Client files Chapter 13 for $400K unsecured debt

Retirement System (1936) 7 C2d 565, 569, 61 P2d 754, 756. Premarital agreements may also serve to preserve a person’s estate for his or her heirs, free of the other party’s inheritance claims. Estate of Wamack (1955) 137 CA2d 112, 115, 289 P2d 871, 872.

Pursuant to Family Code §1612(c),“ Parties to a premarital agreement may contract with respect to all of the following:(1) The rights and obligations of each of the parties in any of the property of either or both of them whenever and wherever acquired or located. (2) The right to buy, sell, use, transfer, exchange, abandon, lease, consume, expend, assign, create a security interest in, mortgage, encumber, dispose of, or otherwise manage and control property.(3) The disposition of property upon separation, marital dissolution, death, or the occurrence or nonoccurrence of any other event.(4) The making of a will, trust, or other arrangement to carry out the provisions of the agreement.(5) The ownership rights in and disposition of the death benefit from a life insurance policy.(6) The choice of law governing the construction of the agreement. (7) Any other matter, including their personal rights and obligations, not in violation of public policy or a statute imposing a criminal penalty. However, the right of a child to support may not be adversely affected. Family Code §1612(b).

Premarital agreements that are entered into voluntarily by parties who are each represented by independent counsel and aware of the effect of the agreement, a post 1985 premarital waiver of post dissolution support does not offend contemporary public policy and is not per se unenforceable. Fam.C. § 1612(c); Marriage of Pendleton & Fireman (2000) 24 C4th 39, 53–54, 99 CR2d 278, 288–289;

Marriage of Facter (2013) 212 CA4th 967, 981, 152 CR3d 79, 90.

Under both the Uniform Premarital Agreement Act and prior law, the spouse claiming the agreement is invalid or not enforceable bears the burden of proof on that allegation. Family Code. § 1615(a);

Marriage of Bonds, supra, 24 C4th at 27, 99 CR2d at 269;

Marriage of Iverson (1992) 11 CA4th 1495, 1502, 15 CR2d 70, 74–75; However, the UPAA (as amended effective 1/1/02) deems that a premarital agreement was not executed voluntarily unless the court makes five prescribed findings provided for under Family Code. § 1615(c)

(1) The party against whom enforcement is sought was represented by independent legal counsel at the time of signing the agreement or, after being advised to seek independent legal counsel, expressly waived, in a separate writing, representation by independent legal counsel. The advisement to seek independent legal counsel shall be made at least seven calendar days before the final agreement is signed.

(2) One of the following:

(A) For an agreement executed between January 1, 2002, and January 1, 2020, the party against whom enforcement is sought had not less than seven calendar days between the time that party was first presented with the final agreement and advised to seek independent legal counsel and the time the agreement was signed. This requirement does not apply to nonsubstantive amendments that do not change the terms of the agreement.

(B) For an agreement executed on or after January 1, 2020, the party against whom enforcement is sought had not less than seven calendar days between the time that party was first presented with the final agreement and the time the agreement was signed, regardless of whether the party is represented by legal counsel. This requirement does not apply to nonsubstantive amendments that do not change the terms of the agreement.

(3) The party against whom enforcement is sought, if unrepresented by legal counsel, was fully informed of the terms and basic effect of the agreement as well as the rights and obligations the party was giving up by signing the agreement, and was proficient in the language in which the explanation of the party’s rights was conducted and in which the agreement was written. The explanation of the rights and obligations relinquished shall be memorialized in writing and delivered to the party prior to signing the agreement. The unrepresented party shall, on or before the signing of the premarital agreement, execute a document declaring that the party received the information required by this paragraph and indicating who provided that information.

(4) The agreement and the writings executed pursuant to paragraphs (1) and (3) were not executed under duress, fraud, or undue influence, and the parties did not lack capacity to enter into the agreement.

(5) Any other factors the court deems relevant.

A premarital agreement may be unenforceable if found to be unconscionable when it was executed and the requisite disclosures were lacking and not waived Additionally, a spousal support provision in a premarital agreement executed under the UPAA, whether before or after January 1, 2002, is not enforceable if found to be unconscionable at the time of enforcement. Family Code § 1612(c). If you are the higher earning spouse and have assets to protect, it is important to seek the representation of experienced counsel in drafting a premarital agreement to make sure that all statutory requirement are met which increases the likelihood that your premarital agreement will be deemed enforceable when attacked in court in case of a divorce.

