[COLUMN] Is Chapter 7 or 13 more suitable for debtors with $50,000 credit cards? —

The debtor also has a collection lawsuit for $10,000

THE client is 48 years old and has just been sued for $10,000 by American Express. He recently received the summons and the complaint.

He is single with a dependent teenager. He had a business, but it failed. He now works as a manager and earns $4,000 a month. He doesn’t own a house now, but he did own a condominium, which was sold about three years ago. The net proceeds from the sale of the house were $100,000. As a roommate, half or $50,000 of the net proceeds went to him.

On the face of it, this should be a Chapter 7 case to get a fresh start where the court vacates the $10,000 lawsuit and the rest of the $40,000 credit cards. There’s really no problem qualifying for the Chapter 7 means test, since his income for a family of two is below the California median. Sounds like a slam-dunk case for Chapter 7.

However, there is a circumstance during the sale of the house that puts a crease in this otherwise clear Chapter 7 case. For some reason I don’t really understand, the client transferred his 50% share of the net proceeds from the sale of the house to the other roommate. Upon closing of the escrow, all of 100% of the net proceeds went to the other roommate.

At this point in the analysis, this circumstance becomes an “asset transfer” that has occurred within the past four years. However, as the client explains, he made the transfer to the roommate, but the roommate returned the $50,000 to him which he has since used entirely for his living expenses.

There could be issues that a Chapter 7 trustee could raise because of the $50,000 transfer that happened three years ago. The trustee could say that the $50,000 was a preferential transfer, which he has the power to avoid or cancel. In other words, the trustee can try to recover the $50,000 from the assignee co-owner even though the $50,000 was actually returned to the client who then used it in full for living expenses for the past three years.

Well, let’s just put it this way. There is a 10% chance that a Chapter 7 trustee will raise this issue, but there is a 90% chance that no such issue will be raised in Chapter 7. The transferee’s defense would be that the transfer was nominal and that the assignee was merely holding the $50,000 in trust for the client, the true owner of the $50,000, and the assignee effectively immediately returned the $50,000 to the client. That’s a pretty good defense because it’s the truth that the real owner of the $50,000 was still the customer. It was property held in trust by the assignee for the customer and under bankruptcy law property held in trust by third parties for the debtor is still considered to be the property of the debtor.

The problem is that this is an issue that can be argued by the Chapter 7 trustee. Once the adversarial proceeding is filed, the assignee must defend itself. In this situation, the legal costs increase because it costs money to defend against a complaint from the adversary.

To completely avoid this problem, a low Chapter 13 payment plan is more suitable for the customer. Since the client’s income is below the median, they will be eligible for a low plan payment under chapter 13. of chapter 13 do not plead this type of problem. They may try to increase the plan payment to compensate for the transfer, but in this case the fact is that the $50,000 actually belonged to the client and the money was used. It’s the truth. The transfer was only nominal. The assignee held the $50,000 in trust for the client and immediately returned it to him and he used it entirely for his living expenses for the past three years.

How low can the plan payout be? I estimate the client can pay $200 per month for 36 months. After paying $7,000, the balance of $43,000 will be discharged.

Without Chapter 13 protection, American Express’ $10,000 lawsuit will eventually become a wage garnishment. In this case, American Express will garnish 25% of the customer’s gross income each month. It’s $1,000 a month. The amount is too large. The client will not be able to pay his rent. Of course, the client can apply for an exemption from garnishment on the grounds that they have no disposable income every month, but the exemption is only valid for 90 days. He has to go to court every 90 days to show the judge he has no money to pay. So it’s very annoying.

For peace of mind, the best alternative for the customer is Chapter 13 with a low plan payment. I had a client who only pays $150 a month for $60,000 in credit cards. In the same situation, she sold her house to her brother-in-law for below market price, in exchange, the brother-in-law allows her to stay in the house rent-free until his death. In Chapter 7, the trustee would try to recover the property because it had been sold below market price by $100,000 for the past four years.

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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 1000 S. Fremont Ave, Mailstop 58, Building A-1 Suite 1125, Alhambra, CA 91803 or 20274 Carrey Road, Walnut, CA 91789 .

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