This is what I call a borderline case of Chapter 7 with trumps. Therefore, it is better not to file chapter 7 as the asset may be lost in chapter 7, while chapter 13 is safe enough because chapter 13 trustee, unlike chapter 7 trustee, does not have the power to liquidate the assets. This is a key difference that can only be emphasized today, when home values keep going up due to very low mortgage rates.
At first glance, you might be wondering why not just file Chapter 7 and wipe out all $400,000 of 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, is in his 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 job that survived the pandemic. The woman also has a job that survived the pandemic.
They owe $400,000 in business loans, all unsecured. Unsecured which means they are signature loans without any collateral of any kind.
The Borderline Case Chapter 7
Under the means test, they may actually qualify for Chapter 7. But filing a Chapter 7 would be a big 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 capital of $600,000 is completely exempt since they live in LA County. Sure, that sounds great on paper, but when the net worth is fully depleted at $600,000 and the Chapter 7 administrators are so excited to liquidate homes, the administrators have real estate agents who are hungry wolves waiting on the sidelines to devour your home. These real estate agents can earn $50,000 through their commissions. That’s a lot of money. When there’s that kind of money to be made, they look at you like a roast pig ready to be eaten.
Even if Zillow’s appraisal says your home has a current fair market value of $1 million, you can be sure that these hard-working realtors can have a buyer ready for at least $100,000 out of $1 million. . Remember that there is always an overbid for houses in LA because there is a shortage of houses. There is a lot of demand and a limited supply, so both of these will cause you to lose your home in a Chapter 7.
Chapter 7 The trustee has the power to sell your house
The Chapter 7 trustee has the power to sell your home for, say, $1.1 million, give you your $600,000 exempt principal in cash, and use the rest of the money to pay off a portion of 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 trustee’s lawyers and trustee administration costs. In all likelihood, ten cents will go to unsecured creditors of $400,000. 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 an asset. There is a liquidation analysis that compares how much unsecured creditors can get in Chapter 7 versus the proposed plan in Chapter 13. So the question that clients will address in Chapter 13 is how far the payment can go. plan ? They could do this with a very low plan payment, say $300 per month, which pays $18,000 on the $400,000. This makes it a 5% plan, i.e. 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 discharged.
Of course, the Chapter 13 trustee will try to get a higher plan payment arguing that the value of the house is understated, but normally an appraisal report will solve this problem, with NO RISK of losing the house because the Chapter 13 trustee does not have authority to sell the home. The worst possibility in a Chapter 13 is a higher than proposed plan payment, say an increase when the car payment is made, or the case is dismissed because it is not feasible. Unlike a Chapter 7, once the home’s value is in question, the next day there will be a for sale sign 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’s no problem because you can still get your Chapter 7 case thrown out. Think again because it’s nearly impossible to get out of a Chapter 7 case once the petition is fully filed.
Conversion from 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 have the means , income, to qualify for Chapter 13. It’s like a square circle. In chapter 7 you show that you have no disposable income whereas in chapter 13 you must show that you have disposable income to fund a plan. Either way, you’ll have to pay the full Chapter 7 trustee administration fee in your Chapter 13. Good luck on that. Just a motion to employ a real estate agent for the Chapter 7 trustee is expensive. By package, I mean between $5,000 and $10,000. By the time your home is listed on MLS, Chapter 7 trustee administration costs can be as high as $35,000 for two weeks of work. Nothing unusual about that. It’s all in the playbook. Trust me on this; you never want your house in the crosshairs of the chapter 7 trustee. You’ll be in the lion’s den like Daniel. But in Daniel’s case, our Almighty Lord God shut all the lions’ mouths in the den and Daniel walked away without a scratch the next morning.
God’s plans are to prosper you, not to harm you
Despite all your troubles, you can rest assured that the plans of our God are to prosper you, not to harm you. “For I know the plans I have for you,” says the Lord, “plans to prosper you, not to harm you, plans to give you hope and a future,” Jeremiah 29:11. What could be clearer than that God so loved that he sent his beloved only Son, Jesus Christ, who also loved us so much, to die for us, to give us a chance to pass the eternity with them in heaven. What a brilliant and glorious plan for us underserved humans!”
Our God can and does wonders beyond our imagination. When you think all is lost, divine intervention comes out of nowhere to solve your problems. “Don’t remember old things and don’t consider things of the past. Behold, I will do something new, now it will arise; won’t you realize it? I will even make a way in the wilderness, rivers in the wilderness,” Isaiah 43:18-19.
Believe it or not, Walt Disney asked for Chapter 7 not once, but twice before his global Disney empire became a success. 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 once before becoming a successful billionaire.
If you need debt relief, schedule an appointment to see 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 by reading this article.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented over 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.