* * * Please note that this article is not legal advice and is not intended as legal advice. The article is intended

Atty. LAwrence yAng

T HIS is what I call a borderline Chapter 7 case with asset. Therefore, it is the better part of caution 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 does not have the power to liquidate assets. This is a critical difference that can only be emphasized nowadays when house values are always going up because of very low mortgage rates. On it’s face, you might wonder why not just file a Chapter 7 and wipe out the entire $400K of unsecured debt in one stroke? Well, you have to look at the details of the case, specially the asset structure.

Client, husband and wife, are in their fifties. Still young. Both own and operate their own businesses for at least 20 years. The pandemic killed both businesses.

Husband has a salary from his job that survived the pandemic. Wife also has a job that survived the pandemic.

They owe $400K of business loans all unsecured. Unsecured meaning these are signature loans without any collateral of any kind.

The Borderline Chapter 7 case

Under the means test, they can actually qualify for Chapter 7. But filing a Chapter 7 would be a big mistake. Why? They own a house that is currently worth $1.0M. The balance of the first and only mortgage is $400K. This means that their entire equity of $600K is completely exempt since they live in LA County. Sure that looks good on paper but when the equity is entirely used up at $600K, and with Chapter 7 trustees so excited to liquidate houses, the trustees have real estate agents who are hungry wolves waiting in the sidelines to devour your house. These realtors can make $50K from their commissions. That’s a lot of money. When there’s that kind of money to be made, they look at you as roasted pig ready to be eaten.

Even if Zillow e appraisal says that your house has a current fair market value of $1.0M, you can be sure that these hard working realtors can have a ready buyer for at least $100K over $1.0M. Don’t forget that there’s always a bidding war going on for houses in LA because there’s a shortage of houses. There’s a lot of demand, and short supply so those two factors will cause you to lose your house in a Chapter 7.

Chapter 7 Trustee has the power to sell your house

The Chapter 7 trustee has the power to sell your house to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article does create any attorney client relationship between you and the Law Offices of Kenneth U. Reyes, APLC This article is not a solicitation.

for say $1.1M, give you your exempt equity of $600,000 in cash, and use the rest of the money to pay off a portion of the $400K unsecured debt. What will happen in reality is that the realtors will get $50K, and there will be $50K left to pay the trustee lawyers and trustee administration fees. In all likelihood, ten cents will go the $400K unsecured creditors. Ridiculous right? But true nevertheless.

Chapter 13 Trustee has no power to sell your house

But in Chapter 13, clients’ house is completely safe because the Chapter 13 trustee has no power to sell any asset. There’s a liquidation analysis that compares how much unsecured creditors can get in Chapter 7 compared to the plan being proposed in Chapter 13. So, the issue that clients will deal with in Chapter 13 is how low can they go on the plan payment? They might be able to with a very low plan payment, say $300 a month, which pays $18K of the $400K. That makes it a 5% plan, i.e., they plan pays 5% of the $400k. After the $18K is fully paid in 60 months, the difference between $400K and $18K, $382K will be discharged.

Of course, the Chapter 13 trustee will try to get a higher plan payment by arguing that the value of the house is understated, but normally an appraisal report will resolve that issue, with NO RISK of losing the house 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 proposed, let’s say a bump up when the car payment is done, or that the case is dismissed because it’s not feasible. Unlike in a Chapter 7, once the value of the house is in question, the next day there will be a for sale sign on your front lawn and your house will be listed on the MLS on the same day.

Almost impossible to dismiss Chapter 7 case

You might think that there’s no problem because you can always have your Chapter 7 case dismissed. Think again because it’s almost impossible to get out of a Chapter 7 case once the petition is completely filed.

Converting Chapter 7 to Chapter 13

The only feasible way of getting out of the Chapter 7 case once the Chapter 7 trustee has targeted your house for sale is the convert your case to Chapter 13. To convert your case to Chapter 13, you will have to prove that you have the wherewithal, the income, to qualify for Chapter 13. This is like a square circle. In Chapter 7, you show you have no disposable income while on a Chapter 13 you have to show you have disposable income to fund a plan. In any event, you will have to pay the Chapter 7 trustee administration fees in full in your Chapter 13. Good luck on that. Just a motion

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Attorney Kenneth Ursua Reyes is a Board Certified Family Law Specialist. He was President of the Philippine American Bar Association. He is a member of both the Family law section, Estates and Trusts section, and Immigration law sections of the Los Angeles County Bar Association. He is a graduate of Southwestern University Law School in Los Angeles