[COLUMN] What does bankruptcy ‘fresh start’ mean?

LET’S give bankruptcy a historical and legal perspective. Right now, when we say bankruptcy law, we refer to Federal law called the “Bankruptcy Code” of 2005. Creditors did a lot of lobbying in Congress to fashion the 2005 bankruptcy Code to enhance their interests. Thus, the 2005 Bankruptcy Code incorporates the “means test” which basically uses the deductions allowed by the IRS from gross income to set the threshold to filter out which debtor can qualify for Chapter 7 of the bankruptcy code. Chapter 7 is the “fresh start” chapter of the bankruptcy code, which allows a debtor to “discharge” most, if not all of accumulated debt while allowing the debtor to keep most, if not all of his assets through a system of asset exemption.

For example, senior clients own a house with equity that is within exemption, retirement portfolio of $500K, an older model MB-E 350 with a car loan of $15K, a new Tesla model X with a car loan of $50K, and they owe $70K of credit card debts. They pay $2K a month to keep the $70K of credit cards current. Since they now rely on social security income and income from their $500K of retirement savings, they are really having a hard time setting aside $2K a month for credit cards. Even if their combined social security income and portfolio income is $80K a year, allocating 30% of that income or $24K a year to keep their cards current is a pain. They would like to travel the world more often but the $24K a year for credit cards means they have to stay put in LA. So clients are not a good place to be in.

In this case, given these circumstances, Chapter 7 of the bankruptcy code will allow clients to keep their house, their cars, their retirement portfolio (must be ERISA qualified 401K, IRA, DBP etc.) while “discharging” their $70K of credit cards. In other words, bankruptcy law allows them to keep all their assets and all their income sources while the Federal court issues an order that “wipes out” the $70K of credit cards. Just imagine the amount of money the clients are going to save if the $70K is discharged. In two years, they save $50K. In 4 years, they save $100K. Whereas, if they did not get rid of these cards, they will spend another $100K in 4 years, but still owe the same $70K!

The relief from debt for clients is tremendous. It’s the difference between night and day. The bankruptcy “discharge” is the essence of the bankruptcy “fresh start.” The United States Supreme Court, in many bankruptcy cases brought before it, has stated that the bankruptcy “discharge” gives the honest debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debts. It is obvious that clients are suffering a lot of pressure and discouragement to fork out $24K of their income every year to service their $70K of credit cards. Thus, bankruptcy law and the U.S. Supreme Court want to give clients a new opportunity in life unhampered by the pressure and discouragement of pre-existing debts, even though they are now seniors. Of course, a fresh start really has nothing to do with age – my youngest client is only 22 and she needs a fresh start because of pre-existing debt that she cannot pay off since a friend of hers used her credit cards without her knowledge and consent.

Just think about it. Clients still have their house, their cars, their retirement portfolio of $500K, and still have all their income, but they don’t have the $70K of credit card debts anymore. It’s the same as having all cancer cells successfully removed from your body. Except that in Chapter 7, clients do not have to undergo chemotherapy. They get a fresh start in life with all of their assets, which they keep, and have zero credit card debts. Further, they will be able to rebuild their credit score very fast. They have nothing to lose except burdensome pre-existing debts. Recently, another senior client discharged $30K of credit cards, and he feels great! He actually had a total makeover. He had a triple bypass and after one month of recovering from that, he said, let’s go ahead and file my Chapter 7 case because with my triple bypass, I feel great, and now I want to feel great financially with a “fresh start” without my $30K of credit card debts!

What does the Federal bankruptcy court “discharge” order mean? It means that creditors cannot collect, in any way, shape or form the discharged debts from debtor. This is permanent. Even if clients win the lottery of $100M next year, they don’t have to pay back the $70K, as long as 6 months from discharge date has elapsed. Creditors lose the right to collect permanently. The debts are discharged permanently. Debtors are given a new financial start in life.

How long is the wait to buy a house after bankruptcy? Normally, in two years from discharge date, debtors can qualify for mortgage loans to buy a house at higher interest. If a person with an excellent credit score will pay 4%, in 2 years, a discharged debtor will pay maybe 6%.

But not all debts are dischargeable. Child support and alimony are not. Student loans are not, unless you can show extreme hardship. Debts incurred by intentional torts cannot. For instance, you killed somebody and the victim’s family obtained a $50M judgment against you, that $50M cannot be discharged. You will bring that debt to hell with you. However, I did settle a $1M wrongful debt judgment against a debtor for $50K. Client made an illegal U turn causing an accident with a motorcycle that caused the death of the motorcycle driver. The debtor’s asset structure was favorable and conducive for a $50K settlement. Debtor had to go to jail for three years for the homicide.

Is bankruptcy constitutional? Of course it is. Article 1, section 8, clause 4 authorizes Congress to make “uniform laws on the subject of Bankruptcies throughout the United States.”

Even our loving God favors debt forgiveness. Deuteronomy 15:1 – At the end of every 7 years you shall grant remission of debts.

If you need debt relief, call our office to set an appointment. I will analyze your case personally.

 “At the end of every seven years you shall grant remission of debts.” Deuteronomy 15:1

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Disclaimer: None of the foregoing is considered legal advise for anyone. There is absolutely no attorney client relationship established by reading this article.

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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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