WHEN YOU SHOULD USE CHAPTER 7 DEBT RELIEF

The Supreme Court of the United States has often called Chapter 7 bankruptcy the “Fresh Start”. This is an accurate description of debt relief given by Chapter 7. Debtors are given a rare opportunity to get rid of their debts without paying them. At the same time, they are able to keep all, if not most of their assets, and their income. Think about it. They will still have the house they live in, their retirement accounts, their cars & furniture. In most cases, they keep everything they own, and all of their income.

                Let’s look at several recent actual client profiles:

1. Client is 66 years old and still working as a registered nurse. She owns a house with $150,000 of equity. She divorced 10 years ago. Due to illness in the family abroad, she liquidated her 401K of $180,000 during 2007, 2008 and 2009. As a result, the IRS is now after her for back income taxes for those years of $80,000. The State is also after her for $30,000 of back taxes. Her income is still good at this time because she still works. She also owes $30,000 of credit cards. But realistically, how will she pay $110,000 of past due income taxes? Further, when she retires in a few years, her income will be reduced by more than half her current income.

A Chapter 7 bankruptcy will discharge $110,000 of back income taxes and $30,000 of credit card debt allowing her to be debt free. At the same time, she can keep her house with $150,000 of equity. It’s too bad she liquidated her 401K because she would have been able to keep the entire $180,000 in her retirement account despite her Chapter 7 bankruptcy. She’s off to a “Fresh Start” at the age of 66 having discharged all she owed to the IRS and FTB and credit cards while keeping her house, other assets and her income. She has the peace of mind of retiring without debt and keeping her current and future income for herself.

2. Client is 55 years old and works as a clerk for the State of California. She makes $60,000 annually. Her husband is an accountant who makes $65,000 annually. Their residence has equity of $80,000. They own two old model cars. She owes $70,000 of credit cards. Her husband owes $50,000 of credit cards. She decided to file for Chapter 7 relief because of unexpected circumstances that requires her to support her mother who lives abroad. She needs to send her mother $2,000 a month for the next 12 months. Mother lost her house and livelihood due to a natural calamity in their home country.

Even though the amount of $2,000 a month for a dependent is an unusually large amount, this is a perfectly legitimate deduction allowed by the means test. With this deduction, client was eligible for Chapter 7 relief subject to strict scrutiny by the Chapter 7 trustee and the U.S. Trustee. But as the Supreme Court has said many times, Chapter 7 relief is the “Fresh Start” that is given to the “honest” debtor. Since client was perfectly honest in her case and had all the documentary evidence to support her deduction, I filed the case for her last month.

Yesterday was the 341A meeting of creditors. To tell you the truth, I was surprised how smoothly everything went at the hearing. The U.S. trustee showed up and I thought he showed up to ask my client questions. But the UST showed up to question the debtor before my client, and did not have any questions for my client. Indeed, the “Fresh Start” is given to the “honest” debtor so he or she can become productive in life again.

3. Client is young at 35 with a good job. However, he became temporarily disabled with an illness which we hope is curable. He owes $40,000 of credit card debt. He now receives temporary disability pay that is half his income. He has payments on a car that he wants to keep.  Chapter 7 discharged his $40,000 of credit card debt and allowed him to keep his car, thus allowing him a “Fresh Start” early in life. His credit score will become perfect again with each passing year because he has a discharge. In 10 years, there will be no record of bankruptcy in his credit report. In 7 years, his credit score will be over 700. In 4 years, his credit score will be at least 680 as long as he timely pays his car and new credit cards .There is no problem rebuilding credit. New credit cards will be offered and car loans are always available as soon as the discharge is given. Interest rates will be higher.

“O Sovereign Lord! You made the heavens and earth by your strong hand and powerful arm. Nothing is too hard for you!” Jeremiah 32:17.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty+ years.  He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California.  He speaks Mandarin & Fujien and looks forward to discussing your case with you personally.  Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave., Mailstop 58, Bldg A-1 Suite 1125, Alhambra, CA 91803.