THE client is 50 and married. He owes $60,000 in credit cards. He pays $2,000 a month as a minimum payment by credit card to keep the $60,000 up. His wife is not liable on these cards. She only owes about $2,000 in credit cards herself.
You own a home that is currently worth $1 million with a $300,000 mortgage. So your equity in the house is at least $700,000. The client’s release for the home is $600,000. This means there is $100,000 in non-tax-exempt equity. Under the liquidation analysis, compared to Chapter 7, the customer must pay the entire $60,000 in Chapter 13 credit cards over five years in 60 equal payments with no interest. All payments made under the Chapter 13 plan will pay off the principal amount as no interest is accrued.
Payment for the Chapter 13 plan is about $1,000 per month for 60 months, which pays off the entire $60,000 in credit cards in five years. If the client makes all 60 payments according to the approved plan, the court will issue an order of relief at the end of the 60th payment. The relief order states that the customer owes zero or nothing on the credit cards at the end of the 5th year. Can creditors still sue the customer for unpaid interest, absolutely not! Legally, the customer no longer owes anything on these cards.
While the customer is on schedule, creditors cannot sue, call, or otherwise contact the customer to collect the cards. The customer is calm. He doesn’t have to be afraid of being sued. You cannot garnish his wages or charge his bank accounts. The bankruptcy court protects the customer’s domicile from any creditors’ liens attached to it. In Chapter 13, the bankruptcy regime protects the client, including all of their assets and home. This is the bankruptcy court’s court order directing creditors to cease and desist from all collection efforts against the customer and their assets. Pretty cool!
The Client pays its Scheduled Payments to the Chapter 13 Trustee, an officer of the court whose job it is to ensure that all Scheduled Payments are distributed to the creditors who have filed their Proofs of Claim. The trustee guarantees that all payments are distributed to the correct creditors. In other words, the trustee cannot run away with your money. This is another reason why the customer will have peace of mind in Chapter 13. He pays the trustee, who is under the supervision of the bankruptcy court.
Before deciding to seek Chapter 13 relief for their $60,000 credit cards, what other alternatives are available to the customer?
One option he had was a $60,000 loan at very high interest rates to pay off all of his credit cards. There have been many offers from lenders for these alternatives. Payday lenders have branched out into this type of high-yield term loan to avoid regulation. The offers are $60,000 at 50% to 100% interest. Does it make sense to get such a loan with high interest rates? No it does not. The customer could end up losing their house if they get this loan. He will live a life of pain. He would have to pay off a $60,000 principal loan in three to five years with $90,000 to $120,000. Compare it to zero or no interest in Chapter 13.
Another option he had was consolidation. He was actually in consolidation, paying $1800 a month to a “consolidator” for 60 months. A “consolidator” is not an official of the court. He is a businessman and consolidation is his business. What if he decides to close his shop? Well, that’s the risk you’re taking. One problem was that two creditors refused to abide by the line and sued him for $30,000. Compare this to Chapter 13, where the court protects the customer from all lawsuits and collection efforts. All collection efforts, including lawsuits, end the moment Customer’s Chapter 13 is filed.
He also had the so-called “settlement” option. He may deal directly with creditors or use a third party to “pay off” the debt for less than the amount owed. In fact, the client received several offers from various creditors to redeem part of the debt owed with a lump sum payment. For example, Creditor A agrees to accept 70% of the $10,000 owed as settlement. Upon payment of $7,000, the creditor considers the matter closed. Good luck collecting the $7000. Maybe you can UBER at night and not sleep at all. After three months you might have $7,000. The problem is they want the $7,000 upfront, not in three months. And the other creditors don’t agree to a settlement, preferring to sue you now to get their money.
Another option is a $60,000 HELOC or home equity loan, with the proceeds used to pay off all credit cards. The interest rate on the HELOC is lower because the customer’s home is used as collateral for the loan. The client must take out a second mortgage on their home for $60,000. Keep in mind that HELOC loan interest rates fluctuate. If mortgage rates rise like they did yesterday and will rise for the rest of the year to tame high inflation at the time, customers will end up paying double-digit rates on HELOC. And if he stops paying for the HELOC, guess what happens? The creditor can and will foreclose on his house.
It really isn’t surprising that the client chose Chapter 13 relief to protect their home from levies, lawsuits, wage garnishments, bank levies, and put an end to all those harassing collection phone calls and the unwanted risk of foreclosure Client’s home from a HELOC loan. Peace of mind, no interest and full legal protection in bankruptcy court. Trustee guarantees that your payments are distributed to the right parties.
Of course, if the client’s equity was $625,000, they would only have to pay a little over $400 per month for 60 months. At the end of the plan, $35,000 will be withdrawn or wiped out. He does not have to pay the entire $60,000 but only pays $25,000 of the $60,000 cards because only $25,000 is not exempt after the liquidation analysis.
If you need a debt relief, make an appointment with me. I will analyze your case personally.
Disclaimer: None of the above statements are legal opinions and there is no attorney-client relationship between reader and lawyer.
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Disclaimer: None of the foregoing should be construed as legal advice to anyone. Absolutely no attorney-client relationship is created by 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 to schedule 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.