“Do not sign personal guarantees for business loans because you will be on the hook if the business cannot pay the loan.”
THE client is 45. He is actually a medical professional in his country of origin.
It would have been great for him if he could practice his profession here in the U.S. Unfortunately, his professional license is not recognized here. He is required to study another two years here in California to complete his professional degree, and thereafter pass the licensing board.
Since the client already has a family with a wife and two kids aged 6 and 7, he believes his priority is to make money to support his family, and not to study further to get his professional degree and qualify for a license to practice his profession here. His wife is a teacher and makes about $4,000 a month.
The client decided to set up a business. He set up a trucking business with a business partner. They established a C-corporation with each owning 50 percent.
The corporation purchased three trucks with installment financing provided by a bank and leased two trucks. The client and partner both drove two trucks, and they hired three drivers for the other three. Each truck was generating about $100,000 a year of gross receipt. In their first year, gross receipts were about half a million dollars, less operating expenses of $480,000. Considering that each partner got paid a salary of $2,000 a month, which was part of operating expenses, plus the net profit of $20,000 and the end of the first year of operations, the client’s trucking business was ok, but not that great. The business was able to pay all installment and lease payments and all expenses on time.
The problem came about when one of the trucks got into a serious rear-end accident out of state. Their truck rear-ended a car on the freeway that stopped all of a sudden. It caused a chain collision of six cars with drivers and passengers suffering a lot of physical injuries. The client’s insurance carrier had limited liability, which was insufficient to pay for all damages. So now, the injured parties are suing the business for $700,000 for injuries caused not covered by insurance. Their own driver was badly injured, and could no longer drive.
The business started losing money, and could not pay the banks and the leases. Eventually, the truck that caused the accident was returned to the leasing company. Subsequently, the other truck was also returned to the leasing company. Each truck had a lease return deficiency of $40,000 each. Unfortunately, client personally guaranteed the leases, so the leasing companies have now sent a demand to the client for $80,000 of lease deficiencies. To make matters worse, the banks have also sent a demand letter to client for $140,000 to call on his personal guaranty on the bank loans for the purchase of three trucks, which are now also seriously delinquent.
What did I say many times before? Do not sign personal guarantees for business loans because you will be on the hook if the business cannot pay the loans. If you own a house, why risk your house with a personal guaranty for a business loan? In any event, the client is now about to face lawsuits to collect on his personal guaranty for $220K! It doesn’t even end at $220K. The business itself will be facing lawsuits arising from the accident for $700K.
Fortunately for the client, even though he owns a house, the equity in the house is only $60,000, well within the homestead exemption of $100,000. So client opts for Chapter 7 to wipe out the $220,000, keep his house and all his assets, to start life again without lawsuits. He can be productive again. Maybe he might even be able to go back to school and get his professional degree and license. In two years, with his degree and professional license, the client should have no difficulty making $250,000 gross a year.
Senior files Chapter 7 for $55K in credit cards
The other client is 62. He still works a mid-level management position and grosses $60,000 a year. The wife is a licensed vocational nurse and makes $36,000 a year. They make about $100,000 a year, which is good. They still have a daughter in college. They send her $1,500 a month out of state.
The wife has a sister abroad with a big family and insufficient income so the wife sends her sister $500 a month. The husband has $40,000 of credit card debt. He pays $1,200 of that to keep current. The wife owes $15,000 of credit cards. She pays $600 of minimum payments to keep them current. So, credit card payments are almost $2,000 a month, just to keep them current. The client says that they have been paying for these cards for ten years. They have paid $240,000 in 10 years, and still owe the same $40,000 and $15,000.
However, the client anticipates that he may just continue working for another year or so. What happens then? His income will be gone, and he will rely on social security, which is less than $2,000 a month. Might as well wipe out all credit cards now and save $24,000 this year, and another $24,000 next year, or save $48,000 in two years. He should have done it, Chapter 7, to wipe out all his credit cards 10 years ago, and set aside $240,000 more in his retirement account! And now, he would have $240,000 cash in is retirement accounts plus, he would have perfect credit today, if he filed for Chapter 7 10 years ago!
* * *
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 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803.