THE client is 57 and is recently divorced with two children, one in high school the other in college. She makes $40,000 yearly in middle management for a large corporation. She has $50,000 in credit card debt accumulated while she was still married.

The ex-husband had good income. So, when she was still married, her husband paid for her credit cards. The minimum monthly is $1,500 to keep them current. That’s almost $20,000 a year, which is half of her $40,000 annual gross income. Needless to say, there is no way that she can keep on paying for these cards.

Fortunately for her, she lives in a house that, shall we say, doesn’t belong to her but all she has to do is pay the mortgage of $800. The mortgage also is not in her name. It is not her debt. Who is the owner of this house that she lives in?

Her parents are on the title to the house and the mortgage is also in the name of the parents. In addition, parents have been paying the mortgage for the last 20 years. The mother died five years ago, while the father died two years ago.

The parents gave the house to her son seven years ago by grant deed. However, the son has no income right now because he is still in college. As a result, the client paid the mortgage for the last two years and claimed the mortgage interest as her deductions in her tax returns. Since this house is almost fully paid, the ownership of the house makes a big difference in the client’s bankruptcy. If the client owns this house, then she won’t be able to qualify for a chapter 7. She would have to file under Chapter 13. In Chapter 13, the client will be required to pay $1,000 a month for 60 months; a 100 percent payment of the credit cards without interest because the non-exempt equity is more than $60,000.

Let’s analyze this case more. Although the client is now paying for the mortgage, she has only paid that for two years. In addition, she doesn’t own the house. Both the legal and equitable title to the house belongs to her son who is in college because her parents gave the house to her son, not to her. Under this analysis, the client would have a proportionate ownership share equivalent to two years, which is not much. That’s probably about 10 percent because two out of 20 years is 10 percent. Her homestead exemption is at least $100,000, which is more than enough to cover 10 percent.

But what if her mortgage payment for the last two years is considered rent, because her son owns the house. This analysis is also plausible and has legs to stand on. If those payments were considered rent, she would have zero ownership interest in the house.

Either way, the client would qualify for Chapter 7 without worrying about losing a roof to live under.

Another senior seeks Chapter 13 relief for $50K in credit card debt

The next client is 72. He looks slim and younger than his age. He has no health problems but his wife is sick and he takes care of her. He owns a house with non-exempt equity of about $25,000. He owes $50,000 of credit cards. He actually wants a Chapter 7 discharge.

However, I cannot recommend it. I can only recommend a Chapter 13 where he will pay $450 a month for five years. If he files Chapter 7, there is a chance that he may lose the house because of the non-exempt equity of $25K. Of course, in Chapter 7, the trustee has to give him his exemption of $175,000 when the house is sold. But he still wants to live in the house. So, there is no sense in assuming this kind of risk. He now pays $1,500 a month for $50K of credit cards. That eats up 40 percent of his household income, which consists of a combination of social security and pensions.

It would have been better for him to file for Chapter 7 in 2010 when he was 66. At that time, the fair market value of his house would have been at least $50,000 lower than today such that his homestead exemption would surely cover all of his homestead equity then.

Had he filed a Chapter 7 then, he would have discharged all of the $50,000 without any problems with the house. How much money would he have saved if he filed for Chapter 7 in 2010? Well, let’s do the math: $1,500 a month is $18,000 a year of minimum credit card payments. Six years of that is $108,000 saved! But he says that he’s been paying for the $50,000 credit cards for 15 years. Therefore, he would have saved, if he filed for Chapter 7 at the age of 66, the grand total amount of $162,000! He says he paid for 15 years at $1,500 a month, but right now, he still owes the very same $50,000! What can I tell you?

The client should have filed his Chapter 7 in 2010 because $162,000 is a lot of money.

$162,000 saved up in your pocket and invested in a diversified fund giving you a 5 percent return or $687 a month of dividend income certainly gives you more security than $50,000 of credit cards eating up $1,500 of your social security at the age of 72.

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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.

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