[COLUMN] Senior needs Chapter 13 to protect house from creditors of a failed business —
THE client is 71 years old. Her husband passed away five years ago, so she lives with her single son who does not have a full-time or stable job.
She has a large net worth in her residence of around $ 400,000. For her age, the home 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 besides social security.
Since the son does not have a lucrative activity, she has to rely on herself. She says, in answer to my question, how she feels, that she still feels like when she was young, but when she looks at herself in the mirror, she says that she has become old. Now, how true that age is only in the spirit. An older person is actually like an older model car that is well maintained and maintained. It still runs well and looks like a car, but the new cars somehow stand out when placed side by side. Just place your well-maintained 1995 Camry next to 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 louder because of its gasoline engine. The Tesla will be very quiet because it does not have a mechanical motor. 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 that, I asked. She said she invested half, $ 150,000, in a business, which was unsuccessful. The remaining $ 150,000 she put in something else. In other words, right now, at age 71, the $ 300,000 is gone. It would have been nice to have that $ 300,000 or so now that she is retired, right? Either way, it’s water under the bridge. The investment mistake has been made and cannot be reversed. Well, “what’s the matter now?” ” I ask.
She says the company had two loans that she personally guaranteed. 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 corporation, LLC, or company into liquidation in Chapter 7 and let the business creditors file their claims in the business bankruptcy mass, and forget about them. You, as the owner or manager, will not be personally liable for these commercial debts, unless of course you give the creditors your personal collateral, then most certainly you are on the hook, including your beloved home. .
Certainly, the client does not want commercial creditors to touch her house. How can they do this? They can sue her on her personal guarantee; obtain a judgment and subsequently a judgment lien on his residence. Unfortunately, judgment creditors can literally force the sale of her home in due time unless she protects herself and her home now with Chapter 13. She can’t do a Chapter 7 because his house is well over $ 175,000. It does not make sense to lose your house to the Chapter 7 trustee who can sell his house, give him $ 175,000 and use the rest of the sale proceeds to pay the $ 20,000 and pay the trustee’s fees. as well as the legal fees of the trustee, which can be a lot.
The trustee’s request to authorize the sale of the house alone can cost $ 25,000 to $ 30,000. The syndic lawyer receives his fees as well as the CPA syndic. Once all the debts and expenses are paid, in addition to the $ 175,000 given to him for the home equity exemption, there is not much left for him to give. This means that with Chapter 7, she could lose her home for $ 20,000 in commercial debt that she personally guaranteed.
But in chapter 13, the trustee does not have the power to sell the debtor’s residence. Chapter 13 protects the debtor and her home by preventing creditors’ lawsuits and legal liens on her residence from occurring. However, the Chapter 13 plan, in her case, since she has a large amount of non-exempt equity, the $ 20,000 must be paid over 60 months in equal monthly installments. It would be about $ 350 per month, more or less for 60 months. Once the file is filed, the creditors can no longer sue her on her personal guarantee. Therefore, they cannot obtain a judgment lien on his residence. Chapter 13 protects his residence. How can she “age well” with a privilege of judgment over her residence?
If you add in the attorney’s fees, interest, and fees, the judgment lien would be about $ 30,000, not $ 20,000, which is just the principal owed. Creditors have to pay lawyers to sue and get judgment and liens. They cost money as everyone knows. Trump paid his personal lawyer Cohen hundreds of thousands in legal fees. Lawyers cost money. It is a fact of life. Judgments earn a legal interest of 10 percent per year. So, soon enough, the $ 20,000 of commercial debt becomes $ 60,000 of judgment lien on the customer’s house. We don’t want that to happen. Certainly not.
His business is an S corporation with several shareholders. This company can file its own Chapter 7 to manage all of its trade debts. These debts have nothing to do with the client, as she only gave her personal guarantee on $ 20,000 of these 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.