THE client is 71. Her husband died five years ago, so she lives with her unmarried son who does not have full time or steady employment.
She has a large equity in her residence of about $400,000. For her age, the equity exemption for homestead is $175,000. She was a registered nurse when she was still working. Her social security is $2,200, while her mortgage payment is $1,100. She has no other income in addition to social security.
Considering the son is not gainfully employed, she has to rely on herself. She says, in response to my question, how she feels, that she still feels the same as when she was young, but when she looks at the mirror, she says that she has become old. Well, how true that age is only in the mind. An older person actually is like an older model car that is well kept and maintained. It still runs well and looks like a car, but the new cars sort of stand out when they are placed side by side. Just put your well-maintained 1995 Camry beside a 2018 Tesla model 3, and the difference in appearance is obvious. But both cars will get you where you want to go. The Camry will be noisier because of its gas engine. The Tesla will be very quiet because it has no mechanical engine. It’s electric. It looks sleeker than the Camry.
The client had $300,000 in her 401K when she was still working and younger. However, she liquidated the entire amount with a penalty. Why did she do this, I asked. She said she invested half, $150,000, in a business, which did not succeed. The other $150,000 she put in something else. In other words, right now, at age 71, the $300,000 is gone. Would have been nice to have that $300,000 around now that she is retired, right? Anyway, this is water under the bridge. The investment mistake has been made and cannot be reversed. Well, “what’s the problem now?” I ask.
She says that the business had two loans that she guaranteed personally. She thinks the two loans are about $20,000. How many times have I said, never personally guarantee a business loan. I must have said it a hundred times before. If the business folds, just put the company, LLC or corporation, in Chapter 7 liquidation and let the business creditors file their claims in the bankruptcy estate of the business, and forget about them. You, as owner or officer, will not be personally liable for those business debts, unless of course, you give the creditors your personal guarantee, then most assuredly, you are on the hook, including your beloved house.
Certainly, the client does not want the business creditors to touch her house. How can they do this? They can sue her on her personal guaranty; get a judgment and subsequently a judgment lien on her residence. Unfortunately, judgment creditors can literally force the sale of her house in due time unless she protects herself and her house now with Chapter 13. She can’t do a Chapter 7 because her home equity is a lot more than $175,000. It doesn’t make sense to lose your house to the Chapter 7 trustee who can sell her house, give her $175,000, and use the rest of the sale proceeds to pay the $20,000 and pay trustee fees as well as trustee legal fees, which can be a lot.
Just the trustee motion to authorize the sale of the house can cost $25,000 to $30,000. The trustee lawyer gets his fees as well as the trustee CPA. After all debts and expenses are paid, in addition to the $175K given to her for her home equity exemption, not much more will be left to be given to her. This means that with Chapter 7, she could lose her house for $20,000 of business debt that she guaranteed personally.
But in Chapter 13, the trustee doesn’t have the power to sell the debtor’s residence. Chapter 13 protects the debtor and her house be preventing the creditor lawsuits and judgment liens on her residence from ever happening. However, the Chapter 13 plan, in her case since she has a big amount of non-exempt equity, the $20,000 must be paid over 60 months in equal monthly installments. That would be about $350 a month, more or less for 60 months. Once the case is filed, the creditors cannot sue her on her personal guarantee. Therefore, they cannot get a judgment lien on her residence. Chapter 13 protects her residence. How can she “Age Well” with a judgment lien on her residence?
If you add attorney fees, interest and costs, the judgment lien would be about $30,000, not $20,000, which is just the principal owed. Creditors have to pay lawyers to file the lawsuits and get the judgment and liens. They cost money as everyone knows. Trump paid his personal lawyer Cohen hundreds of thousands of legal fees. Lawyers cost money.
That’s a fact of life. Judgments earn legal interest of 10 percent a year. So, soon enough the $20,000 of business debt becomes $60,000 of the judgment lien on the client’s house. We don’t want that to happen. Certainly not.
Her business is an S corporation with several stockholders. That corporation can file its own Chapter 7 to handle all of its business debts. These debts have nothing to do with the client because she only gave her personal guarantee on $20,000 of those business debts.
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Disclaimer: None of the foregoing is considered legal advice. Each case is different.
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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.