Clients are married to each other and they are both seniors. He is 68 and she is 66. He is a member of the professions and still works in that professional capacity. She is retired. Their residence has equity of $400K. This fact alone knocks them out of Chapter 7. In Chapter 7, the trustee has the power to sell their home, give them their homestead exemption of $175K and use $225 to pay of trustee administrative expenses and trustee’s lawyer. After they are paid, whatever is left is used to pay the $80K and if there is anything left, probably one dollar will be given to the debtors. It’s strange that $145K can be used for administrative and legal fees to pay $80K of credit cards, but I have seen this happen. It’s really not that unusual. I represent an unsecured creditor for $250K in a Chapter 7 case of a company that had $385K in its checking accounts when the case was converted from Chapter 11 to Chapter 7. In a span of 18 months, the bulk of the $385K had been used up for trustee and his legal fees. My client’s $250K which I had to defend vigorously in trial is probably worth 20% now. However, what is going on is perfectly legal. Once the trustee and his lawyers start to administer the bankruptcy estate assets, they will make a lot of money. I understand that the moneymaking bankruptcies are offset by the money-losing bankruptcies; so in the end, of course, the trustee has to stay ahead of his expenses. The closest analogy is using a sledgehammer to kill a fly, or paying $10K for a screwdriver. It’s this kind of stuff. It’s legal but it doesn’t make any sense but we have to live with it.

Aside from owning their residence, clients also own a rental, which has no equity. It’s negative about $20K, and they lose about $300 a month because the rent is less than the mortgage payment and the property management fee. Husband last year liquidated $50K of his $70K 401K to cover the $30K he needed for minimum payments on the $80K credit cards. After that payment of $30K at the sacrifice of his retirement account, they still owe the same $80K! They have been paying the minimum of $2,500 a month to keep these cards current for a very long time. Even at ten years, and I am sure their credit card debt has been there longer than that, they already have paid $300K and today they still owe the very same $80K! Now being a professional and educated person, husband knows that there is something very wrong in this equation but he cannot get himself to make the right decision. Yes, it’s clear that they need relief from the $80K cards but what should they do at their age? Wife seems to be the clearer thinker of the two as she immediately sees the impossibility of keeping these cards. These cards have wiped out husband’s 401K which should not happen in the first place. A retirement account is for their retirement, not to pay minimum payments on credit cards. But when push comes to shove, this is what happens. Desperation sets in and a desperate person will even hold on to a sharp knife to keep afloat as the saying goes. 

I explain to clients that Chapter 13 will allow them to pay off the $80K in 60 months, without interest, at the rate of about $1400 a month. The bankruptcy court protects their house from judgment liens from the credit cards and other bad guys as long as the bankruptcy is in place. Once they complete 60 payments, the court enters a discharge order that erases all of the credit card debts. By the time husband is 73 and wife is 71, they will owe nothing on these cards. First, the plan payment of $1400 is more than a thousand dollars less than $2500 a month just for minimum interest payments on the cards. Second, in 5 years, they paid $80K of principal and their balance owed is zero, whereas, without Chapter 13, in 5 years they will pay $150K but in 5 years when he turns 73 and she turns 71, they will still owe the very same $80K that is weighing them down today. Wife can clearly see the benefit, so she will convince husband soon to get Chapter 13 relief.

In fact, Chapter 13 is superior to any other method to get rid of the $80K. One method is refinancing the house to pay for the $80K. But converting unsecured debt such as credit cards into secured debt using the house as collateral is risking the loss of your house for credit cards. Once husband stops to work, the higher mortgage payment caused by the refinance will become a very stressful burden and places the house at risk. This is something you don’t want at any age.

Next clients are more than twenty years younger than senior. Young clients are 43 and 42. I’m 44 but I stopped counting a long time ago so I know forties is way young. Forties are like new born babies. Together, husband and wife owe $40K. They don’t own a house and have two teenagers and one in the oven. They are very tight because only husband works and he grosses $4K a month. There’s really no money left for the luxury of paying for credit cards. No wonder the lawsuits have started. They were just served with summons and complaint to collect $5K. Needless to say, Chapter 7 will give them the necessary relief by wiping out all of the $40K. So, they decide to go for it immediately. It’s the right decision for the family.

 “BUT I WILL RESTORE YOU TO HEALTH AND HEAL YOUR WOUNDS,” DECLARES THE LORD, “BECAUSE YOU ARE CALLED AND OUTCASE, ZION FOR WHOM NO ONE CARES.” JEREMIAH 30:17

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.

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