Seniors seek chapter 7 relief for $48k credit card debt
Business owner with $1.0M labor lawsuits
CLIENT is 65. He operates a service-oriented business with 3 outlets in strip malls. He has been in business for 8 years. Of the 3 outlets, two are losing money, while the third has some profit that subsidizes the loss of the first two, and provides client with some disposable income that is barely enough to cover his monthly living expenses. The gross receipts from one outlet, is about $10K a month. 40% goes to rent, 50% goes to labor, so what else is left? The gross receipts from the second outlet is $4K a month, barely enough to cover rent. The third outlet, which turns a profit keeps client from becoming a homeless person and puts food on the table. So, it’s not a great business, but allows client to survive. He has no retirement accounts, no 401K or pension, and expecting minimum social security when he turns 66 next year. In other words, client still needs to keep the business going beyond retirement, just so he can live a decent life in a rented home. He doesn’t even own a house.
The problem with client’s business is that a service, is performed by individuals who are not technically speaking, employees. When the service is rendered, client takes a cut from the receipt and gives the rest to the individual who performed the service. Let’s just say that these individuals are more independent contractors than employees. Business owners, if they can get away with it, prefer the independent contractor to the employee. Independent contractors are paid on a per customer basis. If a customer walks in and the service is performed, client just gives the independent contractor his share of the payment for services rendered. If there is no customer, there is no salary to pay. In addition, there is no overtime pay to worry about. For instance, trucking companies prefer to have their drivers buy their own trucks so they can classify them as independent contractors. As independent contractors, drivers do not qualify for employee benefits and do not get paid a salary. Instead, they get a check for each delivery they make. At the end of the month, they probably get about $10K. From that amount, they deduct their operating expenses. Whatever is left is their net profit for that month. Are truck drivers employees of the trucking company or are they independent contractors? The same thing can be said for UBER drivers. They own their cars. But UBER gets them the passengers and cuts them a check for each ride. I have clients who make $2K a month gross with UBER doing part time driving. Some make $4K a month gross. Are UBER drivers, employees of UBER or are they independent contractors?
The IRS uses the “control” test. If the business owner has control over most of the time of the individual, that individual is deemed an employee, not an independent contractor. Going back to client, he has 4 individuals who perform the advertised service for client’s business. He takes a cut from the gross receipt, then, gives the balance to the individual. There are no set “work” times (9 to 5). If a customer comes in at 9.30 pm, the individual performs the service for the customer and then client and individual split the gross receipt for services rendered. Client has operated his business using this method for 8 years. Certainly, he considers the individuals independent contractors, and for 8 years, the individuals appear to agree. But recently, all 4 individuals filed 4 separate state court lawsuits for overtime and back pay with each claiming $250K of unpaid overtime and back pay!! That’s $1.0M of overtime of back pay. Where will client get $1.0M? If he had $1.0M, he would probably just close his business and retire somewhere in the world where no one knows him and where he can live like a king. Maybe in the Caribbean or some remote island country where there’s plenty of sunshine everyday, and live the rest of his life in peace. Last he checked, he only had $1K in his business checking account. He’s just short $999K.
Client opts for Chapter 7 for a fresh start to discharge the $1.0M lawsuits. But can bankruptcy wipe out claims for unpaid overtime and back pay? It sure can. They are not exempted from discharge; therefore, they are dischargeable. Even if plaintiffs attempt to prove that these claims are not dischargeable under say, “intent to cause damage” or “fraud”, client would prevail because client’s intent was to enter into a business contract with these individuals and these individuals voluntarily and freely agreed to this business relationship between client and them. Client did not put a gun on their heads to force them to perform the service. It’s clearly a business relationship that worked for both client and plaintiffs for 8 years.
Seniors with $48k credit card debt
The next client is 68 with equity in his residence of $150K but owes $48K of credit card debt. He started getting social security of $1,800. His wife gets social security of $1,200. After the house payment of $1,500 and necessary expenses, there is no money left to pay minimum credit card debt of $1,400 monthly. This is a no brainer. Client and wife opt for a fresh start as seniors to discharge $48K of credit card debt, which they carried for 20 years. They only paid $312K of interest in 20 years and they still owe the same $48K. If they did a chapter 7 even 10 years ago, they still would have saved $156K of interest!! Since client is 68, his equity exemption is $175K. That is more than enough to cover his equity of $150K, so there’s no problem with his house. He keeps everything he owns, but got rid of $48K of credit card debt. It’s a great deal and gives them a fresh start in their retirement, and in another 3 years, their credit score will be over 620. In 5 years, it will be 690. In 7 years, 720. In 10 years, there is no record of their chapter 7 petition filing.
As it is written: “No eye has seen, no ear has heard, no mind has conceived what God (Adonai/El Elohim) has conceived, what God has prepared for those who love Him.” —1 Corinthians 2:9
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. 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.