[COLUMN] Client compares Chapter 13 with various alternatives for $60K credit cards

THE client is 50 and married. He owes $60,000 of credit cards. He pays $2,000 a month as minimum credit card payments to keep the $60,000 current. His wife is not jointly liable on these cards. She owes about only $2,000 of credit cards by herself.

They own a house that is currently worth $1M with a mortgage of $300,000. So their equity in the house is at least $700,000. The client’s exemption for the house is $600,000. This means that there is $100,000 of nonexempt equity. Under the liquidation analysis, when compared to Chapter 7, the client will have to pay the entire $60,000 of credit cards in Chapter 13 over five years in 60 equal payments, no interest. All payments made pursuant to the Chapter 13 plan pay down the principal balance because there is no interest applicable.

The Chapter 13 plan payment is about $1,000 a month for 60 months, which will pay off the entire $60,000 of credit cards in five years. If the client makes all the 60 payments pursuant to the confirmed plan, the court will enter a discharge order at the end of the 60th payment. The discharge order will state that client owes zero or nothing on the credit cards at the end of the 5th year. Can creditors still sue client for unpaid interest, absolutely not! Legally, client owes nothing anymore on these cards.

Further, while the client is on the plan, creditors cannot sue, call or otherwise contact client to collect on the cards. The client has peace of mind. He doesn’t have to worry about being sued. They cannot garnish his wages or levy his bank accounts. The bankruptcy court protects the client’s residence from any creditor liens attached to it. So in Chapter 13, the bankruptcy automatic stay protects client, including all his assets and house. This is the court order from the bankruptcy court ordering creditors to cease and desist from any and all collection efforts against the client and his assets. Pretty cool!

The client pays his plan payments to the Chapter 13 trustee, an officer of the court whose responsibility it is to make sure that all plan payments are distributed to the creditors who have filed their proofs of claim. The trustee guarantees that all payments are distributed to the right creditors. In other words, the trustee cannot run away with your money. This is another reason why the client will have peace of mind in Chapter 13. He pays the trustee who is under the supervision of the bankruptcy court.

What other alternatives are available to the client before he decided to seek Chapter 13 relief for his $60,000 of credit cards?

One option he had was getting a $60,000 loan with very high interest to pay off all of his credit cards. There were many offers from lenders for these alternatives. Payday lenders have branched out into this type of high interest medium term loans to avoid regulation. The offers are $60,000 at 50% to 100% interest. Does it make sense to get this kind of high interest loan? No it doesn’t. The client might end up losing his house if he got this loan. He will live a life of pain. He would have to repay a principal loan of $60,000 with $90,000 to $120,000 in three to five years. Compare it with zero or no interest in Chapter 13.

Another option that he had was consolidation. He actually was on consolidation paying $1800 a month for 60 months for six months to a “consolidator.” A “consolidator” is not an officer of the court. He is a businessman and consolidation is his business. What if he decides to close his business? Well, that’s the risk you take. One problem that arose was that two creditors did not agree to toe the line and proceeded to sue him for $30,000. Compare this to Chapter 13 where the court protects client from all lawsuits and collection efforts. All collection efforts, including lawsuits stop the minute the client’s Chapter 13 is filed.

He also had the so-called “settlement” option. He can negotiate directly with the creditors, or use a third party to “settle” the debt at less than what is owed. The client actually did get several offers from various creditors to knock off a portion of the debt owed with a lump sum payment. For example, creditor A will agree to accept 70% of what is owed of $10,000 as a settlement. So for $7,000 payment, the creditor will consider the matter closed. Good luck raising the $7000. Maybe you can do UBER at night and not sleep at all. After three months you might have $7,000. Problem is they want the $7,000 up front, not in three months. And, the other creditors do not agree to settle, they prefer to sue you right now to get their money.

Another option is getting a HELOC or home equity loan of $60,000 and uses the proceeds to pay off all of the credit cards. Interest rate for the HELOC is lower because the client’s house will be used as security for the loan. The client will have to get a second mortgage on his house for $60,000. Don’t forget HELOC loans interest rates are fluctuating. When mortgage rates go up, like it did yesterday, and will be going up for the rest of the year to tame high inflation at this time, eventually client will be paying double digit interest on HELOC. And, if he stops paying on the HELOC, guess what happens? The creditor can and will foreclose on his house.

It’s really not surprising that the client chose Chapter 13 relief for protection of his house from levies, from lawsuits, from wage garnishment, from bank levies and just putting a stop to all those harassing phone calls for collection, and from the unwanted risk of foreclosure of client’s home from a HELOC loan. Peace of mind, no interest & total legal protection from the bankruptcy court. Trustee guarantees that your payments are distributed to the right parties.

Of course, if the client’s equity was $625,000, he would only need to pay a little more than $400 a month for 60 months. At the end of the plan, $35,000 is discharged or wiped out. He doesn’t have to pay the entire $60,000, just needs to pay only $25,000 of the $60,000 cards because under the liquidation analysis, only $25,000 is not exempt.

If you need debt relief, set an appointment to see me. I will analyze your case personally.

Disclaimer: None of the above is considered legal opinion and there is no attorney client relationship between reader and attorney.

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Disclaimer: None of the foregoing is considered legal advise for anyone. There is absolutely no attorney client relationship established by reading this article.

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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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South, Suite 10042, Alhambra, CA 91803.

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