[COLUMN] Seniors eligible for Chapter 7 relief for $67K credit cards despite $260K home equity

GONE are the days when debtors — who owe lots of credit cards but have home equities that surpass the homestead exemption limits depending on age and the number of relatives living in the house — have to use Chapter 13 instead of Chapter 7 to get rid of debilitating credit card debt.

Let’s analyze the cases of two clients to see the difference between the new amended 704.730 of the California Code of Civil Procedure and the old 704.730.

In the first case, the clients are husband and wife. The husband is 65, while the wife is 60.

Together they owe $67,000 of credit cards. The husband is retired and has social security of $1,800. The wife is employed and makes a gross of $3,500 monthly. They own a house that has a current market value of $500,000 in LA County. It’s an old house constructed in 1960, and it’s small, about 1,000 square feet. They have one mortgage with a balance of $240,000. This means that they have equity in their home of $260,000. The $67,000 of credit cards require a minimum of $2,000 a month to keep them current. $2,000 a month, that’s a huge amount, considering their mortgage payment is only $1,600 a month, including a real estate tax. It’s almost absurd but the math is correct: they pay $2,000 a month for $67,000 of credit cards monthly, just to keep them current so they don’t go on default, while they pay only $1,600 a month, including real estate tax for a mortgage that has a balance of $240,000. Yep, it’s more expensive to live in their house of plastic cards, $400 more, than it is to live in their real house. Something’s not right here.

The clients did not feel the financial pressure of keeping the cards current until the husband retired last year. He used to make $4,000 a month when he was still working so most of his salary was used to keep their credit cards current every month. They were de facto slaves to MasterCard and Visa for many, many years. In fact, they had been paying the $67,000 of cards at the rate of $24,000 a year for the last ten years. That’s a total of $240,000 that they have paid to their credit card masters. But today they still owe the same $67,000. If they had used that $240,000 to pay off their house, their house would have only a balance of $20,000 today!

Now that husband has retired and relies on social security of $1,800, $2,000 a month to keep their credit card masters happy is nearly an impossible task. Just the idea of using social security to feed the unquenchable plastic monsters satisfied every month is so irritating. They have a worksheet logging each minimum payment to about ten credit cards. Let’s see: Is the Bank of America visa card that’s owed a balance of $7,000 already paid the $210 minimum due this month? And is the Wells Fargo MasterCard that’s owed $10K already paid the $300 minimum due this month? You know how nasty they can get if they don’t get their monthly minimum stipends on time. You get a phone call immediately to remind you that your $210 or $300 payment is late. Since it’s late you now owed another $50 in late penalty charges. So what’s the difference between a slave and you? Well, a real slave is owned by his master and he has to work for free for his master, you know work the plantations under the hot sun from the crack of dawn to dusk. For that labor, the slave gets paid nothing. He even gets sold to another slave owner if his master decides to. In the case of the credit card debtor, he has to pay his credit card master a minimum payment every month. So debtor goes out and works and gets paid for his labors, but in turn, he has to fork over his hard-earned money to his credit card master every month. So same difference. Both you and the real slave have to answer to your masters. Yes, master! No wonder you feel like a slave because you are one. Get rid of those plastic shackles and be free!

Under the old 704.730 law, my senior clients would not qualify for Chapter 7 even if their income qualifies them under the means test for Chapter 7. Or, let’s just say that if they choose Chapter 7 to get rid of the $67,000 credit cards, they would have been able to, but in Chapter 7 under the old law, they would lose their house to the Chapter 7 trustee. The Chapter 7 trustee would sell their house, give them their homestead exemption of $100,000, and use the rest of the sale proceeds to pay off the $67,000 of credit cards.

They lose their house to pay off credit cards. That’s just too stupid and mean, right? But that’s the way the old law worked. So under the old law, clients would have to choose Chapter 13 where the trustee has no power to sell the house. But in Chapter 13, they would have to pay the $67,000 in full over 60 months (five years) without interest. After the 60th payment, the court discharges or wipes out the $67,000. In other words, in Chapter 13 then, because of the large equity in their home that surpasses $100,000, they would have to pay about $1,100 a month. Sure that’s still better than paying $2,000 a month perpetually. In Chapter 13 then, they would pay the $1,100 for 60 months and after that, they wouldn’t owe anything at all anymore. So that’s still a lot better than paying $2,000 forever.

Fortunately for clients, the new law which just took effect this year will allow them to obtain a Chapter 7 discharge of all of their $67,000 of credit cards, without a single payment, and still allow them to keep their home even if it has $260,000 of equity. That’s a sweetheart deal under the new law. Thank you our Lord God Almighty! For me, God Almighty is Yahweh, Adonai, El Shaddai, El Elohim, Jehovah, who loved us so that He sent his only Son, Jesus Christ to die for us and redeem us from the consequences of sin, to give us eternal life, because He loves us so very much! We who are all sinners who are not worthy of His love! What an awesome and wonderful God He is!

Debtors eligible for Chapter 7 relief

The next client is only 50. Believe me, that’s young. Her equity in her home is $200,000. She owes $120,000 of credit cards. She had a business pre-pandemic. She used her credit cards to run the business. She doesn’t think her business can recover from the pandemic.

She needs a fresh start now. Thank God she can now do a Chapter 7 to wipe out the $120,000 of credit cards and she can still keep her house, which is now fully protected pursuant to the new amended 704.730 homestead exemption.

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

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DISCLAIMER: NONE OF THE FOREGOING IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.

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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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.

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