CLIENTS CHOOSE CHAPTER 13 TO AVOID RISK OF LOSING HOUSE TO CHAPTER 7 TRUSTEE ON STERIODS; SENIOR WANTS CHAPTER 7 TO WIPE OUT $22K CREDIT CARD DEBT

The first case involves clients who are still young. By young, I mean less than fifty, late forties. They have teenage children, one son, and two daughters. Their household income is about $75K a year. Husband used to work two jobs as a technician, while wife used to own a retail business, now defunct. She still makes some money but hardly enough to pay for her $68K of credit card debt. She racked up this debt when she used these cards to support a failing business, just to keep the business afloat for two more years. Husband owes only $20K of credit cards. Together, clients owe about $90K of credit cards. Minimum monthly payments are almost $3k a month. Needless to say, wife’s cards are now all past due, while husband’s cards are still current, as a last ditch effort to hold the fort, the same thing that Gen. Custer did. Thinking he could protect the fort, the Indians won and Custer died. Three Indian tribes, the Lakota, Cheyenne and Arapaho decimated the 7th cavalry of Gen. Custer, which had 700 men. Custer and his two brothers died in the battle of ‘Little Big Horn” in 1876.

So, I’m not so sure if it’s a good idea to take a last stand to try to pay $90K of credit card debt when clients’ household income, although decent at $75K a year, because there is no way mathematically for clients’ to pay $90K of credit card debt with minimum payments. These cards will never get paid in clients’ lifetime, unless they win the power ball lottery. Dream on. The chance of winning power ball is 1 in 292 million. You have a better chance of getting hit by lightning, twice, than winning power ball.

After a little probing, I determine that clients want a Chapter 7 to wipe out all of the $90K credit cards. The problem is that their residence has about $130K of equity. It has a current fair market value of $450K and they owe about $320K on it. It this was four years ago, they could easily sail through a Chapter 7 without the risk of losing their house to an aggressive Chapter 7 trustee. Of course, their homestead exemption is $100K plus about $25K for cost of sale of the house, so there is no viable equity for the trustee to take, so there is minimal risk to the house. But there is a five percent chance that the trustee that gets assigned to clients’ case is the most aggressive Chapter 7 trustee when it comes to non exempt assets, particularly houses. If this misfortune should befall clients, this is just the worst thing that can happen to a Chapter 7 debtor with “borderline” exempt equity in the house, having to deal with a Chapter 7 trustee on steroids who is hell bent on selling your house for $1 of non-exempt equity.

And even though debtors have the right to convert to Chapter 13 anytime, to escape the clutches of a Chapter 7 trustee who wants to sell their house, the right to convert is not absolute. This trustee will certainly oppose the conversion to Chapter 13. His trustee and legal fees to fight the conversion to Chapter 13 can easily reach $25K, and all of that $25K must be paid in full the Chapter 13 as priority Chapter 7 administrative fees. So even the trustee loses on the opposition, he still wins, because he still gets paid $25K in the Chapter 13 case. It doesn’t pass the smell test for fairness, but in reality, that’s the way it works. I have one case now and we are fighting to keep debtor’s house in Chapter 7 (no conversion to Chapter 13) because debtor owes more than $1.0M of unsecured debt. We are fighting the trustee in an adversary case because this house doesn’t even have non-exempt equity but the trustee is making it appear that debtor lied under oath and now asks for denial of discharge to debtor. I just can’t believe what is going on in this case. But we are fighting it 100%, and in this case, we are the Indians.

To avoid this kind of scenario altogether, it is safer for clients to choose Chapter 13. In Chapter 13, they can pay a small amount, maybe $300 a month for sixty months. After having paid $18,000 in sixty months with no interest, the difference between $90K and $18K, $72K will be discharged with the last payment on the 60th payment. This means that clients will pay 20% of their $90K credit cards over 5 years with no interest, the court will discharge 80% of $72K on the 60th payment. 

In Chapter 13, there is no risk of clients’ losing their house to the trustee because Chapter 13 trustees do not have the power to sell houses. On the other hand, Chapter 7 trustees have the power to sell your house if there is viable non-exempt equity. To avoid the hassle of dealing with an over aggressive Chapter 7 trustee and risk losing their house, clients chose to file Chapter 13 and pay 20% of their credit card debt. And may I add, this is the right choice because there is no risk to the house which they want to keep, and $300 plan payment is certainly a lot less than $3K a month for minimum payments that never end, with a bright light at the end of the 60th payment when $72K is discharged by the court! In 5 years, clients will owe zero unsecured debt, and they will still have their house, which may then have $200K of equity if Hillary Clinton becomes president. I’m with her. We are stronger together.

Second client is a young senior. She is only 55. Divorced ten years ago. Now lives by herself. She used to be a happy camper with a $40K yearly salary. But she lost that job last year. She is stuck with $22K of credit card debt. She pays $900 a month for these cards to keep them current. But her savings are quickly diminishing. When it’s a choice between paying $900 of rent which lets her have a roof over her head for a month, or $900 to mastercard and visa, given the fact that she now has no income, it’s really a no brainer. The $22K of credit cards has to be discharged. She chooses Chapter 7 to achieve this goal. Her credit score will go up pretty fast since she still pays for a car. In two years her credit score will be about 620. Within a couple of months of getting her discharge, she will get new credit cards mailed to her. Some credit cards specialize in giving credit to people who have come out of Chapter 7. Chapter 7 is the best choice for client.

 “GIVE UNTO THE LORD THE GLORY DUE TO HIS NAME; WORSHIP THE LORD IN THE BEAUTY OF HOLINESS.” PSALM 29:2

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 1000 S. Fremont Ave., MAILSTOP 58 BUILDING A-1 SUITE 1125, Alhambra, CA OR at 20274 Carrey Road, Walnut, CA 91789.