THE 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 $100,000. The problem is that her equity in the house is more than $100K. Her equity is $140,000. Because of this circumstance, although client would really benefit from a Chapter 7 wipeout of the entire $120,000 of credit cards, I cannot recommend a Chapter 7 for her. In Chapter 7, even if it’s true that she does not have to pay a single cent of the $120,000 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 $100,000 in cash and use the $40,000 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 $120,000 of credit cards? Her minimum payments of $120,000 are 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 $120,000 of credit cards current, considering her gross monthly income is $5,000 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 $120,000 current. Now, that doesn’t make sense either, does it?
In a Chapter 13 bankruptcy reorganization, considering that she owns a house with $40,000 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 $42,000, the bankruptcy court will discharge the entire balance of the unpaid $120,000. So, in Chapter 13, the client will pay 1/3 of the $120,000 of credit cards, while the court will discharge or wipe out 2/3 or $80,000 of the $120,000 credit cards. After paying $40,000 in the Chapter 13 plan for 60 months, the 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 $120,000 current. This means that in 12 months she would have paid $43,000, and in 24 months, she would have paid $86,000, in 36 months she would have paid $129,000, in 48 months she would have paid $172,000, and lastly, in 60 months, she would have paid $215,000.
So, in Chapter 13, she only pays $40,000 and after 60 months, $80,000 is wiped out by the court, so after 60 months, and paying $40K, the client will owe nothing. If she continues with her current situation, she would pay $215,000 in 60 months, and how much would she still owe? She would still owe the very same $120,000! She would have paid $215,000 and still owe the same balance of $120,000! 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, the 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 the debtor the rare opportunity of paying only a portion, in this case only 1/3 of her credit card debt of $120,000. All plan payments are applied to principal and there is no interest in Chapter 13. As long as the client pays all plan payments, the court will wipe out the unpaid 2/3 or $80,000 of credit card debt. So in client’s case, Chapter 13 reorganization will allow her to keep her house even if it has $40,000 of non-exempt equity since her total equity in the house is $140,000, pay only 1/3 of her credit card debt of $120,000, and discharge $80,000 of unpaid credit cards. Of course, if her equity in the house was only $100,000, then she would just file for Chapter 7 and wipe out the entire $120,000 credit cards because there would be no risk of losing her house since the entire $100,000 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.
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Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with the attorney. The first general consultation is free.
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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 or at 20274 Carrey Road, Walnut, CA 91789.