CLIENTS are seniors and they have a house in Los Angeles County where the homestead exemption is $600,000. The exemption amount refers to the equity in their house. Equity means fair market value minus all mortgages and liens on the house. The house’s current market value is $1.1 million, while the mortgage balance is $650,000 and there are no other liens on the house, so the equity is $450,000. Since the homestead exemption is $600,000, the entire equity of $450,000 is covered by the exemption.
Clients owe $417,000 of unsecured debt. A portion of that debt is contingent and unliquidated, about $200,000. Contingent and unliquidated means that how much is really owed is not yet determinable legally because certain things have to happen first. In their case, a lawsuit has been filed against them claiming $200,000 but there is no trial yet and no judgment saying what they owe the plaintiff is $200,000. This factor is relevant because $417,000 is just a single digit from the Chapter 13 limit but contingent and unliquidated debts are not part of the limit calculation. Well, that’s good for clients, as otherwise, a higher claim by any one creditor can push them beyond the limit for Chapter 13, and they would be forced to choose between 7 and 11, not the convenient store mind you. Chapter 11 is a lot more expensive than Chapter 13, while a 7 puts their house at risk of being lost to the Chapter 7 trustee.
In Chapter 13, the trustee has no power to sell their house. The most the trustee can do is try to increase the proposed plan payment. Since their equity is fully covered by the homestead exemption of $600,000, the liquidation analysis in Chapter 7 is entirely in their favor. Their plan payment can go way low depending on their disposable income. In this case, clients have proposed a 5% plan. This means they only pay 5% of the $417,000 of debt they owe over a period of 60 months, and there is absolutely no risk of them losing their house to the Chapter 13 trustee. They only pay $20,000 out of $417,000 over five years. That’s a great deal no matter how you look at it, even for Mr. Scrooge.
On the other hand, if clients filed a Chapter 7, they would be on needles and pins and rightly so. Even if the petition states that the equity is $450,000 and fully exempt, at the 341A hearing, the Chapter 7 trustee may say this: My realtor says he can sell your house for $1.4 million. He has four interested buyers who are competing with each other.
If this happens, the equity will become $750,000, that’s $150,000 over the $600,000 exemption. This means that the trustee’s realtor will put a “for sale” sign on their front yard as soon as the day after the hearing, and will put their house on the MLS on the same day. Clients will lose their house. The trustee will give them $600,000 in cash from the sale proceeds and use the rest of the money to administer the case and pay some of the debts.
Then here comes another big problem for debtors. The trustee will give them a notice saying that they will have to invest the $600,000 in a new house and must actually move into the new house within six months of their receipt of the $600,000. If this does not happen, debtors will have to pay back the $600,000 to the trustee! This is the truth, it’s absurd and insane and pure unadulterated nonsense, but it’s bankruptcy law at its finest. Not many people know this. I have one client right now who has moved back to her home country and fortunately for her, she purchased and moved into a new homestead abroad within the six-month period.
If you need debt relief, set an appointment to see me. I will analyze your case personally.
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Disclaimer: None of the foregoing is considered legal advice for anyone. There is absolutely no attorney-client relationship established by reading this article.
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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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.
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