[COLUMN] Debtor with $70K credit cards but good income needs Chapter 13 relief 

THE debtor who is 50 has accumulated credit card debt at the rate of $6,000 a year for the last 20 years. Now, he owes $70,000 in credit cards. He needs $2,400 a month of minimum credit card payments to keep all $70,000 current.

His mortgage payment is $2,500 with a mortgage balance of $400,000. The fair market value of his residence located in LA County is $650,000, so there’s equity of $250,000. He lost his job during the pandemic but has found new employment that pays him $5,000 a month in a mid-management level. His wife is employed as a medical professional and makes about $100,000 a year. Thus, their household income is $150,000 a year. I’d say that is good income.

There are already three lawsuits with two judgments against him for three credit cards that he has not paid for a year. He has not been able to pay any of the credit cards for the last eight months. So all cards are now in default. Well of course the judgment creditors want a part of his salary by wage garnishment. They’re merciless you know. It doesn’t matter that he lost his job for a year and just got a new job. They just want to get their pound of flesh. That’s the way it works in the real world. We’re not living in Mother Theresa’s world after all. If you lose your income and can’t pay your mortgage or rent, then after the mortgage and rent forbearance expires, the mortgage holder and the landlord want all unpaid mortgage and unpaid rent repaid in full, plus the current mortgage or rent.

If you still have no income, you are going to lose your house by foreclosure, or eviction. In either case, you are moving into tent city, unless you have relatives or friends who are kind enough to shelter you until you get back on your feet. Nobody wants to live under the freeway or even in a nicer tent city provided by the City of LA. But when push comes to shove, that is the reality we live in. Even with three stimulus payments and a year of pandemic unemployment income, the wolf is still at the door, ready to pounce.

There are now supposedly millions of new jobs available, businesses that were closed during the pandemic have reopened and looking for people to hire. The economy is roaring back at an unheard of 6.5%. So, the job market is looking good. Many people who lost their jobs will be able to find new jobs, and the first problem that they will face is the credit cards that have accumulated during the pandemic that were used for necessities.

Just like the client, many people will have to get relief from accumulated debt, either by a total discharge of debt by a Chapter 7 petition, or a reorganization of financial affairs paying a portion of debt. There’s nothing wrong with the client’s household income at $150,000 annually, that’s almost $13,000 a month. But even at $13,000 a month, after deducting withheld taxes, mortgage, car payments, 401K contribution, food, insurances, money sent abroad to help relatives survive COVID in the home countries, it’s a heavy burden to service $70,000 of credit cards at $2,400 a month minimum payments. At $2,400, it’s almost the same amount paid for his mortgage of $2,500.

Many people, who have close relatives, parents, and siblings in their home countries, are also in dire financial straits because COVID has made them lose their jobs. So they have no income. Thus, many people who are fortunate to have good paying jobs here have the moral obligation tugging at their hearts to send money back home for their relatives to survive. In the client’s case, he sends $1,000 a month for his relatives back home. Without this $1,000, his relatives would be homeless and have nothing to eat in their home country.

In addition, the client has four adult children with low income who live with him. That’s a lot of food expenses, as we all know. Easily, that’s $2,000 a month for food. With all these necessary expenses, another $2,400 to cover minimum credit card debt of $70,000 is just not manageable. Creditors don’t care about the client’s family and financial situation, they just want their money back with high interest, penalties and legal fees as they are in business after all and they are not charitable organizations. So, unpaid creditors do what they do, they file their lawsuits to collect.

Obviously, the client wants a Chapter 7 wipe out of the $70,000. There’s no problem with $250,000 of home equity under the new homestead exemption of $600,000. But with $150,000 of annual income, even with so many dependents, the client would not qualify under the means test for Chapter 7 even if that’s what he wants.

He would need Chapter 13 which would allow him to pay a portion of the $70,000 over five years with no interest. How much would the plan payment be? Well, certainly a lot less than $2,400 a month, which is the minimum monthly payment to keep them current. He might be able to get away with $600 a month of plan payment. That will pay about half of the $70,000 in five years.

If he makes all timely payments, then the court will discharge the unpaid balance of $34,000. That’s certainly a reasonable reorganization plan under Chapter 13. The two court judgments with garnishments will stop with the filing of the case and the third lawsuit will be dismissed outright. All creditors will be forced by the confirmed plan in Chapter 13, which is a court order to accept a proportionate equal distribution from the $600 a month of plan payment.

The client will have peace of mind as all creditor collection efforts and lawsuits will stop because of the bankruptcy automatic stay. No more collection phone calls, letters, threats of lawsuits and actual lawsuits once his Chapter 13 case is filed, order and peace out of chaos. The client immediately decides to file for Chapter 13. It’s the right thing to do.

If you have too much debt and need relief, please 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. Each case is different. There is no 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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