Friday, September 22, 2006

Real Estate Strategy and Personal Bankruptcy

Real Estate Strategy in Personal Bankruptcy

We live in environment of low interest rates, appreciated real estate and individuals or couples who have lost jobs and have accumulated a significant amount of debt. What are the options for these people?

Let's look at a recent example from a couple that consulted with Shenwick & Associates: The couple owns a house which has appreciated in value in the amount of $80,000.00 (this is determined by taking the fair market value of the house less outstanding mortgages, brokerage expenses, NYS and NYC transfer taxes and legal fees. Capital gains which may be due are beyond the scope of this email).

The couple owes $20,000 in taxes (which are non-dischargeable in bankruptcy), $30,000 in student loans (which are also non-dischargeable in bankruptcy) and $40,000 of credit card debt, which would be dischargeable in a chapter 7 bankruptcy filing by the couple. Recently the husband lost his job and they are living on the wife's salary. They have sufficient income to pay the mortgage and the student loans. What can this couple do?

Let's explore some options-

1. They can do nothing (the ostrich effect) and wait for a creditor to sue (usually the credit card companies) and creditors who obtain a judgment will docket the judgment against the house preventing the couple from selling or refinancing the house.

2. The couple can sell the house-providing that there are no judgments or liens against the house-but what do they do with the sales proceeds of $100,000? What creditors if any should they pay?

3. An optimal strategy may be to sell the house, pay the non-dischargeable debts and then file for chapter 7 personal bankruptcy protection. Let's explore this option in greater detail. The couple can sell the house, at the closing they can payoff the non-dischargeable taxes ($20,000.00), the non-dischargeable student loans ($30,000.00) and use the balance of the money $30,000.00 to pay living expenses, rent an apartment, buy life insurance or an annuity. When they have otherwise spent or used the balance of the money, they can then file for chapter 7 personal bankruptcy and discharge the $40,000.00 of credit card debt to obtain the benefit of a "fresh start" in bankruptcy (The Couple is allowed to exempt or keep $5,000.00 of cash in a chapter 7 bankruptcy filing.) CAVEATS THE COUPLE MUST PREFERENCE PROOF THE PAYMENTS TO THE STUDENT LOAN AND TAX AUTHORITIES BY WAITING A MINIMUM OF 90 DAYS FROM THE DATE THAT THE CHECKS TO THE STUDENT LOAN AND TAX AUTHORITIES CLEAR! CLIENTS SHOULD CONSULT WITH AN ATTORNEY PRIOR TO USING THIS STRATEGY!

4. A variation on the strategy in paragraph 3 would be to use the $30,000 proceeds from the sale of the house to negotiate a settlement with the credit card companies who are owed $40,000.

Jim Shenwick

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