4/1/25 Credit Solutions & Subchapter V Lifelines for American Businesses

The Moneywise Radio Show and Podcast Tuesday, April 1st BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Guys" podcast call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Manageme instagram: MoneywiseWealthManagement Guest: Leonard K. Welsh - Of Counsel | Bankruptcy Law with Young Wooldridge, LLP website: www.youngwooldridge.com/

• 0:00Speaker 00

  From the padded radio room off Stockdale Highway, here is Money Wise. Call or text in at 661-396-1000.

• 0:09Speaker 01

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• 0:30Speaker 02

  Securities offered through SEF Securities, Inc., member FINRA/SIPC. Investment advisory services offered through SEF Investment Advisors, Inc. SEF Securities, Inc. and Money Wise Wealth Management are independently owned and operated.

• 0:40Speaker 00

  Now, let's start the Money Wise Show.

• 0:43Speaker 03

  Welcome to the Money Wise Show. We are live from the Gero Ellis padded radio room off Stockdale Highway on ESPN Bakersfield, 1230 a.m., 101.1 FM, and always streaming at MoneyWiseGuys.com. You can text into the show 24 hours a day at 39661-396-1000. That's 661-396-1000. Today, we're your hosts. I'm Sharad Waite and?

• 1:06Speaker 04

  I'm Sammy Abiyawie.

• 1:07Speaker 03

  Dang, Sammy, it's good to be on the show with you.

• 1:09Speaker 04

  Yeah, I'm very excited today.

• 1:10Speaker 03

  I'm excited too. We're going to bring back a guest that we had on, oh, last month, I believe, Leonard Welch. He's a bankruptcy attorney. Bankruptcy is such a fascinating subject that we could, we could go on and on about it.

• 1:23Speaker 04

  Yes, only in America.

• 1:25Speaker 03

  Really?

• 1:26Speaker 04

  Yeah.

• 1:26Speaker 03

  Well, there's a lot, that's a good question. We can ask Leonard about that. How's bankruptcy in Morocco? Is there, is there a process there?

• 1:34Speaker 04

  Frowned upon. You might go to jail.

• 1:37Speaker 03

  Well, which kind of leads to just also debt is viewed differently. Like debt historically and culturally is viewed very different in America than it is certainly in Morocco.

• 1:50Speaker 04

  It's shameful.

• 1:51Speaker 03

  Yeah.

• 1:52Speaker 04

  It's, I mean, in 2008, we saw a lot of, a lot of bankruptcies taking place because of the real estate market and the collapse and what have you. Stuff like that overseas, especially in countries like Morocco, is just not, not looked at the same way we, we do here in this country.

• 2:10Speaker 03

  Yeah, it's a long history of, yeah, like you said, it's basically shame shameful to have debt. And yet, in America, it's almost the other end of the spectrum where it's admired. If you, you know, you look at all the credit cards I have, look at all the access to credit I have is like a badge of honor. And that's created a lot of, it's created the biggest wealth on the planet and the wealthiest country on the planet. But with every good thing, there's a downside to it and there's an ugly side to it, which is people that don't know how to manage it.

• 2:41Speaker 04

  And they get in trouble and they have to do bankruptcies.

• 2:44Speaker 03

  Right. You know, but fortunately, there are, there are some ways to, to, to handle it when you find yourself in, in that position. And we, we talked about, we're giving away a lot here, but last time with, with Mr. Welch, we talked about the, the rate of people that actually continue to declare bankruptcy is very low. It's, it's surprising, it's like in the single digits, the people that can, that have repeat bankruptcies. So that's the good news is that you, people do usually learn their lesson.

• 3:17Speaker 04

  Yes.

• 3:18Speaker 03

  And they, they figure out, okay, yeah, something does need to change because it's surprising that you get your credit back pretty quickly. You know, within a few years.

• 3:26Speaker 04

  Seven, seven to 10 years, I believe.

• 3:29Speaker 03

  Well, that's when it completely drops off, but you can get credit within a year or two again, like, you know, secured credit cards, albeit. But even then, after a few years, it's not, it's not uncommon for somebody to qualify for a mortgage. Or for like real, like credit, they still have the bankruptcy on their, on their history, but they can actually still go and borrow money.

