Clients seek to discharge $100K and $30K in credit card debt

Both qualify for different chapters of the bankruptcy code 

MOST debtors prefer to have a Chapter 7 wipe-out of debt. This is called a fresh start without debt. Most debtors who qualify for Chapter 7 debt relief get to keep everything they own but are able to get rid of all of their debt, thus, they start life again without debt but keep all their assets. They are able to keep their assets by “exempting” their assets under CCP 704 or 703. Let’s compare the following two cases to appreciate the difference between Chapter 7 and Chapter 13 of the bankruptcy code.

Client no. 1 is 58 years old and separated from her husband who lives out of the country. They owned and operated a business ten years ago. The business failed and husband decided to go back to his home country. Wife decided she wanted to stay here, so they are in fact separated and live apart. Wife makes about $30,000 a year and does not own a house. She doesn’t know what husband is doing in his home country. For purposes of bankruptcy, the client is de facto separated from her husband, so we don’t care what husband does in his home country. His income, if any, is not a factor in the calculation of client’s household income. In other words, even if the separated husband has become a millionaire in his home country, his income is irrelevant in the determination of client’s ability to qualify for Chapter 7 debt relief here in Southern California. Client completely on her own here, has to make do with her income of $30,000 a year. It’s only her income that is relevant in the means test calculation.

The client has $100,000 of credit card debt, most of which were used to operate their business that failed ten years ago. Believe it or not, for the last ten years, the client has been making minimum payments on the $100,000  at the required $3,000 a month. I guess she used to make more than $30,000 a year before because he now only makes $2,500 a month, which is less than $3,000 a month. But in the last 10 years, she has paid $360,000 to keep $100,000 of credit cards current. Today, she still owes the very same $100,000! Yes, sad but true and not at all fair but nevertheless that’s the reality of what happened. If she had filed for Chapter 7 10 years ago and wiped out the $100,000 in 2008, she would probably have $700,000 in her wealth portfolio now, growing at the rate of between 6 percent to 10 percent a year. 

But she took her own sweet time, perhaps she was afraid to file for Chapter 7 10 years ago, or even five years ago, and now suffers the consequence of that wrong decision. Now, she still owes the very same $100,000 but had paid $360,000 to keep that $100,000 current in the last 10 years. Now, that’s not being smart, is it? No, that’s being pretty dumb. Because if the client did actually get Chapter 7 relief and wipe out the $100,000 10 years ago, the consequence of that smart decision, would be that she would have at least $700,000 now, and that’s a smart move. Of course, it’s not too late to get Chapter 7 relief now. Better late than never with a Chapter 7 wipe-out of the $100,000 now and to have a fresh start now at the age of 58, instead of having a fresh start at the age of 48. Further, if she did have the fresh start in 2008, her credit score would be perfect now over 800, and there would be no fact of filing Chapter 7 in her credit report. It’s like it never happened. No wonder Pres. Trump thinks bankruptcy law is heaven sent. His own businesses filed for bankruptcy, 4 Chapter 11s, in the 90s wiping out more than a billion dollars of unsecured debt. 

The client now qualifies for and is eligible for Chapter 7 under the means test and all her assets are exempt so she gets to keep all her assets including her retirement account of $50,000and her fully paid MB 300 in 2013, while wiping out the entire $100,000. So she goes for it 10 years late because as we said earlier, better late than never.

Client no. 2 is 52 and married. I did his join Chapter 7 exactly 20 years ago. Then, he and wife were able to discharge $20,000 of credit cards and an uninsured car accident liability of $40,000. They got the fresh start then, and now he has racked up another $30,000 of credit card debt, while the wife has her own credit cards too. The client recently lost his job and his unemployment benefits are about to expire. Certainly, he wants a Chapter 7 discharge of his $30,000 of cards. However, he owns with his wife as joint tenants, their house worth $500,000 on which they owe a total of $300,000. So, they have equity of $200,000. But since he is only 52, their homestead exemption is only $100,000, leaving non-exempt equity of $100,000. This means that if he does a Chapter 7, the trustee will sell their house for $500,000, give him $100,000 for his exempt equity, and use the rest to pay off his $30,000 credit cards, and if there is any money left, the balance will also be given to him. 

Chapter 7 is not advisable in this case, as the client will lose his house for $30,000 of credit cards. This makes no sense. Why lose over your family’s head for the sake of credit card debt?  Makes no sense whatsoever. The client needs to file Chapter 13 to protect his house from eventual judgment liens from the $30,000 credit cards. Judgment lien creditors can force the sale of the house in order to get paid. Unbelievable but true! A judgment creditor for $5,000 with a lien on your house can force the sale of the house to satisfy the judgment as a last resort. 

Chapter 13 will protect client’s house from judgments occurring in the future from the $30,000 of credit cards. The Chapter 13 plan will allow him to pay the $30,000 at the rate of $500 a month. On the 60th month, the court will give him an order of discharge. At that time, he will owe credit cards zero. Using Chapter 13 to handle his $30,000 credit cards entails no risk of losing his house because the Chapter 13 trustees have no power to sell debtor houses, unlike Chapter 7 trustees who are hungry for houses with non-exempt equity.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

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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.

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