Client is 53. He is married and owns a house. He used to have a business, which was a DBA sole proprietorship. “DBA” means doing business as. Sole proprietorship means that an individual conducts a business in his personal capacity, without a corporation, or other kind of business entity. Other business entities used to conduct business include LLC, S corporation, C Corporation, registered partnership etc. In a sole proprietorship, all of the debts incurred for and by the business, are personal debts of the individual conducting the business. For example, client was in import and wholesale distribution of electrical parts. The business has a warehouse for the inventory. Client signs the warehouse lease in his personal capacity even if the lease is in the name of the business. Client has a line of credit from a bank for $100K. Even if this line of credit is in the name of the business, client is personally liable on this line of credit such that the line of credit is treated as a personal loan to client for him to operate his business.

It appears that the Trump trade war has been creating pressures on client’s business. His overseas suppliers based in China are encountering shipping delays. Shipping delays have negative impact on collections because client cannot ship an order, bill and collect without merchandise. There is added pressure on the business when a factoring company is used. A factoring company finances the receivables of the business. Delayed shipments cause havoc on factoring arrangements because if the merchandise is not timely delivered, the customers may not pay or may even cancel the order. 

Client’s business was running smoothly for ten years. But the recent hiccups in delivery caused major problems for client. If customer suspected client had delivery problems, customer will just cancel large orders and give the business to others who do not have delivery problems. So, client’s business has suffered greatly and no longer profitable. Worse, client has to fend off suppliers and banks that want to get paid. 

Client then uses his credit cards to refinance his business debts, one by one. Why do I mean by refinance? For example, he has an American Express card with a credit line of $20K. He draws on that to pay off a portion of credit line from the other bank. In other words, he is borrowing from Peter to pay Paul. Soon enough, he has maxed out all of his credit cards. He tells me that he maxed out at $150K of credit cards. He now pays $4,500 a month of minimum monthly payments to keep the $150K current. He did that for 6 months but could not make the minimum payments anymore. Well, that’s obvious. To be able to pay $4,500 monthly, client’s gross income should at least be 5 X that amount. To pay that with ease, his gross income should be at least $22K. But his gross income now from employment is only $4K a month. 

It’s clear he has to get rid of the $150K credit card debt, right? There are only two effective ways of getting rid of his $150K of credit card debt. The first is Chapter 7 bankruptcy. The second is Chapter 13 bankruptcy. The other options are pie in the sky: getting a 2nd trust deed to pay off the $150K or, consolidating these with a settlement company. The first pie in the sky is sucking $150K of equity out of your house and using the proceeds to pay off the $150K credit cards. Replacing credit card debt with a mortgage on your house is never a good idea. By doing this, you increase your mortgage payments. You put your house at risk. Need I say more? Instead of paying $1700 for your house payment, you will now pay another $800. That increases your house payment to $2500. That’s a bad idea.

The second pie in the sky involves signing a contract with a debt settlement company. The so called settlement company will deal with all your credit card companies and beg them to give you some kind of settlement deal. The problem is this settlement company is somewhere in Timbuktu, it’s anyone’s guess which credit card will agree to whatever kind of settlement (this is why debtors who opt for this pie in the sky still get sued by creditors despite the “arrangement”), payments are sent to the settlement company, not the creditor. In other words, what actually happens to the money you send to the settlement company again is anyone’s guess. And the settlement company may have its own cash flow problems putting your payments at risk.

If you are eligible for Chapter 7, that’s the simplest way to go. Chapter 7 will wipe out client’s $150K and all other debts and give him a fresh start in life without accumulated debt for a business that failed. Why should he spend the rest of his life paying back a business loss? He should be given a fresh start without debt, just like Walt Disney who filed for Chapter 7 twice before his Disneyland business became wildly successful. Of course you’ve been to his Disneyland theme parks a couple of times with your family, haven’t you?  He filed for Chapter 7 twice. So don’t get into the “holier than thou” mentality. It is counter-productive and you’ll never get out of your ever-deepening debt hole. 

If client does not qualify for Chapter 7 because he has too much equity in his house that is beyond the homestead exemption, then he should file for Chapter 13 reorganization instead. In Chapter 13, he may pay only a portion of the $150K. If the non-exempt equity of his house is $20K, he need only pay $350 a month for 60 months, and after that is done, the court wipes out $130K and all of his other debts. There is no risk to his house. All of his payments are paid to the Chapter 13 trustee who is an officer of the court. All payments are guaranteed by Federal law and the Federal bankruptcy court to be paid to all creditors who timely file a proof of claim.  Creditors who do not file a proof of claim need not get paid. Those debts just get wiped out. When the Chapter 13 is filed, a court order protects client’s house from liens and judgments, and all creditors are prohibited from calling or suing debtor. Peace of mind and order out of chaos. 

If you want to become productive again without accumulated debt, you absolutely need to wipe out accumulated debt with Chapter 7 or Chapter 13 bankruptcy. If you want to straighten out your financial life once and for all, do Chapter 7 or Chapter 13. You will not regret it. It’s the best remedy to accumulated debt short of winning the lottery.

“THROUGH JESUS, THEREFORE, LET US CONTINUALLY OFFER TO GOD A SACRIFICE OF PRAISE – THE FRUITOF LIPS THAT CONFESS HIS NAME.” HEBREWS 13:15

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.