Client is 55 married with a son and daughter who have just entered college. His income is $5,600 gross a month. Wife’s income is $5,500 gross a month. So, the combined gross of his household of four is $11,100 a month. His income was actually higher than $5600 a month until 4 months ago. 4 months ago, his gross income was $6700 a month. He suffered an income reduction of $1100 mostly due to the evaporation of overtime. Employer decided to hire another person. That killed the overtime pay. He doesn’t own a house but with two children in college, there are a lot additional expenses that did not exist before. For instance, he had to provide his son with a new car for college. He also gave his daughter a new car for college. Both cars are being leased. He himself is paying for a late model car, and his wife also drives a new car. Therefore, client is paying for 4 new cars. At $500 per month for each car, the car payments total $2K per month. Car insurance for 4 new cars is almost $1K a month. So, 4 cars plus insurance, is about $3K a month.

Even if the household’s gross income is $11,100 a month, after taxes and other payroll deductions, net take home pay for the household is about $8K. After $3K of car payments, what is left is $5K for rent, food and other necessities. Rent is $1,500 so what is left is $3,500. Gasoline for 4 cars is at least $1K, so what is left is $2,500. There’s still food, medicals, and other stuff that have to be paid. After everything is paid, there’s really no disposable income left to pay for credit card debt, if any.

Unfortunately, client owes $40K of credit card debt. Wife owes only $10K of credit cards. Client’s $40K of credit cards require at least $1,200 of minimum payments to keep them current. Wife’s $10K of credit cards require at least $300 of minimum payments. There is no $1200 and no $300 of disposable income left. So what happens now?

Well, certainly husband starts to default on the $40K, but wife is still valiantly paying her $300 to keep her $10K of cards current. Client prefers to get a Chapter 7 fresh start and not pay any portion of the $40K. Wife prefers to not file Chapter 7 for her $10K. This is a good decision because $10K of cards is still manageable for them if husband does get rid of his $40K. Instead of $1500, they only have to produce $300 to keep her cards current. If husband is able to discharge $40K in Chapter 7, then the household would have reduced their credit card debts from $50K to $10K, a reduction of 80%. That should be close enough to a fresh start for the family with only the major debtor spouse filing a Chapter 7.

But can client actually qualify for Chapter 7? If you consider that the median income for a family of 4 in California is $6,800 a month and compare that with client’s household income of $11,100, you can see that there’s going to be a problem overcoming or avoiding the presumption of abuse under the means test for Chapter 7. However, even if client’s income of over the median for a family of 4, if he has additional allowable deductions, he might still qualify for Chapter 7. For instance, if client takes care of a parent by giving that parent $1K a month, the entire $1K is deductible; or, if there is a non-dischargeable tax debt that is being paid by installment of $500 a month. That is also deductible. So just these two items can squeeze client through the means test if applicable because they can make any disposable income on the means test disappear altogether.

This kind of case requires a lot of detailed examination of what client’s monthly expenses are. It looks like client has a 401K-loan repayment of $500 a month. In Chapter 7, the repayment of $500 cannot be deducted in the means test. But in Chapter 13, the $500 a month 401K-loan repayment is deductible in the means test analysis. I like to call this 401K-loan repayment paradox. Let’s say the presumption of abuse arises in this case and the disposable income that pops up is $500 a month. Client will not qualify for Chapter 7 because he has $500 of disposable income monthly. But in Chapter 13, we can deduct the $500 401K-loan repayment. Removing the $500 401K-loan repayment in Chapter 13 would actually make client’s disposable income zero in Chapter 13, making client’s plan payment zero!

If this case is filed as Chapter 7, documentation of expenses must be complete. The $1K being sent to mother must be fully documented. Otherwise, the U.S. Trustee may file a motion to dismiss for abuse of bankruptcy law. At that time, client will have the option of converting to Chapter 13. So there is some gambling involved here. If client has good documentation of expenses, he may be eligible for Chapter 7.

A just had a hearing on a Chapter 7 case where I informed client that there was a possibility that because her income was over the median for a family of two, there could be some headwinds with the U.S. Trustee asking about her expenses. Client was 70 years old. She still works and makes $75K a year. She sends $2K a month to her 72-year-old husband who lives abroad. He doesn’t work and has diabetes and hypertension. Client was fortunate that her case went through smoothly without questions from the U.S. Trustee even though her income was over the median. This is a borderline Chapter 7 case that if there was inadequate documentation of expenses could have been dismissed or converted to Chapter 13. Each case has different circumstances and so may have different endings.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

“THEN HE SAID THIS IS WHAT I’LL DO. I WILL TEAR DOWN MY BARNS & BUILD BIGGER ONES, AND THERE I WILL STORE ALL MY SUPPLIES OF GRAIN. AND I’LL SAY TO MYSELF, “YOU HAVE PLENTY OF GRAIN LAID UP FO MANY YEARS. TAKE LIFE EASY, EAT, DRINK & BE MERRY.” “BUT GOD SAID TO HIM “YOU FOOL! THIS VERY NIGHT YOUR LIFE WILL BE DEMANDED FROM YOU. THEN WHO WILL GET WHAT YOU HAVE PREPARED FOR YOURSELF?” THIS IS HOW IT WILL BE WITH WHOEVER STORES UP THINGS FOR THEMSELVES BUT IS NOT RICH TOWARDS GOD.” LUKE 12-21 (THE PARABLE OF THE FOOLISH RICH MAN TOLD BY JESUS)

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 Fujien 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 91803 OR at 20274 Carrey Road, Walnut, CA 91789.