Senior seeks discharge of $40K credit card debt
CLIENT no. 1 is 55 years old. She is now divorced and living by herself. The divorce judgment gave her the marital home six years ago. Ex-husband was not interested in owning the property. Divorces not only settle property rights between the spouses. It also settles the responsibility of who should pay for credit card and other debt. However, the divorce judgment does not bind the creditor. For instance, spouses going through divorce agree that husband will pay for American Express card, which they jointly owe $50,000. The divorce judgment says that husband will pay that off. What happens if husband does not pay it off? Wife, of course, is still legally liable for the $50,000 debt because she is jointly and legally liable on the card. American Express can and will sue both ex-spouses for $50,000 later on. Wife cannot use the divorce court judgment ordering the ex-husband to pay the $50,000. If she does pay the $50,000, she can sue ex-husband to collect what she paid because the divorce court judgment states that the $50,000 is ex-husband’s responsibility.
In the case of client no. 1, ex-husband did not pay a joint credit card debt of $20,000. Creditor has a judgment against client for $35,000. Further, a judgment lien has attached to client’s house for $35,000. Client doesn’t like the idea that there’s a judgment lien on her house. She wants it removed. What alternatives does she have to remove it?
Well, one-way is to pay creditor $35,000. Upon receipt of payment, creditor is required by law to file a ‘satisfaction of judgment’ notice with the court. Creditor is also required by law to immediately remove the judgment lien. What if client doesn’t have $35,000? Another way is to negotiate a settlement with creditor for an amount that is less than $35,000 as full settlement of the debt. If a settlement amount is mutually agreed upon, and client pays the settlement amount timely, then creditor is required by law to file a ‘satisfaction of judgment’ and remove the lien. Note that a negotiated settlement of a judgment lien must always be in writing. In that writing, creditor must specifically state that he will accept a specific less amount than what is owed as a full settlement provided payment is received by a certain date and time. This is also called ‘accord and satisfaction’. Why is this writing required? Because if the settlement amount is timely paid, but creditor does not file the ‘satisfaction of judgment’ and withdraw the judgment lien within a reasonable time, debtor can sue creditor for specific performance of the settlement terms and force the release of the lien.
A third alternative is a Chapter 7 or Chapter 13. In a Chapter 7 or 13, client can file a ‘motion to avoid judicial lien on real property’ to have the court order the removal or cancellation of the lien. How does this work? This only works if the judicial lien has attached to the exempt portion of debtor’s house. For instance, debtor’s house is currently worth $600,000. She has a first mortgage of $520,000. As a result, she has equity of $80,000. The entire $80,000 is exempt under bankruptcy law in Chapter 7 or Chapter 13. Since, client can exempt the $80,000, she can file the motion to avoid the $20,000 judicial line on her house. She will need to obtain an appraisal report that confirms that the current fair market value of her residence is $600,000 to support her motion to avoid lien. Creditor can object to her motion to avoid lien if creditor believes that the house is worth more than $600,000. If creditor can provide an appraisal report that says the house is worth $650,000, then there is a problem. A valuation hearing will be required to have the court determine what the correct current fair market value is, $600,000 or $650,000. If the court determines that the correct value is $600,000, then the court will grant debtor’s motion and order the removal of the lien. If the court determines that $650,000 is the correct value, then debtor’s motion to avoid lien will be denied.
The credibility of the appraisers becomes the bone of contention at the valuation hearing. The court has to decide which appraiser to believe. So, the qualifications of the appraiser are important in the final outcome.
Client no. 2 is 75 years old. He receives a pension, which is good enough for his modest senior lifestyle. Last year he liquidated the balance of his retirement account to pay off a portion of his credit card debt. After paying off $30K of credit card debt, he still owes today $40K. Client decided that he wants a Chapter 7 to finally be rid of the rest of his credit card debt now. A fresh start at 75 is still good than never. My oldest Chapter 7 client was 92 and he was still going strong with a 3rd wife who was 30. He was the Duracell bunny in human form.
Even at the reduced debt level of $40K, client still needs to give the lion’s share of his pension for minimum monthly payments of $1,200 to keep his cards current. He’s been paying the $70K for 15 years at $2,300 a month minimum when he was still working. In the last 15 years, he basically paid a fortune of $414K to keep $70K of credit cards current. If you consider $414K is more than what he currently owes on his first mortgage, he could have paid off the mortgage on his house in the last 15 years. Instead, he paid his credit cards $414K, but still owed the same $70K! Now, that just totally unfair, is it not? But most debtors just keep doing it until they retire. They think the debts will go away with minimum payments, but they remain the same, year in and year out. When they retire, they decide they don’t have any more money to give but by that time, they already lost their chance to save the money they paid for credit card debt. Just think about it, if this client had filed for Chapter 7, fifteen years ago, he would have today, $414K of cash in the bank, or would not owe anything on his house. You don’t have to be Einstein to figure out that you have to choose the right path at the right time. A fresh start with no debt, especially at the later stage of life is the right thing to do.
“Let the peace of Christ rule in your hearts, since as members of one body you were called to peace. And be thankful.” Colossians 3:15
* * *
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.