Dear Bankruptcy Adviser,
We are seniors in a Chapter 13 bankruptcy and we can no longer pay our monthly payment. If we choose to drop out of the bankruptcy can our creditors take our house, which is paid off? Could they garnish our Social Security checks or our IRA?
Let me be direct: You need to take action, and soon. The consequences of not making your Chapter 13 payment are severe. You need to contact your attorney or the trustee immediately to see whether you can lower the monthly plan payment. You may even qualify for a hardship discharge depending on your circumstances.
You see, your debts are not discharged until you complete the plan. Until then, the debts continue to accrue interest. By now, your debts may have increased a great deal. If you do not complete the Chapter 13 plan, those debts resurface and suddenly you may be in a worse position than when you filed in the first place.
With your house paid off, creditors may rush to file a lawsuit against you and place a lien on your property. However, in some states, creditors are not permitted to place liens against your property. While it is unlikely that the creditor will try to force you to sell the property, you will have liens on your home that will continue to grow, usually at 10 percent interest.
While you cannot have Social Security checks garnished, you can have a bank account levied. For example, if you place Social Security checks into a bank account the creditor may be able to levy it, that is, withdraw that money. Is this legal? Yes, but only for student loan debt. It is possible? Yes. The bank employees will receive a bank levy issued by the local sheriff's office and that employee will probably execute the levy on your account.
Now, there is some recourse if this happens. The sheriff's office legally must hold the levied funds in their trust account for 30 days. If it is brought to their attention that this was Social Security income commingled with other monies then they might not send that portion of money to the creditor. However, this probably will require a court order demanding that the funds be returned, and that can be challenging to get in time. You run a legitimate risk that the money might go to the collection agency, and you will have an impossible time getting it back.
Your IRA should be protected from levies. However, you need to discuss the type of account you have to see whether it is exempt. If it is not, then you could have that money taken.
Many of these issues are state-specific. Meaning, each state may have differing laws regarding levies and regarding protected funds. In some cases, individuals are "judgment proof" and would not face judicial liens, forced home sales or garnishments. However, this must be reviewed on a case-by-case basis and discussed with a competent professional.
As you can see, the situation isn't pretty. However, there may be a solution. Consider a reverse mortgage. Basically, this means that instead of paying a mortgage to the bank, bank pays a mortgage to you while you continue to live in your home. Depending on the value of your property, you might get enough money to make the Chapter 13 plan payment. Once the Chapter 13 is done, you can stop drawing equity out of your home.
You ought to complete the Chapter 13 one way or another. Anything else will be too costly.
Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.