• 3:53Speaker 04

  That's correct.

• 3:54Speaker 03

  So it's really, really interesting subject. So we're going to talk to Mr. Welch about that.

• 4:00Speaker 04

  Great. In the meantime, we have a question, Jared.

• 4:02Speaker 03

  Let's hear it.

• 4:03Speaker 04

  We'd like to start with, good afternoon, money guys. I was wondering if you would have time to explain what this new clawback with social security will affect.

• 4:15Speaker 04

  People that are using their SS. What will change when it goes into effect later this month? What will change when it goes into effect later this month? Thank you.

• 4:26Speaker 03

  All right, so the question is, this, there's a, the new clawback on social security that I the Social Security Administration. This took, this took effect just a few days ago, on March 27th. And what it is, is a change into the amount of money that the social security can withhold from your check if you're getting money that you shouldn't be getting. Right, so that's, that's a key part. That means there is a very small fraction of the population that is receiving social security benefits, or a portion of their social security benefit that they're not entitled to, they shouldn't be getting it. Whether it's because an error on social security side, that's more likely the case, some computational error.

• 5:09Speaker 04

  Like an overpayment?

• 5:10Speaker 03

  Yeah, like an overpayment, like, okay, you know, you got paid too much and it wasn't yours to, to belong, to begin with. So, under the Biden administration, the social security had a tap, a cap, of how much they could withhold from future payments if they were getting an overpayment. And that was at 10%, which I was unaware of that. I didn't realize that that cap was so low, because that seems, seems really low to me. I mean, Sam, if I accidentally give you $1,000, you know, each month, and, and let's say a year goes by, and they go, oh, I should have only given you $800 a month? And I'm only going to require 10% of your, I mean, I don't know.

• 5:48Speaker 04

  Well, look, I mean, a lot, a lot of the social security recipients are on a fixed income, right? So whenever you, you overpay them, their social, the fact that they're receiving social security does not prohibit them from going and borrowing money, for instance. Okay, so let's say they get the $1,000, and then they go and they start qualifying to buy a car, based on that $1,000 income.

• 6:09Speaker 03

  Right.

• 6:10Speaker 04

  Now, if you start clawing back more than 10%, it might affect them negatively, creating a...

• 6:16Speaker 03

  Financial hardship.

• 6:17Speaker 04

  Financial hardship. So I'm okay with the 10%, you know, over time.

• 6:21Speaker 03

  Yeah.

• 6:23Speaker 04

  Just because there's a segment of the population that's, the only income they have is social security and it's, a lot of the time it's pretty low.

• 6:30Speaker 03

  Yeah.

• 6:31Speaker 04

  Right? Now, the change here, starting March 27th is, well, if you get an overpayment, they're gonna get 100%.

• 6:39Speaker 03

  Right.

• 6:40Speaker 04

  Right away. They're not gonna.

• 6:41Speaker 03

  It's like you get, no check is coming until, until the recovery. Well, I guess it would, it's all just on new payments going forward. So if somebody loses all of their check, that means, how long were they getting away with getting a check when they shouldn't have? That means 100% of what they were receiving, they should not have been receiving.

• 6:58Speaker 04

  Correct.

• 6:59Speaker 03

  I hope that, I'm guessing that it's not a lot of that. Social Security is estimating that this change, which again, just took effect on March 27th, could recover over the next 10 years, about $7 billion. Seven billion. With a B, Sammy.

• 7:18Speaker 04

  It doesn't faze me though, Sherrod. The $7 billion does not faze me in light of the number that we issue.

• 7:25Speaker 03

  Right.

• 7:26Speaker 04

  For social security. What was that number per year?

• 7:28Speaker 03

  It's almost one and a half trillion. So over 10 years, it would be 14.6 trillion dollars versus 7 billion.

• 7:37Speaker 04

  What's the percentage?

• 7:38Speaker 03

  Point 000.

