As published in The Star-Ledger, June 24, 2012
Q. My mother is 70 and retired with an annual income of less than $20,000. She owns a home outright that’s worth $250,000 to $275,000. We would like to save the house and let it appreciate in years to come when the housing market strengthens. Mom informed me and my siblings that she abused her 16 credit cards and owes $84,000. What would be the best course of action? She will be living at my brother’s house so it leaves her house empty. Should she 1) go bankrupt; 2) take a home equity loan to pay the credit cards, or; 3) should we give her a loan at 5 percent interest and rent the house for enough to maintain the house, pay off the loan and hopefully the house would appreciate. If she did declare bankruptcy, what would it mean for the house?
– Worried kids
A. There’s lots to be concerned about here.
First, the credit card debt.
She could simply wait and see. Stop paying the minimums if she hasn’t already and see if the companies try to collect. This isn’t recommended, but it’s a possibility, said Gerri Detweiler of Credit.com
"Since she’s elderly and on a limited income, they may not be able to do a lot to collect," she said. "But that opens her up to possible lawsuits and it’s not the way to go since she did run up this debt."
A better option might be to try to settle the debt, Detweiler said. You can contact the lenders and see if they’d be willing to take less than the full amount so your mom can put this behind her. It’s common for lenders to negotiate, and given your mom’s age, they may be very happy to collect something rather than nothing.
Also make sure your mom is no longer charging more than she can afford.
Regarding a bankruptcy filing, most consumers seek relief under Chapter 7 or Chapter 13 of the bankruptcy code, said Ilissa Churgin Hook, a bankruptcy attorney with Hook & Fatovich in Wayne.
"In a nutshell, in a Chapter 7 bankruptcy a debtor seeks a discharge of her debts in exchange for exposing her assets to analysis and possible liquidation by a Chapter 7 trustee for the benefit of creditors," Hook said. "The problem here is that your mom owns a substantial asset, her home, free and clear of liens."
She said while debtors can claim exemptions which allows them to keep certain assets, the current exemption for a primary residence is only $21,625. Therefore, a Chapter 7 trustee could force a sale of your mother’s home for the benefit of creditors, and pay her the exemption amount at the closing. Any surplus remaining after payments of costs of sale, trustee commissions, legal fees and 100 percent payment to creditors with valid claims would go back to your mom.
A Chapter 13 bankruptcy is a personal reorganization and would allow your mom to keep her home, Hook said.
"However, she would be required to make plan payments over a five- year period equaling the full amount of the credit card debt on the date that she files," she said.
Your mother would need to demonstrate currently monthly income – which could be in the form of wages, Social Security or contributions from family – sufficient to make the plan payments.
In order to weigh the benefits of a Chapter 13 bankruptcy versus a home equity loan, you’d need to learn more about the terms of whatever loan she may qualify for.
It may be a worthwhile investment to meet with a bankruptcy to discuss the particulars of your mom’s case.
- A "Biz Brain" column by Karin Price Mueller