THE client is 72, married, and owns a small business. He’s been operating the business for the last 30 years.
At its height, when times were good, the business had 10 full-time employees. He used to net between $120,000 to $150,000 of profits after tax. That’s a nice and decent profit. Well, what happened to the business? It got left behind due to the change of technology. What does getting left by technology change mean? Let’s use an example of a huge business that literally got killed by technology change. Ever hear of the word KODAK? If you at least 50 years old, you certainly know what KODAK was. When the first cameras were commercially produced probably in the late 1800s, KODAK started making cameras and film, black and white then colored film. I had a brownie camera myself given to me as a gift about 1958. To use this camera, you have to use KODAK film. No focusing required. Just point and shoot. Made in the USA. This was less than 10 years after the end of WWII and American products ruled the world. Everything was American: cars, TVs, radios, cameras, film, etc.
Nobody in the world could compete head to head with KODAK. No one. Of course, other film manufacturers started to come out of the woodworks like Fuji film. But there was no real competition for KODAK. It made tons of money every year. It was smooth sailing for decades for KODAK until digital cameras came into the picture. Interestingly enough, digital cameras do not use film. What’s more interesting to note here is that KODAK itself invented digital cameras in 1975. Steven Sasson invented the first self-contained digital camera, .01megapixel, for KODAK.
But for another 25 years, KODAK ruled the world with its film. In 1990, its total worldwide sales were $16B and its net profit was $2.5B. It employed 70,000 people. Yet, in 2012, KODAK file for bankruptcy relief. KODAK could not survive the onslaught of digital cameras coming in from Asia. Remember, digital cameras, which KODAK invented in 1975, do not use film. It was so sure that its brand and product were so well known that digital cameras would die. But technology changed and people preferred to use digital cameras, which were more convenient to use without film.
I won’t tell you which technology my client was involved in. But the client also sat too long on his laurels and his business became the victim of technology and got left behind. With the new technology, fewer people needed his service and product, so there is no doubt the client had gone the KODAK way. He still has two employees and able to breakeven.
So what’s the problem? He has $70,000 of credit card debt.
He needs $2,200 a month for minimum credit card payments monthly. When your business is breaking even, $2,200 a month is a big deal; that’s $26,000 of profit at the end of the year or $26,000 of interest expense.
I don’t want to get into the details of what he owns aside from the business, but obviously, the $70,000 of credit cards is now a very irritating situation for him. He has received “hard money” offers to pay off the credit cards. These are high-interest loans to pay off the cards. In other words, they lend you $70,000 to pay off his credit cards, but he ends up paying more than $2,200 a month to service the hard money loan. Now, that’s a no brainer, isn’t it? Yeah, replace the debt with higher interest loan, that’s a great idea, like a square wheel.
Well, it so happens that after careful analysis of the client’s asset structure, he can actually get Chapter 7 relief, for a fresh start.
Keep everything including his business but wipe out the $70,000 with a Chapter 7 discharge. The higher interest loan would cost more than $70,000, probably $200,000 when it’s fully paid off. A consolidation would also cost at least $70,000 over 5 years. With Chapter 7, the client gets a fresh start without paying a cent on the $70,000. That’s $200,000 cheaper than the higher interest loan, and it’s $70,000 cheaper than consolidation.
So which would alternative sounds the best for the client? In five years, with a Chapter 7, his credit score will be back over 700 and he would not have to pay any portion of the $70,000. If he chose the higher interest alternative in five years he would be out $200,000. If you don’t see the benefit of Chapter 7 relief, I don’t know what else to tell you. But the client did the right thing and chose Chapter 7 relief to get rid of the $70,000.
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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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