Seniors consider Chapter 13 relief for $80K credit cards

“Once the trustee and his lawyers start to administer the bankruptcy estate assets, they will make a lot of money.”

THE clients are married to each other and they are both seniors. He is 68 and she is 66. He is a member of the professions and still works in that professional capacity. She is retired. Their residence has equity of $400,000. This fact alone knocks them out of Chapter 7.

In Chapter 7, the trustee has the power to sell their home, give them their homestead exemption of $175,000 and use $225 to pay of trustee administrative expenses and trustee’s lawyer. After they are paid, whatever is left is used to pay the $80,000 and if there is anything left, probably one dollar will be given to the debtors. It’s strange that $145,000 can be used for administrative and legal fees to pay $80,000 of credit cards, but I have seen this happen. It’s really not that unusual.

I represent an unsecured creditor for $250,000 in a Chapter 7 case of a company that had $385,000 in its checking accounts when the case was converted from Chapter 11 to Chapter 7. In a span of 18 months, the bulk of the $385,000 had been used up for trustee and his legal fees. My client’s $250,000, which I had to defend vigorously in trial is probably worth 20 percent now.

However, what is going on is perfectly legal. Once the trustee and his lawyers start to administer the bankruptcy estate assets, they will make a lot of money. I understand that the moneymaking bankruptcies are offset by the money-losing bankruptcies; so in the end, of course, the trustee has to stay ahead of his expenses.

The closest analogy is using a sledgehammer to kill a fly or paying $10,000 for a screwdriver. It’s this kind of stuff. It’s legal but it doesn’t make any sense but we have to live with it.

Aside from owning their residence, clients also own a rental, which has no equity. It’s negative about $20,000, and they lose about $300 a month because the rent is less than the mortgage payment and the property management fee. Husband last year liquidated $50,000 of his $70,000 401K to cover the $30,000 he needed for minimum payments on the $80,000 credit cards. After that payment of $30,000 at the sacrifice of his retirement account, they still owe the same $80,000! They have been paying the minimum of $2,500 a month to keep these cards current for a very long time.

Even at 10 years, and I am sure their credit card debt has been there longer than that, they already have paid $300,000 and today they still owe the very same $80,000! Now being a professional and educated person, the husband knows that there is something very wrong in this equation but he cannot get himself to make the right decision. Yes, it’s clear that they need relief from the $80,000 cards but what should they do at their age? The wife seems to be the clearer thinker of the two as she immediately sees the impossibility of keeping these cards. These cards have wiped out husband’s 401K which should not happen in the first place. A retirement account is for their retirement, not to pay minimum payments on credit cards. But when push comes to shove, this is what happens. Desperation sets in and a desperate person will even hold on to a sharp knife to keep afloat as the saying goes.

I explain to the clients that Chapter 13 will allow them to pay off the $80,000 in 60 months, without interest, at the rate of about $1,400 a month. The bankruptcy court protects their house from judgment liens from the credit cards and other bad guys as long as the bankruptcy is in place. Once they complete 60 payments, the court enters a discharge order that erases all of the credit card debts.

By the time the husband is 73 and wife is 71, they will owe nothing on these cards. First, the plan payment of $1,400 is more than a thousand dollars less than $2,500 a month just for minimum interest payments on the cards. Second, in five years, they paid $80,000 of principal and their balance owed is zero, whereas, without Chapter 13, in five years they will pay $150,000 but in five years when he turns 73 and she turns 71, they will still owe the very same $80,000 that is weighing them down today. The wife can clearly see the benefit, so she will convince husband soon to get Chapter 13 relief.

In fact, Chapter 13 is superior to any other method to get rid of the $80,000. One method is refinancing the house to pay for the $80,000. But converting unsecured debt such as credit cards into secured debt using the house as collateral is risking the loss of your house for credit cards. Once the husband stops to work, the higher mortgage payment caused by the refinancing will become a very stressful burden and places the house at risk. This is something you don’t want at any age.

Young couple needs Chapter 7 relief for $40K credit cards

The young clients are 43 and 42. Together, the husband and wife owe $40,000. They don’t own a house and have two teenagers and one in the oven. They are very tight because only the husband works and he grosses $4,000 a month. There’s really no money left for the luxury of paying for credit cards. No wonder the lawsuits have started. They were just served with summons and complaint to collect $5,000. Needless to say, Chapter 7 will give them the necessary relief by wiping out all of the $40,000. So, they decide to go for it immediately. It’s the right decision for the family.

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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.

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