CLIENT no. 1 is 50 years old and is the manager of a big retail store. He’s been working there for 30 years.
His spouse got into an accident and is now on disability. He owns a house with $200,000 of equity. He has, believe it or not, 11 children from age 2 to 18. Just imagine his food expense every month! He owes $60,000 of credit card debt. Since his wife became disabled, he applied for a loan modification of his first mortgage. His first mortgage payment is $2,800. His gross income is $80,000. With wife’s disability pay, they gross $100,000 a year. But with 11 kids and $60,000 of credit card debt, something has to give. He can’t pay the minimum credit card payments of $1,800 anymore. So he wants Chapter 7 to get rid of the $60,000 credit cards. But does he qualify for Chapter 7 discharge?
Well, in terms of the means test, there certainly is no presumption of abuse because he has 11 kids. But in Chapter 7, there is going to be a problem with the residence. The homestead exemption for the client is $100,000 but his equity is $130,000. So, there is $30,000 of nonexempt equity.
Theoretically, Chapter 7 could work for the client because there is almost no viable nonexempt equity to speak of if you factor in the cost of sale of 6%. The house is currently valued at $500,000. Six percent of $500,000 is $30,000, which is the amount of nonexempt equity. A Chapter 7 trustee would have nothing to administer and theoretically, the client should be able to keep his house in Chapter 7.
The problem is that real estate prices in Los Angeles are still going up. An aggressive Chapter 7 trustee can file an adversary proceeding to have the house sold because of the $30,000 nonexempt equity. The adversary case may take 18 months to reach trial. By that time, the house value could have increased by another $50,000. The increase in value is justification in favor of the trustee’s argument that there is viable equity for him to administer. Nobody wants this kind of problem in bankruptcy but it happens.
I have this exact situation with another client whose case was filed two years ago. The trustee filed an adversary complaint to get his house because the nonexempt portion, according to the trustee was $100,000. Our defense was that there was no viable equity for the trustee to administer because there was a judgment lien for $97,000. This adversary was due for trial on April 26, 2017. But a week before trial, the trustee offered a settlement to enable the client to keep his house. The trustee argued that the value of the house had increased “substantially” in the last 18 months resulting in viable nonexempt equity. So this kind of problem does happen in Chapter 7 although not often.
To avoid this situation, it is the better part of caution to file for Chapter 13. Why? The Chapter 13 trustee, unlike the Chapter 7 trustee, does not have the power to sell debtor’s house. So, in Chapter 13, there is no risk of losing debtor’s house. But in Chapter 13, the client must pay at least $30,000 over 60 months, or $500 a month. After five years, the client would have paid the trustee $30,000. Upon completion of the last payment, the court will discharge the other $30,000. So, in five years, the debtor will not owe any more credit cards as the entire $60,000 will be gone.
Separated debtor needs Chapter 7 relief
Client no. 2 is 64 years old. He is married but separated. He does not have his own children but he helps his nephews and nieces who live abroad with money for the monthly expenses, which include college tuition abroad. He makes a gross of $90,000 a year as a scientist. He does not own a house. He owes $50,000 of credit card debt, which is using up $1,500 a month of his net income. The client also likes to gamble, which he seems to be good at because he had $40,000 of gambling winnings last year.
The client wants a Chapter 7 discharge of his $50,000 of credit cards. Will he qualify for a Chapter 7 discharge given the fact that he is practically single with $90,000 of gross income a year? That’s a good question. After doing the means test analysis, it appears that there is no presumption of abuse with Chapter 7.
On the other hand, if some deductions we claim are disputed by the trustee, there could be some disposable income that will indicate that client has the ability to pay off a portion of his $50,000 credit card debt.
But note that this case is significantly different from the first case because in this case, the client does not own a house. So, even if it’s a borderline case, i.e. client can file Chapter 7 or 13, the client can file for Chapter 7 relief as long as the IRS deductions are kosher. Kosher means in this case that he can justify the money that he sends to his nephews and nieces abroad. If he can justify that expense, it can be argued that the nephews and nieces are his dependents even though they do not live with him. Under the worse case, he can convert his case to Chapter 13. However, he has very good chances of getting a Chapter 7 discharge. This is a no brainer for a gambler like the client, so he opts for Chapter 7.
If you need bankruptcy relief, please call my office for an appointment and I will analyze your case personally.
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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.