• 7:40Speaker 04

  0.5%?

• 7:42Speaker 03

  A few zeros.

• 7:43Speaker 04

  Yeah.

• 7:43Speaker 03

  Yeah.

• 7:43Speaker 04

  Yeah. Like I said, the $7 billion compared to how many trillions of dollars we're gonna, you know, inject into the economy, get pay over the 10 years.

• 7:53Speaker 03

  It's like 1,000th of a, less than 1,000th of a percent.

• 7:56Speaker 04

  Yes.

• 7:57Speaker 03

  Of 1%.

• 7:58Speaker 04

  It doesn't faze me. Now, the big thing for me, what I'm learning from this is if you are a recipient of social security with all the changes and all the things that are being looked at, definitely take a look at your check, take a look at your benefits and make sure that you're on the top of understanding what they are. If you're not, definitely schedule a meeting or go into the office or make a phone call so you can have an understanding with what you're gonna be getting versus not getting.

• 8:24Speaker 03

  Yeah, and. And while you're doing that, good luck getting a hold of anybody at Social Security Office. It's just, it's very, very difficult. And, and those jobs are being cut too. So it's, it's

• 8:36Speaker 04

  Yeah. I, I encourage people, if you're gonna go to the Social Security, take advantage of scheduling an appointment versus staying in line or what have you.

• 8:43Speaker 03

  I don't even know if they take lines anymore. Like, I don't even know if they could take walk-ins. Do you know?

• 8:48Speaker 04

  I don't know. I just see, like, sometimes I drive by going just on, on Truxton, going into Mook Creamery.

• 8:54Speaker 03

  Yeah.

• 8:54Speaker 04

  I'll, I'll see a bunch of people in line.

• 8:56Speaker 03

  Waiting out there.

• 8:57Speaker 04

  Waiting out there in the cold. They get there at seven and they keep waiting. It's like, they open at eight. It's just...

• 9:02Speaker 03

  Is there, it's almost, I mean, that's worse than the D M B.

• 9:05Speaker 04

  Hey dude, I went through the I N S, getting my citizenship.

• 9:08Speaker 03

  Oh man.

• 9:09Speaker 04

  I'd rather go to the I N S.

• 9:13Speaker 03

  This is like, it's such a, it's so painful to know that, you know, their government's so inefficient in so many ways. I, I would love to see Social Security be updated. Just the technologies need to be updated. As well as the, the I R S, it's the same thing. It's, it's, it's, you can't get any answers. You're, I mean, we have CPAs that are, are put on hold and never get through to anybody. And they've got their own secret hotline and they still can't get answers and so...

• 9:41Speaker 04

  There's, there's some truth about how inefficient our government agencies are. There's no ifs or buts about that. I've known this as business owners for years.

• 9:49Speaker 03

  Yeah.

• 9:49Speaker 04

  As a banker, I've known that for years.

• 9:52Speaker 03

  Yeah.

• 9:52Speaker 04

  It's, it's, some things have to change. I'm, I, I would agree.

• 9:57Speaker 03

  Well, uh, it looks like we're gonna start a new holiday tomorrow, Sammy. Have you heard about this? This holiday that is, uh...

• 10:04Speaker 04

  Is that the freedom?

• 10:05Speaker 03

  It's... It is called the Liberation Day.

• 10:09Speaker 04

  Liberation.

• 10:10Speaker 03

  Liberation Day is, uh, is what President Trump is calling, uh, this announcement that he will have tomorrow where this sweeping new reciprocal tariffs are gonna be announced. And, uh, you know, surprisingly, the markets were sort of mixed today. The Dow was, was al- almost flat. I mean, it was really down 11 points. So hard, we'll, we'll call it flat. S and P 500 was barely up, about three tenths of a percent, but still had a positive mood, which is basically the market saying, well, let's see. Let's see what is announced tomorrow. So much of this news has already been digested by, by Wall Street.

• 10:47Speaker 04

  Mm-hmm.

