THE first client is 48, married, and has a good job that pays $80,000 a year. His wife makes another $40,000 a year. Together, they make $120,000 gross a year.
They have 3 children aged 5 to 12. The wife has no credit card debt, but the client has about $30,000 of credit cards left unpaid. According to him, he has been paying $800 a month to a debt consolidator out of state for one year. However, the $800 a month is proving to be too much of a burden. He asked if he qualified for Chapter 7 fresh start without any payments to wipe out the $30,000.
The problem it appears is not really his gross household income of $120,000. He does have enough qualifying expenses under the means test that could make him eligible for Chapter 7. The issue is that they own a house with a net equity of $200,000. Since their homestead exemption is $100,000 of equity, he has $100,000 of nonexempt equity. Hence, under the Chapter 7 liquidation analysis comparison, the $30,000 of credit cards would get paid in full if he were to file a Chapter 7 because the Chapter 7 trustee could very well sell his house, give him $100,000 of cash to pay him for his homestead exemption, and use the rest of the $100,000 to pay the $30,000 of credit cards in full and to pay legal and administrative costs of the trustee which is quite substantial.
I represented a client as a creditor in a Chapter 11, which subsequently converted to Chapter 7. At the time of conversion to Chapter 7, the bankrupt debtor had $400,000 of cash in the bank. That’s right, close to half a million dollars in cash was available for distribution.
My client’s unsecured claim was $300,000. The trustee sided with another major creditor who challenged my client’s claim saying, “The entire $300,000 had been paid off by debtor prior to filing for bankruptcy.” This claim was certainly absurd. The client had an open account relationship with the debtor and had at the high point shipped debtor over $2 million of merchandise on credit. The debtor paid $1.7 million, and left $300,000 unpaid.
We defended the adversary complaint and won. The court judgment after the trial was for the client for $300,000. After another year of trustee proceedings, the $400,000 was down to, would you believe, $15,000. My client got a distribution of $5,000 on their unsecured claim of $300,000.
In this case, the young client’s option is not Chapter 7, but Chapter 13. In Chapter 13, the trustee has no power to sell debtor’s house. And, the debtor can dismiss his Chapter 13 case at any time, for any reason. Whereas, a Chapter 7 case, once filed is very difficult to dismiss. In Chapter 13, he would be paying $500 a month for 60 months to pay the $30,000 in full without interest, while protecting his house from judgment liens arising from the $30,000. Still, $500,000 a month is, guaranteed to get rid of the $30,000 and guaranteed to stop all collection efforts by lawsuits by creditors. This is absolute peace of mind. No more creditor harassment immediately.
Unlike, consolidation through a third party, his payments may just be funding the consolidator’s retirement account or the guy’s vacation house in the Mediterranean, and indeed, there is no protection against creditor lawsuits as some of them may opt to just garnish debtor’s wages instead of agreeing to freely accept monthly payments.
A Chapter 13 is consolidation by the bankruptcy court. The court-appointed trustee will not run away with his monthly payments. He can sleep soundly with the thought that his payments are being distributed by the trustee, and assured with the guarantee that the court’s injunction order will stop all creditor collection efforts, including lawsuits, letters and phone calls and wage garnishments and bank levies. All collection efforts are stopped immediately by court order. This is the peace of mind and order out of chaos guaranteed by law.
The second client is 45. He is single. He owns a house with $300,000 of equity. But he doesn’t owe any credit cards or unsecured debt. The client went back to his country of origin to attend the funeral of his father. After the funeral, he decided to stay there for some time. I guess he was having a good time visiting friends whom he had not seen for 20 years, and lost track of time.
While he was there, he forgot to pay the first and second mortgage on his house. When he came back, he realized that he had $10,000 of arrears in his first mortgage because the bank would no longer accept his current mortgage payment. The bank returned his current mortgage payment to him and said they would not accept the payment because his arrears were too big. After a week, the second mortgage creditor sent him a notice of auction sale for the end of this month saying that the entire mortgage of $30,000 had come due.
This is a slam-dunk case for Chapter 13. Chapter 13 will immediately stop the foreclosure of his house by the second mortgagee. And Chapter 13 will give him five years to pay off the arrears on the first, as well as the entire $30,000 of the second mortgage, the entirety of which has come due.
Chapter 13 will protect the debtor’s house from foreclosure, and give him enough time to cure the default on the first and the second mortgage. There’s no problem on the income side, the debtor is self-employed with several sources of income that give him a monthly net of $6,000. That’s good enough.
Reminder: Even if you go abroad, don’t forget to pay your mortgages!
The third client is 43. She is going through a divorce and owes $20,000 of credit cards, and other unsecured debt. She doesn’t own a house. She cannot file a Chapter 7 because her last bankruptcy filing was five years ago when she discharged $50,000 of cards.
The only choice now is Chapter 13 where she will be given five years to pay off the $20,000 in 60 monthly installments. Her monthly payments to the trustee will be about $350. She wants to do it immediately so she can forget about making payments to several different creditors and just paying the minimum. She also wants to stop all the creditor phone calls.
In addition, the stress caused by her divorce is a little bit much for her to handle with creditor problems. Getting rid of creditor calls and collection efforts will give her at least a lot less stress on the financial side.
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.