THE client is 38 years old and single. He is a professional with a license and makes about $100,000 gross a year. He rents a room near his workplace, where he stays on weekdays; on the weekends, he stays at the family residence, which he pays $1,800 a month for, with his parents and a younger brother.
He has $60,000 of credit cards. But the big gorilla in the room is that 10 years ago, the client was involved in a business. He apparently was the CEO of the business but was not actually involved in running the business. A business deal turned bad, and the business and client were sued for a $1-million breach of contract. The client never filed an answer, so a default judgment for $1 million was obtained against him. Ten years later now, the creditor has tried to enforce a judgment of $1 million by levying on his bank account, hereby obtaining $5,000 in cash from the client.
The client filed a Chapter 7 petition a couple of months ago. A default judgment can still be litigated as an adversarial case regarding dischargeability if fraud was part of the complaint. If an answer was filed and so the case was litigated and there was a finding of fraud by the state court, all bets are off. This judgment will not be dischargeable.
The client also owes the IRS $26,000 in income taxes for the year 2006. In addition, he has $40,000 of credit cards which are all current.
Let’s assume that the $1 million judgment is dischargeable because it’s based on a breach of contract cause of action. If no answer was ever filed and it was, in fact, a default judgment for $1 million, then we look forward to litigating the dischargeability of this million-dollar judgment in federal court if the judgment creditor objects to its discharge.
Is the $26,000 owed to the IRS dischargeable? Yes, assuming conditions for discharge are met. What are the conditions? There are time requirements. The return must at least be three years old, and the IRS must have made an assessment at least 240 days before the bankruptcy was filed. Another requirement is that there must have been no fraud involved. There are other requirements but I would say that the client would have no problem complying with the discharge requirements for the $26,000. If the IRS objects to discharge, then the correct response from the client would be an adversary proceeding against the IRS in the Chapter 7 case to have the trial judge determine if the $26,000 is dischargeable.
All of the $40,000 credit cards are dischargeable. So, a discharge order, in this case, will wipe out the following for the client: 1) $1 million judgment; 2) income taxes of $26,000 for 2006; and 3) $40,000 of credit cards.
The discharge gives the client a fresh start without any debt at the age of 38. It’s a great deal of course. Who wants a $1 million judgment hanging like a heavy yoke around your neck anyway? I mean, the client now earns $100,000 a year but if he has to pay the $1.0M back, what kind of life would that be for him? Not much fun to say the least.
Looking back, it would have been better for the client to do his Chapter 7 petition at the age of 28. That would have wiped out the judgment 10 years ago. By now at the age of 38, he would have a perfect 800 credit score again and no record of the bankruptcy. Well, this happens when the person refuses to face the problem head-on and resolve it at the right time. The problem remains and festers and becomes bigger and bigger like a snowball going down a hill. Ignoring it doesn’t solve the problem or make it go away. Judgments can be renewed every 10 years for another 10 years.
In other words, as long as the creditor renews the judgment before it expires on the 10th year, the judgment is still in effect in perpetuity. It can be valid for the entire lifetime of the debtor and even after death. After death, the judgment becomes a claim against the assets of the debtor. So spare your descendants the headache of having to deal with your debts when you die by getting your fresh start by wiping out all your debts while keeping all if not most of your assets while you are still alive and kicking because in 10 years, there is absolutely no record that you ever filed, and your credit score becomes perfect again as long as you handle new credit on a timely basis.
Please note that Walt Disney filed for Chapter 7 twice before his business, Disney — which includes theme parks worldwide, Marvel, and movies and is worth billions of dollars — became wildly successful. Milton Hershey of Hershey Chocolates also filed for Chapter 7 before his chocolate business became a worldwide business also worth billions.
I mean, I don’t think you can say that you’re smarter than Walt Disney or Milton Hershey, right?
So, a fresh start under bankruptcy law is not just something good, it’s something very good. Even Orange County filed for bankruptcy relief about 15 years ago. It still looks pretty good over there next door, doesn’t it? What’s Forever 21 doing now? It’s under bankruptcy reorganization. What did Pres. Trump’s businesses do in the 90s? They filed at least four bankruptcy reorganizations.
If you need debt relief, please set an appointment. 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 20274 Carrey Road, Walnut, CA 91789 or 1000 S. Fremont Ave., Mailstop 58, Building A-10 South Suite 10042, Alhambra, CA 91803.