mortgage.

So why not sell the house and rent a room for $500 a month? She doesn’t want to do this. She’s lived in the house with her husband and children for most of her life, so she wants to live the rest of her life in the house.

Since the client is still perfectly healthy at 72, she may still live to 90, another 20 years. So what does she do? A relative who lives out of state wants to buy a house in California as an investment. She is willing to sell the house to the relative for $100,000 below market and in exchange, the relative agrees to let her stay in the house without paying rent for as long as she wants, or until she passes on.

This is a good deal for the client because she gets to live in the house without having to worry about a mortgage or rent payment. Just as a caveat, if you are thinking of this kind of arrangement, make sure that you create a life estate and record it with the recorder’s office. A life estate is a right to live in the house until you die. Whoever buys the house cannot evict you because of the life estate. The client did not create a life estate but merely relied on the goodwill of the relative who purchased the house. What happens if the relative sells the house? Since there is no life estate, the client will most likely have to start paying rent to the new owner. But let’s hope this never happens until after the client has left this world and spend the rest of eternity with Jesus, God the Father and God the Holy Spirit in heaven. In Heaven, she can live in a mansion for free because Jesus said that in His Father’s house, there are many mansions where she can stay for free: “In my Father’s house there are many mansions, and if not so, would I have told you that I go to prepare a place for you?” John 14:2

Our problems on the earth are so many and myriad. Even a place to stay and live is a problem. In heaven, our loving God provides us with everything for free!

Now that client has lived in the house rent-free for a year, she’s getting tired of using $1,300 from her $2,000 of social security benefits. In the last 12 months, $16,000 from her $24,000 of social security to keep her $40,000 of credit card debts current. Is this a financially sound thing to do for the rest of her life? I don’t think so. She just paid $16,000 in one year, yet she owes the same $40,000 of credit card debt. If she lives another 20 years, she would have paid her credit card masters $320,000 yet she will still owe the same $40,000!

She’s thought the whole thing over and wants to get rid of the $40,000 cards with a Chapter 7 petition. I would certainly file a Chapter 7 for her to discharge the $40,000, but its really not that simple. The problem is that she sold her house to the relative for a lot less than market value. This is a red flag in Chapter 7. In Chapter 7, the trustee can sue the relative to get the house back. It’s a big problem.

The alternative is a Chapter 13 with the lowest plan payment possible, maybe $250 per month for 60 months. After paying $15,000 of principal, no interest in Chapter 13, the balance $25,000 would be discharged. She can still have $1,750 of social security left for what she wants to do after the plan payment. Maybe she can take a cruise in Southeast Asia. That’s a good thing to do and enjoy when you’re 72 and still healthy.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

“THE LORD IS NEAR TO ALL WHO CALL ON HIM, TO ALL WHO CALL ON HIM IN TRUTH.” PSALM 145:18

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Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with the attorney. The first general consultation is free.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or at 20274 Carrey Road, Walnut, CA 91789.

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