[COLUMN] Is now a good time for filing bankruptcy? 

IF you live in Los Angeles County, or in Southern California — including the counties of Orange, Riverside and San Bernardino County — and you own the house that you live in, now is a good, no, now is a very good time to file for Chapter 7 bankruptcy for a fresh start.

Why? Because the homestead exemption under 704.730 of the California Code of Civil Procedure has been increased a lot, and when I say a lot, it’s a lot. If you filed for Chapter 7 last year and owned the house that you were living in LA County and needed to wipe out $100,000 of credit cards but had equity of $200,000 in your house, and you were younger than 65 years old, you would not have been able to file for a Chapter 7 total wipeout of the $100,000 credit cards without losing your house to the Chapter 7 trustee.

If it was last year, you would have had to file a Chapter 13 and pay the entire $100,000 over five years if you did not want to lose your house. Your plan payment would be about $1,600 a month. After paying $1,600 a month for 60 months, the court will give you an order to discharge your debts. In effect, you paid 100% of the principal through the Chapter 13 plan, without paying any interest for five years. That would still have been better than paying $3,000 a month of minimum payments every month to keep the $100,000 current. If you did not file for Chapter 13 last year, you would pay $36,000 a year or $180,000 of minimum payments for five years, and still owe the same principal of $100,000.

On the other hand, assuming your income under the “means test” makes you eligible for Chapter 7 relief this year, and you waited until now to file your bankruptcy, you would be eligible for a complete wipeout of the $100,000 without making a single payment and still be able to exempt your house (keep it despite the bankruptcy), even if the equity in your house had increased to $300,000, or even to $400,000, or even to $600,000! This is really quite amazing the likes of which, we as bankruptcy lawyers have never seen before in our lifetime. How is equity calculated? Let’s say your house is now worth $1 million using comparable sales of similar properties around your neighborhood. You owe a first trust deed balance of $400,000. This makes your equity (your own money) in your residence, $600,000. In other words, if you were to sell your house for $1 million to Redfin for cash, you will net maybe $550,000 after deducting commission and closing costs; that entire amount of $550,000 is your equity in your house. That’s your money. House values are increasing here in SoCal since mortgage rates are at rock bottom low again — never seen before lows — at about 2.5% fixed for 30 years. Anyone who owns a house here in LA is definitely sitting on a big pile of cash.

It’s almost unbelievable that you can exempt your house under 704.730 even if your equity in the house is $600,000. But it’s true. I’m having clients with $400,000 of equity, or even $500,000 of equity qualify for Chapter 7 to wipe out credit card debt they have racked up during the pandemic to pay for basic necessities, food, shelter and transportation. Many people lost their jobs during the pandemic and because of it. Surely, the pandemic unemployment benefits have helped tremendously but still not enough. So many households had to rely on credit cards to make up for the difference. Many households have increased their credit card balances by $20,000 to $30,000 during the pandemic just to make ends meet, or even a lot more than that to hang onto the business that came to a halt during the lockdown.

Are these credit cards dischargeable in Chapter 7? I would say that if you are an honest debtor, they should all be dischargeable. However, I do suggest that you consult with an experienced bankruptcy attorney of your choice to determine your eligibility for Chapter 7, or Chapter 13. There may be some nuances in the circumstances of your case that may affect your case.

For instance, the client used or drew down on $50,000 of credit cards last year, by buying gift cards then selling these gift cards for cash. The $50,000 in cash was then deposited into a bank account then sent offshore. Well, let’s just say that this is certainly not a routine case. The bank statement going back the last 12 months will show that $50,000 was in the account then was sent overseas. This may involve a continuation of the first hearing for the production of a lot of documents to explain what happened to the $50,000. Some creditors may file adversary cases to object to discharge. In the worst case, there could be a criminal referral by the U.S. Trustee. On the other hand, if the client is an honest debtor, he should be able to get a discharge after navigating choppy waters in his bankruptcy proceeding.

If you need debt relief, please set an appointment and I will analyze your case personally.

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DISCLAIMER: NONE OF THE FOREGOING IS CONSIDERED LEGAL ADVICE. EACH CASE IS DIFFERENT.

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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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