[COLUMN] Client files Chapter 13 for unsecured debt of $ 400,000 –


This is what I call an edge case of Chapter 7 with trump. Therefore, it is better not to file Chapter 7 because the asset may be lost in Chapter 7, while Chapter 13 is safe enough because the Chapter 13 Trustee, unlike the Chapter 7 Trustee, has no no power to liquidate assets. This is a critical difference that can only be highlighted these days when home values ​​are steadily rising due to very low mortgage rates.

At first glance, you might wonder why not just file a Chapter 7 and wipe out all of the $ 400,000 in unsecured debt all at once? Well, you have to look at the details of the deal, especially the asset structure.

The client, husband and wife, are in their fifties. Still young. Both have owned and operated their own businesses for at least 20 years. The pandemic killed both companies.

The husband has a salary from his work which survived the pandemic. The woman also has a job that survived the pandemic.

They owe $ 400,000 in business loans, all unsecured. Unsecured meaning that these are signature loans without any collateral of any kind.

The Borderline case Chapter 7

Under the means test, they may in fact qualify for Chapter 7. But filing a Chapter 7 would be a serious mistake. Why? They own a house that is currently worth $ 1 million. The balance of the first and only mortgage is $ 400,000. This means that their entire equity of $ 600,000 is totally exempt since they live in LA County. Sure, it looks good on paper, but when equity is fully depleted at $ 600,000 and Chapter 7 Trustees are so excited to liquidate homes, Trustees have Realtors. who are hungry wolves waiting on the sidelines to devour your house. These real estate agents can earn $ 50,000 with their commissions. That’s a lot of money. When there is that kind of money to be made, they think of you as a roast pig ready to eat.

Even if the Zillow appraisal says your home has a current fair market value of $ 1 million, you can be sure these hard-working real estate agents can have a buyer ready for at least $ 100,000 to $ 1 million. . Remember, there is always a home bidding war in LA because there is a shortage of homes. There is a lot of demand and a limited supply, these two factors will cause you to lose your home in a Chapter 7.

Chapter 7 The Trustee Has the Power to Sell Your Home

The Chapter 7 trustee has the power to sell your house for $ 1.1 million, for example, give you your exempt equity of $ 600,000 in cash and use the rest of the money to pay off part of it. unsecured debt of $ 400,000. What will actually happen is that the real estate agents will receive $ 50,000, and there will be $ 50,000 left over to pay the attorneys for the trustee and the administration fees for the trustee. In all likelihood, ten cents will go to the $ 400,000 of unsecured creditors. Ridiculous, isn’t it? But still true.

Chapter 13 The trustee does not have the power to sell your house

But in Chapter 13, the clients house is completely safe because the Chapter 13 Trustee does not have the authority to sell assets. There is a liquidation analysis that compares the amount unsecured creditors can get in Chapter 7 versus the plan proposed in Chapter 13. So the problem clients will face in Chapter 13 is how far can go plan payments? They might be able to do this with a very low plan payment, say $ 300 per month, which pays $ 18,000 out of the $ 400,000. That makes it a 5% plan, meaning it pays 5% of the $ 400,000. Once the $ 18,000 is fully paid in 60 months, the difference between $ 400,000 and $ 18,000, $ 382,000 will be paid.

Of course, the Chapter 13 trustee will try to get a higher payout for the plan by arguing that the home’s value is underestimated, but normally an appraisal report will fix this, WITHOUT RISK of losing the home. because the Chapter 13 trustee has no power to sell the house. The worst possibility in a Chapter 13 is a higher plan payment than what is offered, say an increase when the car payment is made, or the case is closed because it is not feasible. Unlike Chapter 7, once the home’s value is in question the next day there will be a sign for sale on your lawn and your home will be listed on MLS the same day.

Almost impossible to dismiss the Chapter 7 case

You might think there is no problem because you can still get your Chapter 7 case filed. Think again because it is almost impossible to get out of a Chapter 7 case once the petition is fully filed.

Converting Chapter 7 to Chapter 13

The only possible way out of the Chapter 7 case once the Chapter 7 trustee has targeted your home for sale is to convert your case to Chapter 13. To convert your case to Chapter 13 you will need to prove that you can afford it. , income, to qualify for Chapter 13. It’s like a square circle. In Chapter 7 you show that you have no disposable income while in Chapter 13 you have to show that you have disposable income to fund a plan. Either way, you’ll have to pay the full Chapter 7 administration fee in your Chapter 13. Good luck. Just a motion to employ a real estate agent for the Chapter 7 trustee costs a bundle. By package, I mean between $ 5,000 and $ 10,000. By the time your home is listed on MLS, the Chapter 7 trustee administration fee can reach $ 35,000 for two weeks of work. Nothing unusual about it. That’s all in the playbook. Trust me on this; you never want your house to be in the sights of the administrator of chapter 7. You will be in the lion’s den like Daniel. But in Daniel’s case, our Lord God Almighty shut all the lions’ mouths in the den and Daniel came out without a scratch the next morning.

God’s plans are to make you prosper so as not to harm you

Despite all of your troubles, you can rest assured that our God’s plans are to make you prosper, not to harm you. “For I know the plans that I have for you,” declares the Lord, “plans to make you prosper, not to harm you, plans to give you hope and a future,” Jeremiah 29:11. What could be clearer than this that God loved so that he sent his beloved only begotten Son, Jesus Christ, who also loved us thus, to die for us, to give us a chance to spend eternity with them in heaven. What a great and glorious plan for us who do not serve humans! “

Our God can and does wonders beyond our imagination. When you think that all is lost, divine intervention pops up out of nowhere to solve your problems. “Do not remember the old things, or consider the things of the past. Here, I’m going to do something new, now it’s going to arise; won’t you notice I will even make a road in the wilderness, rivers in the wilderness ”, Isaiah 43: 18-19.

Believe it or not, Walt Disney applied for Chapter 7 not once, but twice before his global Disney empire was successful. He became a billionaire after getting rid of all his debts twice. Milton Hershey of Hershey Chocolates, the world’s largest chocolate company, also filed for Chapter 7 before becoming a billionaire and successful.

If you need debt relief, make an appointment with me. I will analyze your case personally.

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Disclaimer: None of the above is considered legal advice to anyone. There is absolutely no attorney-client relationship established while 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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