THE client is a young senior in his early 60s who took an early retirement last year. He owes $15,000 of credit card debt and nothing else.
He has a community property house that is fully paid with a current market value of $500,000. Fortunately for the client, he did not refinance his fully paid house with a mortgage, so the house does not secure any mortgage. Certainly, the client must have been tempted often to get some cash out from a refinance at low interest. Good for him that he did not succumb to that temptation; otherwise, he would still be paying on a new mortgage now. His wife is also taking early retirement next year. I asked why he took an early retirement at 62. He said he doesn’t know how long he is going to live, so he might as well take early retirement so at least he gets his social security now even if its less by 25 percent compared to full age retirement at 66.
Since he used to work as a professional for some time, I asked him if he had a pension from the employer. He said no and social security of $1,200 is all that he has now. The problem is that he still owes $15,000 of credit card debt, which he has not been able to pay for six months because of his reduced income from social security. He used to pay about $600 a month to keep them current but he just could not get the principal down from $15,000. He wanted to do a Chapter 7 to wipe out the $15,000. I asked him if he owned a house and what the current value was. He said he owned a house worth about $500K. I asked him if he owed anything on the house. He said he owed nothing on it anymore. So I told him that he could not do a Chapter 7 because, in Chapter 7, he would lose his house. The trustee would take his house and sell it, give him $175,000 use the rest to pay his credit card debt of $15,000, give him the rest of the sale proceeds after deducting trustee fees which could be sky high.
It doesn’t make sense, in his case to do Chapter 7. Why lose your house for $15,000 of credit card debt? But then again, his house does need protection from his credit card debt. He is now behind by six months. This means that lawsuits for collection are forthcoming. Lawsuits will eventually become judgments. Judgments eventually become liens on his house. A $15,000 judgment will double in a couple of years. Soon enough, there will be a $60,000 judgment lien on his house. And, the worst part is that judgment creditors can ask the court to have his house sold to satisfy the judgment lien! This means he can lose his $500,000 house for $15,000 of credit card debt. It sounds unfair, but it certainly may happen if the problem is left to fester without an effective solution.
I told him that he could do a Chapter 13 without any risk of losing his house to the trustee because Chapter 13 trustees, unlike Chapter 7 trustees, do not have the power to sell debtor houses. In Chapter 13, he can pay off the $15,000 over five years without interest; just the principal is being paid. He’s looking at a plan payment of $250/month to $300/month, including court and trustee administrative fees. This is a lot less than the $600 that he used to pay which did nothing to reduce the principal of $15,000 in the last 20 years. Under the plan, the debtor will have zero credit card debt when he turns 68. And the best part is, the Chapter 13 protects his fully paid house by preventing lawsuits and judgment liens from attaching to his house.
Credit card debts are like weeds that keep on growing and growing. In a month, a weed can grow a foot, while normal plants take so much time to grow. The most effective way of getting rid of weeds is to uproot them. If you just cut them at the base, in a month they look like they were never cut. This is the same, as the client’s credit card debt of $15,000, which he has paid for 20 years, yet now still owes the same amount. In a year, he paid $7,200. He thought that would cut his debt in half and it would disappear. But credit cards are like weeds — they keep growing back unless you uproot them. The debtor’s Chapter 13 will uproot his credit card debt and pay them off completely in 60 months so they don’t grow back again. Smart decision on the client’s part, I have to say, because some people just do not have the courage to make the right decision.
Client seeks Chapter 7 relief to discharge $30,000 in credit card debt
The client is 48 and married with no children. He owns a home with $55,000 of equity. He bought his house three years ago with 3 percent down, so his equity has increased somewhat but still within homestead exemption of $75,000. He has a live-in girlfriend, and I don’t know if she qualifies as a family member that would increase his exemption to $100,000. In any event, $55,000 is $20,000 less than $75,000 so the house is secure and protected. His problem is $30,000 of credit cards, which he has been paying for five years, at $1,000 minimum monthly just to keep them current. Do the math.
He’s paid $60,000 to keep $30,000 of cards current for five years, and he still owes the same amount of $30,000. It doesn’t seem fair, but that’s the way cards work. Just like weeds, they keep growing, nonstop. But since he now has a mortgage to pay, he having a hard time making the minimum payment of $1,000 a month for the cards. The choice he has now is to either pay the mortgage or pay the cards. It’s a no-brainer. Get rid of the cards to assure payment of the mortgage. At least, the house appreciates in value over time and home ownership is the American dream, while credit card debt is the American nightmare that sucks up your net income every month, every year. His choice is Chapter 7 to protect his house and discharge the $30,000 of credit cards.
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Disclaimer: The foregoing is an expression of opinion and is not meant to be legal advice to any reader. There is no attorney-client relationship established by this article with the reader. If you want to discuss your situation, you have to set an appointment to consult with the attorney. The first general consultation is free.
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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 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or at 20274 Carrey Road, Walnut, CA 91789.