CLIENTS SEEK TO DISCHARGE $100K AND $30K CREDIT CARDS BUT QUALIFY FOR DIFFERENT CHAPTERS OF 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 $30K a year and does not own a house. She doesn’t know what husband is doing in his home country. For purposes of bankruptcy, 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 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 $30K a year. It’s only her income that is relevant in the means test calculation.

Client has $100K 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, client has been making minimum payments on the $100K at the required $3K a month. I guess she used to make more than $30K a year before, because he now only makes $2,500 a month, which is less than $3K a month. But in the last ten years, she has paid $360K to keep $100K of credit cards current. Today, she still owes the very same $100K! 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 ten years ago and wiped out the $100K in 2008, she would probably have $700K in her wealth portfolio now, growing at the rate of between 6% o 10% a year. 

But she took her own sweet time, perhaps she was afraid to file for Chapter 7 ten years ago, or even 5 years ago, and now suffers the consequence of that wrong decision. Now, she still owes the very same $100K but had paid $360K to keep that $100K current in the last ten years. Now, that’s not being smart is it? No, that’s being pretty dumb. Because if client did actually get Chapter 7 relief and wipe out the $100K ten years ago, the consequence of that smart decision, would be that she would have at least $700K 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 $100K 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 11’s, in the nineties wiping out more than a billion $ of unsecured debt. 

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 $50K and her fully paid MB 300 2013, while wiping out the entire $100K. So she goes for it ten 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 $20K of credit cards and an uninsured car accident liability of $40K. They got the fresh start then, and now he has racked up another $30K of credit card debt, while wife has her own credit cards too. Client recently lost his job and his unemployment benefits are about to expire. Certainly, he wants a Chapter 7 discharge of his $30K of cards. However, he owns with his wife as joint tenants, their house worth $500K on which they owe a total of $300K. So, they have equity of $200K. But since he is only 52, their homestead exemption is only $100K, leaving non-exempt equity of $100K. This means that if he does a Chapter 7, the trustee will sell their house for $500K, give him $100K for his exempt equity, and use the rest to pay off his $30K 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 client will lose his house for $30K 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. Client needs to file Chapter 13 to protect his house from eventual judgment liens from the $30K credit cards. Judgment lien creditors can force the sale of the house in order to get paid. Unbelievable but true! A judgment creditor for $5K with a lien on your house can force the sale of he house to satisfy the judgment as a last resort. 

Chapter 13 will protect client’s house from judgments occurring in the future from the $30K of credit cards. The Chapter 13 plan will allow him to pay the $30K 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 $30K credit cards entails no risk of losing his house because Chapter 13 trustee 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.

“LET GOD HAVE ALL YOUR WORRIES AND CARES, FOR HE IS ALWAYS THINKING ABOUT YOU AND WATCHING EVERYTHING THAT CONCERNS YOU.” 1 PETER 5:7

Lawrence B. Yang is a graduate of Georgetown University with a Master’s Degree in Law and specializes in Bankruptcy, Business, Real Estate and Civil Litigation.  He speaks English, Mandarin and Fujian and has successfully represented thousands of clients in California, including companies overseas. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 20274 Carrey Road, Walnut, CA 91789 or1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.