DEBTOR TOO LATE TO STRIP $70K 2ND MORTGAGE STUDENT LOANS & TAXES CATCH UP WITH SENIOR

TOO LATE TO STRIP 2ND MORTGAGE

I saw debtor about 4 years ago, and now she returns to consult on a new financial crisis. The first time I met her she was 58, now she is 62. Four years ago, she consulted with me regarding what she should do with a rental property which was upside down and losing money, and her own residence which was also upside down. She bought her residence at the highest price possible when even your dog can qualify to buy a house with zero down. She bought the house with a first mortgage of $650K, and a 2nd mortgage of $70K. She bought the house for $720K. For that price, even during the height of \the housing bubble, debtor should have bought a newer house with at least 2,000 sq. ft.  Instead, debtor made the mistake of buying a very small 75-year-old house that is a little over 1,000 sq. ft. with nothing down, an ARM loan, and a 2nd mortgage. 

Four years ago, I told her to file a Chapter 13, abandon the rental, and strip the 2nd mortgage on the residence of $70K. However, I also told her that the first mortgage on her residence would be adjusting to a higher mortgage payment in 4 years, at which time, she will have difficulty paying it. Had she followed my advise and gotten rid of the 2nd mortgage at the time I told her to, now she would be able to sell her house free and clear of the 2nd mortgage. She could now pocket the $70K of equity, which now exists if she decides to sell the residence today, 4 years hence. This is one of those time travels back to the future, with the present being the future then.

She did a short sale on the rental because the mortgage debt forgiveness program of Obama was in effect. With the short sale of the rental the IRS did not consider the forgiven portion income. She did not file a Chapter 13 to strip the 2nd on her residence. The problem is that the first mortgage is now $4,000 a month, and the 2nd is $500 a month. She pays a total of $4,500 for a tiny 75-year-old house that up to now has no equity because the 2nd mortgage has not been stripped. For $4,500 a month, she should be living in a mansion.  Instead, she is paying through her nose to live basically, in a shoebox. I mean, why even keep this house, which makes no sense. She also said that she doesn’t like the feeling of paying $4,500 for a very small old house. She totally regrets buying it.

Now someone is telling her to modify the first and the second for a large fee. Incredibly, she still believes that she can significantly modify the first and the 2nd, even though she paid another group of business people more than $12K to modify the 1st mortgage which was denied because her income was $150K a year as a medical professional. You read that right, more than $12K for a denied LM. I asked her why she parted with a large sum for that transaction, and she told me they had a very big office, and she was impressed with their big office. Apparently, my office was a lot smaller than theirs so she trusted them who were not lawyers instead of me who actually was the lawyer with a license. 

Now at 62, she is looking to retire in 2 or 3 years. When she retires, her net income will be $4,000 a month. Although that income is good for retirement, how will she pay her mortgage of $4,500? She now wants to strip the 2nd mortgage when it’s no longer possible because there is some equity supporting the 2nd.  She also wants to short sale the residence without a tax impact. But that option is no longer available effective 2015.  There could be a short sale of the residence for something less than the balance of the first mortgage, but the amount forgiven will become part of her income this year. This year she will still gross $130K a year. The amount forgiven in the short sale will be added to her income. If the amount forgiven is $80K, her income this year will be $210K, resulting probably in additional income tax liability of $30K. 

Again I’ve given her advise as to what she should do now which I will not disclose here because the approach is novel but it will handle both the first and the 2nd in a way that will be good for her. When she retires she will no longer owe the first and the second. With her $4K of retirement income, she should only allocate maximum $1,500 for house payment.  Whether she will actually follow my legal advise remains to be seen.

STUDENT LOANS & TAXES CATCH UP WITH SENIOR

Client is 66. His income is $70K a year. His problem is that he owes income taxes of $28K for last year, $160K of student loans, and $50K of credit cards. The student loans payment is $2000 a month, which is the same as his mortgage payment. Credit cards require another $1,400 a month. His only child went to private college and he co-signed all her student loans. Son has graduated but is not able to get a job, so he cannot pay his student loans. Since client equally liable on son’s student loans as a co-signer, creditor is now going after client for payment. At 66, how can client possibly pay off his son’s student loans? It’s simply not possible. 

Relief is possible by separating the loans into categories and resolving each category by different methods. A Chapter 13 will take care of taxes and credit card debt. Client may qualify for a zero percent plan where he only pays off the taxes in 5 years without interest or penalty, and nothing is paid to credit cards. Initially, student loans will be paid in the same class as credit cards. Since credit cards get zero, student loans will also get zero. At the end of the payment plan taxes will be fully paid, credit cards will be discharged but student loans will remain. Therefore, it is necessary that student loans be resolved specifically with the objective of having them forgiven by creditor at the right time. The right time, being the year of BK discharge to avoid a tax liability for the forgiven part. 

Client’s income position may change drastically if he loses part of his income, which will require a totally different approach.

“GIVE UNTO THE LORD THE GLORY DUE TO HIS NAME; WORSHIP THE LORD IN THE BEAUTY OF HOLINESS.” – PSALM 29:2.

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, Building A-1 SUITE 1125, Alhambra, CA 91803 OR at 20274 Carrey Road, Walnut, CA 91789.