SENIOR CLIENT SEEKS CHAPTER 7 TO PROTECT HOUSE

Once in while, you get a really strange request from client. Senior citizen client has two liens on his condo, and a third one on the way, soon to become another lien on condo. First of all, there is a first mortgage for $200,000 on his condo that is worth $400,000. There is no second mortgage. However, there is a judgment lien for $7,000 and another judgment lien for $10,000. There is a third judgment for $11,000 entered last year, but there is no lien yet. So, the third judgment can become a lien at anytime as soon as the judgment creditor decides to get one. Client also has credit card debt of $15,000 which are still current but there is really no money to pay the minimum payment of $450 because client has just retired and now receives only a paltry $800 for social security. Wife signed a personal guaranty on her niece’s student loan for $40,000. Apparently, niece has not paid her student loan, so now creditor is calling on the guaranty to pay whatever is due. Wife also relies on a small social security income, as well as does some odd jobs to get some extra income but hardly enough to make good on the guaranty.

This would normally be a Chapter 13 to pay off all unsecured debt of client and wife. But client does not have the income to pay even a miniscule payment plan. In addition, wife’s student loan guaranty presents a legal problem to discharge. Although, there is a strong legal argument that may be advanced that may convince the court that the personal guaranty is dischargeable because the student loan was made to the niece, not to client’s wife who is merely a guarantor of payment in case niece defaults on her student loans. The guaranty is a contingent liability that is triggered only if there is a default, and this contingent liability is not a loan. This may be compared to the difference between a promissory note for tuition deferral which has many decided cases saying that it is dischargeable because it is not a student loan because no funds were given to the debtor from a loan. Whereas, a student loan is an entirely different animal because in that case, funds were given to the debtor for which debtor has agreed to repay. There is no question that a student loan is generally not dischargeable. But it may be argued that a personal guaranty of a student loan is not a loan because it is a contingent liability of the guarantor, which does not kick in until the debtor defaults. Therefore, it is not a loan, but akin to a tuition deferral which is dischargeable.

Senior client is running on a very low budget, which prevents him from having any kind of disposable income to fund a Chapter 13 plan. So, a chapter 13 is not possible. But client says that all he wants to do is protect the house from foreclosure because a loan modification has reduced his mortgage payment to $700 a month, which is doable. This is the only monthly expense he can afford to pay, and all he wants to do is stay in the house until he dies. A Chapter 7 may be the solution for the limited needs of client, although, it’s a little tight to squeeze a chapter 7 through because there is some equity in the condo that exceeds the homestead exemption of $175,000. But this is resolved by the fact that there are two judgment liens for a total of $18,000. There is still a negligible excess over the exemption amount, but that should be easily surmounted, and the Chapter 7 should go through without a major risk to the condo.

The Chapter 7 will protect the condo in the following manner: 1. If the case is filed before the third judgment becomes a lien, the bankruptcy will prevent the lien from happening. Once the case is filed, judgment creditor cannot proceed to get a lien, so the condo is then protected from the third lien of $11,000 to attach to the condo because the automatic stay prohibits creditor from any further steps to perfect a lien. 2. The two judgment liens that have already attached to the condo will stay as liens that have attached to the condo, but judgment creditors cannot proceed to set a foreclosure sale of the condo if the lien remains unpaid. Judgment creditors, contrary to popular belief, can foreclose on the condo, after the legal periods have been complied with, probably a 6 months wait for payment after the lien has attached. All they have to do is file a motion to ask for foreclosure based on the fact the liens have not been paid, and the required legal period to pay them has lapsed. 

The bankruptcy automatic stay and eventually the discharge order will prevent the two judgment lien holders from filing their motions to foreclose the property because that will be a further step to collect a judgment which is prohibited by the stay and discharge. Wife can file an adversary case to determine whether or not the guaranty is dischargeable. But since client is super tight, there is no money to do that. But wife can file the adversary at any time without reopening the case later on when push comes to shove. So, Chapter 7 will allow seniors to stay in their house until it is time for them to see our Lord.

“Lean on, trust in, and be confident in the Lord with all your heart and mind and do not rely on your own insight or understanding,” Proverbs 3:5.

  Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years.  He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California.  He speaks Mandarin and Fujien and looks forward to discussing your case with you personally.  Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave, Mailstop 58, Bldg. A-1 Suite 1125, Alhambra, CA 91803.