THE first client is 82. He is married. “What’s the problem?” I ask.
He says that he owes about $15,000 of credit cards and his wife owes about $10,000 of cards. Together they owe $25,000. He says he doesn’t know how much longer he has before he dies but it doesn’t appear like they can actually finish paying off the $25,000 of cards. I ask him why this pessimism when they both look healthy.
“Yeah, I feel ok. In fact, I was still working a regular job before COVID started in March, then I was laid off. The problem is that we’ve been paying for these cards for such a long time and the balances don’t seem to be decreasing at all,” he said.
I asked, how much minimum payments they pay. He said they owe about 10 cards and pay a little on each card but it adds up to $1,000 a month. He says he called up the credit card companies and they were told that at $1,000 a month, it would take another 25 years to fully pay off the $25,000 of credit cards. “I don’t think I have another 25 years to live and I don’t want the credit cards to be a problem for their adult daughter who lives with them,” he responded.
Of course, he’s making pretty valid points here. Who wants to spend another 25 years paying $1,000 a month to pay off $25,000 of credit cards? That’s $300,000 to pay off $25,000. Yeah, it’s a pretty profitable business for MasterCard and Visa. Go buy their stocks. They keep going up. It may not take all of $300,000 but it’s going to take a whole lot more than $25,000 and a very long time for the client to pay off these credit cards; probably at least $150,000 to pay off $25,000.
With minimum payments monthly, you’re just paying current interest so the balance remains the same while you age. Your hair will turn white but you will still owe the same amount of principal after 10 years, 15 years or 20 years. So here we are now with the client just getting the feeling that he’s been paying the cards for a long time with minimum $1,000 payments a month, but he still owes the same $25,000 so he’s now wondering when he will actually pay them off in full because he’s now 82 and was just told by creditors that it will take another 25 years.
The client owns a house. He owes about $100,000 on it. “What’s the current fair market value?” I asked. He said it’s worth about $500,000. I asked him about how many people are on the title, and he said three. This means he and his wife own half, and the other party on title owns the other half. His share of equity would be $200,000 while homestead exemption would be $175,000, leaving non-exempt equity of $25,000.
This means he can’t do a Chapter 7 unless he’s willing to lose his half share of the house. In Chapter 7, the trustee has the power to sell his half share, give him $175,000 in cash, and use the $25,000 difference to pay the $25,000 of credit cards. Theoretically, this is the way it should work. But the trustee has administration and selling and legal expenses to cover. These use up a big chunk of money. The trustee may not make any money after giving the client his $175,000 if the house is only worth $500,000. So we check Zillow. It says that Zillow estimates at $640,000. Well, that does it. There’s enough room for the trustee to make money on it at $640K. It’s not safe for the client to file Chapter 7 to wipe out $25,000.
“I will only file Chapter 13 for you because I don’t think you want to lose your house in Chapter 7 for $25,000 of credit cards, right?” I tell the client. He agrees. Chapter 13 will protect his house from lawsuits and liens from their credit cards with about $450 monthly payments in a Chapter 13 plan to the trustee for 60 months. That’s already $550 less than the $1,000 he pays monthly for minimum payments. And, there’s no interest. So, after 60 months the $25,000 is fully paid thru the court, so the court enters a discharge order saying the client no longer owes any credit card debt. The client decides to file Chapter 13. Right decision. Better late than never.
The second client owes $40,000 in credit cards. He’s much younger at 62. He’s married but they don’t own a house. They just rent. This actually makes it a lot easier to qualify for Chapter 7 because there is no house to look at. House values now as you know are sky-high because interest is at an all-time low. You can get a 30-year fixed-rate mortgage to buy a house at less than 3%. Never heard such low rates ever before. Lots of people want to buy houses now even with the pandemic going on. It’s literally once in a lifetime situation with interest this low. So trustees in Chapter 7 are very well aware of how high house values are right now. If there’s a house involved with large or borderline equity it’s the better part of caution to file for Chapter 13 so as not to put the house at risk of being lost in a Chapter 7, unless you really want to cash out on the exempt equity now for whatever reason you may have. I can think of situations where the client would rather get cash of $175,000 being a senior and want to move out of state because houses are cheaper say in TX or AZ and you can get a nice house fully paid for $150,000. No more mortgage to worry about. Life becomes a lot easier with no mortgage to worry about having a fully paid house. Most seniors depend on social security, which doesn’t go a long way after the mortgage payment. Some seniors just want to cash out to start a new life elsewhere.
In this case, the senior still works and makes about $3,000 a month. The wife does not work. He nets about $2,400 a month. You know the minimum payment on $40,000 of credit cards is at least $1,500 a month. It only takes less than a minute for the client to decide to go for Chapter 7 to wipe out the $40K. Right decision.
If you have too much debt and need relief, please set an appointment to see me. I will analyze your case personally.
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.