“It’s becoming clear that the choice she has to make is to be able to make the mortgage payment or the credit card payment.”    

THE client is 53 and recently widowed. She works as a caregiver and met her now-deceased husband through her job. 

At first, the husband was her patient. She provided caregiving services to the man in his house. He was 70, divorced and lived by himself. As part of caregiving, she drove him to eat at various restaurants that he wanted to go to. While they ate at those restaurants, he would talk to her about his life and eventually popped the question, saying that if she would marry him and take care of him, he will be a good husband to her. The client was previously divorced but felt an affection towards him so she said yes. Apparently, they were pretty happy living together as husband and wife until he slipped and fell in their house, hitting his head on the floor. He fell into a coma and never recovered. After a week, he died in the hospital. 

The husband had placed her name as the joint tenant on the house, which was almost fully paid. The current fair value of the house was $400,000 while the unpaid balance of the mortgage was $150,000, leaving $250,000 of equity. The client automatically became the sole owner of the house because, upon the death of the joint tenant, the surviving joint tenant owns the other half that was owned by the deceased joint tenant. 

As a result, the client now owns 100 percent of the $250,000 equity of the house. The adult children of husband complained about being left out in the cold as far as the ownership of the house was concerned, but the client’s claim of ownership is clear because the husband who was of sound mind, quitclaimed the house to himself and client when they got married. It’s almost impossible for children to prove that it was not their father’s intent to give the house to the client. 

The client’s problem right now is that she has too much debt. She owes $40,000 of credit card debt. The mortgage on the house is $1,500 a month. Her net income from her caregiving services is not a lot. She nets about $2,500 a month. After paying the mortgage there is $1,000 left before food and other monthly necessities. But minimum credit card payments alone are $1,200 a month. Obviously, the $40,000 credit cards have to be wiped out. It’s becoming clear that the choice she has to make is to be able to make the mortgage payment or the credit card payment. The house gives her shelter and has equity of quarter million dollars while credit card debt is just a heavy burden to carry forever. 

Although the client wants a Chapter 7 discharge of the $40K of credit cards, I cannot recommend a Chapter 7 for her. In Chapter 7, she would lose the house and keep only her exempt equity of $100,000. A chapter 7 trustee has the power to sell debtor’s house if the net proceeds will yield an amount that will yield a distribution to unsecured creditors such as credit cards. In the client’s case, the trustee can sell her house at least for $400,000, pay off the mortgage of $150,000, give client $100,000, leaving a surplus of $150K of cash. The trustee will use the $150,000 to pay himself for his trustee services for administering the bankruptcy estate, pay his lawyers and other professional services incurred, and will use the unused balance after these expenses are paid to pay the $40,000 of credit cards, in exchange for a discharge order for the client. 

The Chapter 7 trustee can rack up trustee, legal and other professional fees in no time. Just to hire a broker to sell the house can cost $10,000 to $15,000 in legal fees for the trustee, separate from the selling commission of the broker. The right choice for the widow is Chapter 13, which will allow her to pay $40,000 over 60 months without interest. The plan payment will be about $700/month. After 60 payments, the court will enter a discharge order to wipe out all of her debts. No more minimum payments forever. And her house is protected from judgment liens by the bankruptcy court as long as she is current on the plan payments.

Widower seeks Chapter 13 for $50K credit cards

The next client is 66 and a widower. His house worth $400,000 is almost fully paid, except for $25,000 of the 2nd mortgage. He owes $50,000 of credit cards. He has been paying $1,500 a month on these cards for the last 10 years. He has paid more than $180,000 to keep them current but still owes the same principal of $50,000 today.

At 66, he is just tired of paying for these cards that never diminish in principal. He cannot file a Chapter 7 because he has the same problem as the widow in the first paragraph. His equity in the house is over $175,000, way over it. He sees no problem paying about $900 of plan payment for the next 60 months and looks forward to the last payment on the 60th month when the court enters a discharge order saying that he doesn’t owe any credit card debts anymore.

Compare that to $1,500 a month for minimum payments only such that he would pay $90,000 in the next 60 months but still owe the same $50,000. At 66, he sees very clearly the advantage of Chapter 13 for him now to get rid of his credit card debts.

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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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