[COLUMN] Client files Chapter 13 for $400K unsecured debt

THIS is what I call a borderline Chapter 7 case with asset. Therefore, it is the better part of caution not to file Chapter 7 because the asset may be lost in Chapter 7, while Chapter 13 is safe enough because the Chapter 13 trustee, unlike the Chapter 7 trustee does not have the power to liquidate assets. This is a critical difference that can only be emphasized nowadays when house values are always going up because of very low mortgage rates.

On it’s face, you might wonder why not just file a Chapter 7 and wipe out the entire $400K of unsecured debt in one stroke? Well, you have to look at the details of the case, specially the asset structure.

The client, husband and wife, are in their fifties. Still young. Both own and operate their own businesses for at least 20 years. The pandemic killed both businesses.

Husband has a salary from his job that survived the pandemic. Wife also has a job that survived the pandemic.

They owe $400K of business loans all unsecured. Unsecured meaning these are signature loans without any collateral of any kind.

The Borderline Chapter 7 case

Under the means test, they can actually qualify for Chapter 7. But filing a Chapter 7 would be a big mistake. Why? They own a house that is currently worth $1 million. The balance of the first and only mortgage is $400,000. This means that their entire equity of $600,000 is completely exempt since they live in LA County. Sure that looks good on paper but when the equity is entirely used up at $600,000, and with Chapter 7 trustees so excited to liquidate houses, the trustees have real estate agents who are hungry wolves waiting in the sidelines to devour your house. These realtors can make $50,000 from their commissions. That’s a lot of money. When there’s that kind of money to be made, they look at you as roasted pig ready to be eaten.

Even if Zillow’s appraisal says that your house has a current fair market value of $1 million, you can be sure that these hard working realtors can have a ready buyer for at least $100,000 over $1 million. Don’t forget that there’s always a bidding war going on for houses in LA because there’s a shortage of houses. There’s a lot of demand, and short supply so those two factors will cause you to lose your house in a Chapter 7.

Chapter 7 Trustee has the power to sell your house

The Chapter 7 trustee has the power to sell your house for say $1.1 million, give you your exempt equity of $600,000 in cash, and use the rest of the money to pay off a portion of the $400,000 unsecured debt. What will happen in reality is that the realtors will get $50,000, and there will be $50,000 left to pay the trustee lawyers and trustee administration fees. In all likelihood, ten cents will go the $400,000 unsecured creditors. Ridiculous right? But true nevertheless.

Chapter 13 Trustee has no power to sell your house

But in Chapter 13, the clients’ house is completely safe because the Chapter 13 trustee has no power to sell any asset. There’s a liquidation analysis that compares how much unsecured creditors can get in Chapter 7 compared to the plan being proposed in Chapter 13. So, the issue that clients will deal with in Chapter 13 is how low can they go on the plan payment? They might be able to with a very low plan payment, say $300 a month, which pays $18,000 of the $400,000. That makes it a 5% plan, i.e., they plan pays 5% of the $400,000. After the $18,000 is fully paid in 60 months, the difference between $400,000 and $18,000, $382,000 will be discharged.

Of course, the Chapter 13 trustee will try to get a higher plan payment by arguing that the value of the house is understated, but normally an appraisal report will resolve that issue, with NO RISK of losing the house because the Chapter 13 trustee has no power to sell the house. The worst possibility in a Chapter 13 is a higher plan payment than proposed, let’s say a bump up when the car payment is done, or that the case is dismissed because it’s not feasible. Unlike in a Chapter 7, once the value of the house is in question, the next day there will be a for sale sign on your front lawn and your house will be listed on the MLS on the same day.

Almost impossible to dismiss Chapter 7 case

You might think that there’s no problem because you can always have your Chapter 7 case dismissed. Think again because it’s almost impossible to get out of a Chapter 7 case once the petition is completely filed.

Converting Chapter 7 to Chapter 13

The only feasible way of getting out of the Chapter 7 case once the Chapter 7 trustee has targeted your house for sale is the convert your case to Chapter 13. To convert your case to Chapter 13, you will have to prove that you have the wherewithal, the income, to qualify for Chapter 13. This is like a square circle. In Chapter 7, you show you have no disposable income while on a Chapter 13 you have to show you have disposable income to fund a plan. In any event, you will have to pay the Chapter 7 trustee administration fees in full in your Chapter 13. Good luck on that. Just a motion to employ a realtor for the Chapter 7 trustee costs a bundle. By bundle I mean between $5,000 to $10,000. By the time your house is listed on the MLS, the Chapter 7 trustee administration fees can reach $35,000 for two weeks of work. Nothing unusual about that. That’s all in the playbook. Trust me on this; you do not ever want your house to be in the crosshairs of the Chapter 7 trustee. You will be in the lion’s den like Daniel. But in Daniel’s case, our Lord God Almighty closed all the mouths of the lions in the den and Daniel got out of it without a scratch the next morning.

God’s plans are to prosper you not to harm you

Despite all your problems, you can rest assured that our God’s plans are to prosper you and not to harm you. “For I know the plans I have for you”, declares the Lord, “plans to prosper you, not to harm you, plans to give you hope and a future,” Jeremiah 29:11. What can be clearer than this that God loved as so that He sent His only beloved Son, Jesus Christ, who also loved us so, to die for us, to give us a chance to spend eternity with them in heaven. What an awesome and glorious plan for us underserving humans!”

Our God can and does wonders beyond our imagination. When you think all is lost, divine intervention springs out of nowhere to resolve your problems. “Do not call to mind the former things, or consider things of the past. Behold, I am going to do something new, now it will spring up; will you not be aware of it? I will even make a roadway in the wilderness, Rivers in the desert,” Isaiah 43:18-19.

Believe it or not, Walt Disney, filed for Chapter 7 not once, but twice before his Disney global empire became successful. He went on to become a billionaire after getting rid of all his debt twice. Milton Hershey, of Hershey chocolates, the biggest chocolate business in the world, also filed for Chapter 7 once before he became successful and a billionaire.

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


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Disclaimer: None of the foregoing is considered legal advice 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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