Client is 50 years old and divorced. She owns her residence by herself. Ex-husband quitclaimed the house to her in the divorce and she agreed to buy him off payable when able. She has two children who live with her, so her homestead exemption is $100K. The problem is that her equity in the house is more than $100K. Her equity is $140K. Because of this circumstance, although client would really benefit from a Chapter 7 wipe out of the entire $120K of credit cards, I cannot recommend a Chapter 7 for her. In a Chapter 7, even if it’s true that she does not have to pay a single cent of the $120K of credit card debt, there is a huge risk that she may end up losing her house to the Chapter 7 trustee. What would happen in Chapter 7 is that the trustee may exercise his power to sell her house and give her the homestead exemption of $100K in cash and use the $40K to pay her creditors, and the balance of $80K owed would be discharged by the bankruptcy court. But let’s face it; nobody wants to lose the house to pay credit cards, so Chapter 7 would not make sense.

But how will client handle the $120K of credit cards? Her minimum payments on $120K is at least $3,600 a month. I guess her ex-husband paid the minimum before the divorce. Since her household income has been greatly reduced after the divorce with the loss of ex-husband’s income, it’s really difficult for her to pay $3,600 a month to keep $120K of credit cards current, considering her gross monthly income is $5K as a registered nurse with one job. If she had two jobs, the net income from one job would be used entirely to keep the $120K current. Now, that doesn’t make sense either, does it?

In a Chapter 13 bankruptcy reorganization, considering that she owns a house with $40K of non-exempt equity, she would have to pay at least $700 a month for 60 months. After making 60 payments of $700 each, or $42K, the bankruptcy court will discharge the entire balance of the unpaid $120K. So, in a Chapter 13, client will pay 1/3 of the $120K of credit cards, while the court will discharge or wipe out 2/3 or $80K of the $120K credit cards. After paying $40K in the Chapter 13 plan for 60 months, client will owe zero. Compare this reorganization under Chapter 13 to her current situation: She needs to pay $3,600 minimum a month to keep $120K current. This means that in 12 months she would have paid $43K, and in 24 months, she would have paid $86K, in 36 months she would have paid $129K, in 48 months she would have paid $172K, and lastly in 60 months she would have paid $215K.

So, in Chapter 13, she only pays $40K and after 60 months, $80K is wiped out by the court, so after 60 months, and paying $40K, client will owe nothing. If she continues with her current situation, she would pay $215K in 60 months, and how much would she still owe? She would still owe the very same $120K! She would have paid $215K and still owe the same balance of $120K! This is why you should pay down credit card debt to zero every month, or get rid of the entire balance with a bankruptcy discharge, either 7 or 13, whichever applies to you, unless you are perfectly happy being the milking cow of credit cards.

In Chapter 13, client will not assume any risk of losing her house. Unlike Chapter 7 trustees, Chapter 13 trustees do not have the power to sell debtor houses in bankruptcy. No matter how you look at it, even with a $700 plan payment, Chapter 13 gives debtor the rare opportunity of  paying only a portion, in this case only 1/3 of her credit card debt of $120K. All plan payments are applied to principal and there is no interest in Chapter 13. As long as client pays all plan payments, the court will wipe out the unpaid 2/3 or $80K of credit card debt. So in client’s case, Chapter 13 reorganization will allow her to keep her house even if it has $40K of non-exempt equity since her total equity in the house is $140K, pay only 1/3 of her credit card debt of $120K, and discharge $80K of unpaid credit cards. Of course, if her equity in the house was only $100K, then she would just file for Chapter 7 and wipe out the entire $120K credit cards because there would be no risk of losing her house since the entire $100K of equity is exempt under 704.730.  

If you need debt relief, call our office to set an appointment and I will analyze your case personally.

THIS FRIDAY IS GOOD FRIDAY: On Friday, we commemorate the crucifixion of Jesus Christ, our Lord and Savior, 2000 years ago. Jesus willingly died on the cross to follow the will of God the Father, to redeem mankind from the consequences of sin, so that we may have a chance to have eternal life with them in heaven. Why did Jesus die for us? Because He and God the Father loved us so! Instead of going to hell for the rest of eternity after we die, we have a chance to spend the rest of eternity with Jesus and God the Father, because Jesus died for us on the cross. All we need to do is believe that Jesus is our Lord and Savior! Why take the risk of going to hell for the rest of eternity? You’re just plain stupid if you assume this risk.

            “FOR GOD SO LOVED THE WORLD THAT HE GAVE HIS ONE AND ONLY SON, THAT WHOEVER BELIEVES IN HIM SHALL NOT PERISH BUT HAVE ETERNAL LIFE. FOR GOD DID NOT SEND HIS SON INTO THE WORLD TO CONDEMN THE WORLD, BUT TO SAVE THE WORLD THROUGH HIM.” JOHN 3:16-17

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.