In life, for those who already have experience and some wisdom, there is such a thing as getting the right advice at the right time. In fact, the right advice at the right time can result in losing a fortune or keeping a fortune. The problem is that most people have an ego problem. They think that they can’t make a mistake because they are so very smart, instead of asking our Lord Almighty for help and guidance. So, just to insist that their decision is correct, they keep on doing what they are doing until they have exhausted all of their resources to defend their wrong decision. Then, it’s too late because too much damage has been done.
Client sold his house and realized cash of $500,000. He decided to buy a motel for $2.5 million. He put $400,000 as down payment and the bank financed $2.1 million. He used $100,000 to buy a condo in Pasadena for $400,000 with a mortgage of $300,000. He had a retirement account of $300,000. For the first 6 months, the motel was breaking even. It had a banquet hall that needed improvements of $100,000. The façade of the motel also needed a facelift of $100,000. Client decided to borrow an SBA loan of $250,000 using the motel as collateral. Because of the improvements, the motel started to make a profit of $5,000 a month. For one year, it was making money. On year two, it started to lose money again because a new motel franchised by a Marriott was completed and operating nearby. To continue operating despite it’s monthly loss of $20,000 a month, client liquidated his retirement account of $300,000 in a little over a year. Then, he borrowed $200,000 of credit cards to continue operating. When the credit cards were used up, he went back to SBA to try to borrow some more money unsuccessfully. He tried to sell the motel for $2.5 M and received an offer for $1.0 M. With his back against the wall having used up all of his retirement account and borrowed another $450,000 from the SBA and credit cards to keep the motel afloat, and losing his down payment of $400,000, client now comes to see me with his hands raised in a sign of surrender. No more. All his resources have been used up. Now he wants bankruptcy relief.
Let’s analyze how bankruptcy relief will help client. First, he can keep his condo in Pasadena with $175,000 of equity because it’s now worth $500,000 and he is 65 years old. With some adjustment for cost of sale and the outstanding balance of the mortgage, the viable equity is within the homestead exemption for a senior.
Second, he can return the motel to the bank or have it foreclosed upon without worrying about a foreclosure or voluntary return deficiency. Third, he will discharge the $2.1 million owed to the bank, which financed the purchase of the motel, the $250,000 owed to the SBA and all of his credit card debt of $200,000. So, he keeps his condo, his new Mercedez-Benz 250, which he is still paying for, and everything else that he owns but discharging all debts incurred because of the wrong decision to buy the motel.
Client lost $400,000, the d/p on the motel and $300,000, which was all of his retirement account. Well, I would say that buying the motel was the biggest mistake of his life financially. He lost $400,000 of cash from the sale of his residence, and he lost $300,000, which is supposed to be for his retirement. In terms of cash money lost from his pocket, he lost $700,000. Never mind about the money lost in the form of debts to the banks, which is another $2.5 m.
If client had come to see me earlier, before he raided his retirement account, I would have suggested that he file for bankruptcy before he touched a single cent in his retirement account. If client had decided to file his bankruptcy 18 months earlier, he would have been able to keep his $300,000 in his retirement account even with a Chapter 7. He would have kept his condo, everything else his owned, including his $300,000 of retirement portfolio. But as you can see, ego, stubbornness and sticking to a wrong decision can make you lose a lot of money, including everything that you worked for all your life! So, if you have this kind of problem, don’t raid your retirement account, you can keep that in bankruptcy, up to $1.0 m. Remember, your retirement account is for your security when you retire, not for you business investments or debt payments.
“My God shall supply all your needs according to His riches in glory by Christ Jesus.” – Philippians 4:19.
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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 Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.
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