OVER the last 35 years, many clients have always asked me “Attorney, should I file for bankruptcy?”
This question is asked after they have told me what their problem is. The problem is always financial: having a hard time paying credit cards; behind on mortgage payments and there is a threat of foreclosure from the bank; owing a big amount of money to the landlord for my business; lots of medical bills; my income is only enough to pay for the rent or mortgage and monthly necessities, have no extra income to pay for other debt mostly credit cards; creditors keep calling me to pay but I can’t pay.
So, if you distill the problems to their essence, income is short, and creditors are not getting paid. That’s basically what the problem is.
Let’s look at famous people or businesses that have filed for bankruptcy. We presume all of them had income that was short, and creditors were not getting paid, so they decided to get bankruptcy relief. There’s Walt Disney who filed for Chapter 7 twice before his Disney theme parks took off. Of course, now Disney is a successful global business worth billions. There’s also Milton Hershey who filed for Chapter 7 before Hershey chocolates became the biggest chocolate business now worth also billions doing business worldwide. Orange County filed for bankruptcy reorganization about 15 years ago. Hertz, the car leasing company just got out of Chapter 11 bankruptcy recently. The country of Argentina decided to do a DIY bankruptcy about 20 years ago when it declared to all its creditors worldwide that Argentina was not going to pay any of its debts because it was bankrupt. Creditors who owned Argentine promissory notes lost billions of dollars overnight.
The Catholic Church here in the USA, several of its dioceses declared bankruptcy to handle a large number of child molestation lawsuits against it. This is very sad for me to say because I am Catholic. I don’t mean the bankruptcy they filed to protect themselves, but the huge volume of child molestation cases is just incredible. This is an assault by the devil on the church. There’s no question about that. K mart, which used to be everywhere before, filed for bankruptcy about 15 years ago. Sears Department stores filed for bankruptcy about 10 years ago.
So if you have ever been to Disneyland, ate Reese’s pieces or Hershey chocolate bar, leased a Hertz car, visited Argentina, visited a Catholic church, bought something at K Mart or Sears, and gone to Orange County, you are dealing with entities that have decided that bankruptcy was the right choice for them.
And of course, the Trump companies have filed at least four bankruptcies during the nineties and have avoided billions of dollars of debt. Let’s just leave it at that.
What’s the secret in these bankruptcies? They continue to survive but without debt or with much-reduced debt, thus assuring their survival in the future. In other words, their incomes are the same, but they don’t have to pay debt anymore which guaranties that they can survive. It’s pretty simple and beautiful concept really.
Let’s say your net household income is $7,000 a month. You have 2 kids in high school. You have a mortgage on the house. You have two car payments. Everything is cool until you have to allocate part of that $7,000 net income to pay your $50,000 of credit card debt. $50,000 of credit card debt needs $1,500 of your $7,000 net income. That means your net income is actually only $5,500, not $7,000. Now ask yourself, how long can you continue paying $1,500 a month from your net income? Let’s say you can pay for it for five years. That’s $100,000 in a little over five years. After paying $100,000 to keep $50,000 of credit cards current for five years, how much of it do you still owe? Sad to say, you still owe the very same $50,000 of credit cards! Can you really afford to live like this until you die or at least until you retire? Let’s say you will retire in 10 years. This means you would have paid $200,000 of minimum card payments, yet you still owe after $200,000 of payments, the very same $50,000. When you retire in 10 years, your net income will drop by half. At that time, your net income of $3,500 a month is only enough to pay the mortgage and food. There’s nothing left to pay the $50,000 of credit cards.
Now if you had decided that bankruptcy is the right choice for you today, then in 10 years from now, you will have saved $200,000 which you can invest at the rate of 7% a year. That will double every six or seven years. In 10 years maybe you will have $400,000 in your investment portfolio that will generate $2,800 a month for you in retirement. So, in retirement, you will have your $3,500 of retirement income, plus $2,800, or $6,300 of retirement income monthly, which is just $700 short of your income when you were still working.
So is bankruptcy the right choice for you? You decide. But whatever you decide, it will affect your retirement income in the future, and it will affect how you survive your retirement.
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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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