A reader's mother has $37,000 in credit card debt. Her son thinks he found a loophole.
Question: My mother is 78 years old. My father just died, so she will have to live off of $1,100 a month. She owns her house that’s worth around $130,000, but she was turned down for a home equity loan, maybe because her credit card debt is around $37,000. If she sells the house to me — her son — for a dollar, can they come after the house if she stops paying them?
— Gus in Pennsylvania
Howard Dvorkin CPA answers…
This short question is deceptively complex. There’s actually a lot going on here — and that probably means you need to get an attorney involved.
To sum it up before we break it down: We need to address the massive credit card debt, the origins of the monthly income, and the consequences of selling a house for a dollar.
Credit card debt
Given your mother’s income and the balances she’s carrying on her credit cards, I know of no trick in the book that will secure her a home equity loan. While Debt.com offers a do-it-yourself guide to getting out of debt, $37,000 is insurmountable for most folks to go it alone.
When numbers get this high, credit counseling is the best solution. Credit counseling agencies are all nonprofit, and the ones that partner with Debt.com are staffed by certified counselors who have had extensive training and been tested. On the phone, they’ll review not only your mother’s credit card debt, but her overall financial picture. That includes…
You don’t say if your mother’s income is from Social Security, some other source, or a mix of sources. Here’s why that’s important: Your mother may be judgment proof.
Simply put, this means your creditors can sue and win a judgment against you, but there’s nothing to really collect. Garnish your wages? You don’t have any. Place a levy on your bank account? It’s empty.
It turns out Social Security and other retirement earnings are protected from collections. It also turns out debt collectors can get permission to lien your house. However, your mother will sell hers to you, Gus. Here’s the problem…
Selling the house
The IRS doesn’t like it when family members sell houses to each other for a dollar. The agency doesn’t consider it a sale as much as a gift. So your mother will get hit with a gift tax — and when you sell the house, you’ll be hit with thousands of dollars in capital gains taxes. That’s because your mother did’t sell the house in an arm’s length transaction to a disinterested third party.
As you can tell from these complicated terms, consulting an attorney is important. Thankfully, Debt.com’s certified credit counselors can help you find one who will represent your best interests. Simply call 1-800-810-0989.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.