[COLUMN] What is the “fresh start” of bankruptcy? —

Let’s give bankruptcy a historical and legal perspective. At present, when we talk about bankruptcy law, we refer to the federal law called “Bankruptcy Code” of 2005. Creditors lobbied a lot in Congress to shape the Bankruptcy Code of 2005 to further their interests. Thus, the 2005 Bankruptcy Code incorporates the “means test” which essentially uses IRS-allowed deductions from gross income to set the threshold to screen which debtor may qualify for Chapter 7 of the Bankruptcy Code. Chapter 7 is the “fresh start” chapter of the bankruptcy code, which allows a debtor to “discharge” most, if not all, of the accumulated debt while allowing the debtor to retain most, if not all of its assets through an asset exemption system. .

For example, senior customers own a home with net worth exempt, a retirement portfolio of $500,000, an old model MB-E 350 with a car loan of $15,000, a new Tesla Model X with a car loan $50,000, and they owe $70,000 in credit card debt. They pay $2,000 a month to keep the $70,000 worth of credit cards up to date. Since they are now dependent on Social Security income and income from their $500,000 retirement savings, they really struggle to put aside $2,000 a month for credit cards. Even though their combined Social Security income and wallet income is $80,000 a year, allocating 30% of that income or $24,000 a year to keep their cards up to date is a pain. They would like to travel the world more often, but the $24,000 a year for credit cards means they have to stay in Los Angeles. Customers are therefore not a good place to be.

In this case, given these circumstances, Chapter 7 of the bankruptcy code will allow clients to keep their home, cars, retirement portfolio (must be ERISA 401K qualified, IRA, DBP, etc.) while “freeing up their $70,000 credit cards. In other words, the bankruptcy law allows them to keep all of their assets and sources of income while the Federal Court issues an order that “wipes out” the $70,000 from credit cards. Just imagine the amount of money customers will save if the $70,000 is offloaded. In two years, they save $50,000. In 4 years, they save $100,000. Whereas if they don’t get rid of those cards, they’ll spend another $100,000 in 4 years, but still owe the same $70,000!

Debt relief for clients is enormous. It is the difference between night and day. The “release” from bankruptcy is the very essence of the “fresh start” of bankruptcy. The U.S. Supreme Court, in numerous bankruptcy cases brought before it, has said that “discharge” from bankruptcy gives the honest debtor a new opportunity in life and a clear field for future endeavours, unimpeded by the pressure and discouragement of pre-existing debts. It’s obvious that customers are under a lot of pressure and discouragement to shell out $24,000 of their income every year to manage their $70,000 worth of credit cards. Thus, the bankruptcy law and the Supreme Court of the United States want to give customers a new opportunity in life without being hindered by the pressure and discouragement of pre-existing debts, even if they are now elderly. Of course, a fresh start really has nothing to do with age – my youngest client is only 22 and she needs a fresh start due to pre-existing debt that she can’t. repay because a friend of hers used her credit cards without her knowledge and consent.

Think about it. The clients still have their house, their cars, their $500,000 retirement portfolio, and still have all of their income, but they no longer have the $70,000 in credit card debt. It’s the same as successfully eliminating all the cancer cells in your body. Except that in Chapter 7, clients don’t have to undergo chemotherapy. They get a fresh start in life with all their assets, which they keep, and have no credit card debt. In addition, they will be able to rebuild their credit score very quickly. They have nothing to lose except heavy pre-existing debts. Recently, another senior customer discharged $30,000 from credit cards, and he feels great! In fact, he’s completely had a makeover. He had triple bypass surgery and after a month of recovery he said let’s go ahead and file my chapter 7 case because with my triple bypass I feel great, and now I want to feel great financially with a “fresh start” without my $30,000 in credit card debt!

What does the federal bankruptcy court “discharge” order mean? This means that creditors cannot in any case collect, shape or form the discharged debts of the debtor. It’s permanent. Even if customers win the $100 million lottery next year, they don’t have to repay the $70,000, as long as 6 months from the release date have passed. Creditors permanently lose the right to collect. The debts are definitely discharged. Debtors are given a fresh financial start in life.

How long does it take to buy a house after bankruptcy? Normally, within two years of the discharge date, debtors can qualify for mortgages to buy a home at a higher interest rate. If a person with an excellent credit rating will pay 4%, in 2 years a discharged debtor may pay 6%.

But not all debts are dischargeable. Child support and alimony are not. Student loans are not unless you can demonstrate extreme hardship. Debts incurred by intentional torts cannot. For example, you killed someone and the victim’s family got a $50 million judgment against you, that $50 million can’t be released. You will bring this debt to hell with you. However, I settled a judgment for wrongful debt of $1 million against a debtor of $50,000. The customer made an illegal U-turn causing an accident with a motorbike which resulted in the death of the motorbike driver. The debtor’s asset structure was favorable and conducive to a settlement of $50,000. The debtor had to go to prison for three years for the homicide.

Is bankruptcy constitutional? Of course it is. Article 1, Section 8, Clause 4 authorizes Congress to enact “uniform laws respecting the subject of bankruptcy throughout the United States”.

Even our loving God promotes debt cancellation. Deuteronomy 15:1 – At the end of every 7 years you will grant forgiveness of debts.

If you need debt relief, call our office to schedule an appointment. I will analyze your case personally.

“At the end of every seven years, you will grant forgiveness of debts.” Deuteronomy 15:1

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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.

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