• 10:47Speaker 03

  And, and I don't know if Trump is doing this on purpose, but he's gone back and forth. With what he says he's going to do with tariffs and then pulling back and then and then putting them back in at a different way and then pulling back and so you know, I don't know if this is part of part of the

• 11:05Speaker 04

  To me, what I saw with all this with all this is that especially people that are importing, our imports have increased dramatically before the tariffs hit.

• 11:15Speaker 03

  Right.

• 11:15Speaker 04

  Took place.

• 11:16Speaker 03

  Right.

• 11:17Speaker 04

  Huge amounts of imports.

• 11:18Speaker 03

  Right, because they're trying to get ahead of what could come.

• 11:20Speaker 04

  Retailers are bringing in more and more inventory than.

• 11:24Speaker 03

  Because if they can get it here before the tariffs, let's say they take effect tomorrow, then you don't have to pay a tariff on all that stuff, which is this has been coming up with cars and people going and buying cars is it's sort of causing a problem because now they're using up the inventory. There's a there's been a surge in new car purchases, people trying to get ahead of this. And so then when the tariffs do take effect, there won't be as much already in inventory. So then they'll have to import at least the parts and some of these things. And so I think the hope maybe is that these manufacturers at least are hoping that this is a short term thing that, you know, that the tariff is announced for a little while.

• 12:02Speaker 04

  That's what I'm thinking as well is, hey, at least I I'm covering myself for the next two, three months or whatever short period of time is and see what President Trump is going to do with the tariffs. Is he going to stick to them? He might, you know, use the art of the deal in his book and get a deal done with China, Canada, Mexico, whatever.

• 12:21Speaker 03

  Yeah.

• 12:22Speaker 04

  And then go back and reduce them.

• 12:24Speaker 03

  Right.

• 12:24Speaker 04

  Right.

• 12:25Speaker 03

  Which part of his book and part of his negotiating strategy is is to kind of come out in the beginning and negotiate something that you never were intending to end with in the first place. But you're setting you're setting a line that's way out there that knocks the opponent off their kilter a little bit enough to where then they come back and they counter what they counter back with that first counter back from your outrageous initial offering. Is going to be better than if you didn't make that.

• 13:00Speaker 04

  I don't think he's German by the way. I think he's got some Arab in him because that's some bizarre tactics, man. I'm telling you.

• 13:06Speaker 03

  That's some open air markets.

• 13:07Speaker 04

  Open air markets. It's just like, hey, get, get, ask hi. Way up there.

• 13:12Speaker 03

  Oh, you can't afford that. That's a million dollars for that.

• 13:14Speaker 04

  It's like when our own Gero Ellis went to Morocco and bought that carpet. How much did you pay, Gero? Oh, they asked for five, but I only got it for 3,000. I'm like, oh my God.

• 13:24Speaker 03

  You could've got it for 300 bucks.

• 13:25Speaker 04

  That's right.

• 13:28Speaker 03

  But because they started out, you know, probably started at $10,000, at the end, he feels like he's getting to 3,000.

• 13:34Speaker 04

  That's right.

• 13:34Speaker 03

  Because that first thing, so that's what I think. I still think that that's what's happening here. Remember?

• 13:40Speaker 04

  And he's a master at that. I, I would say, not maybe master, whatever.

• 13:45Speaker 03

  Now he's playing with the ultimate poker chips.

• 13:48Speaker 04

  Yes.

• 13:48Speaker 03

  Because it's global, it's like established global trade and between countries and between massive sectors. We're talking about the whole ag sector, talking about the whole auto manufacturing sector, global auto manufacturing sector. So like this is, this could be an enormous gamble, but remember all of this was to bring, to essentially shift it from income taxes to tariff, to like a consumer based tax, which that's what a tariff is. It's just a tax on, on consumption. And, but yet we're not seeing anything about tax, taxes going down yet.

• 14:26Speaker 03

  And we're, all we're seeing is this tariff stuff and the hopes is, or at least from the administration is, well, these tariffs are, that's what, that's what's going to bring the greatest, the most deep tax reductions ever, you know? And it's like, well, where are those? And the timing on this is very, it could be very tricky because all the comms are saying, well, tariffs are going to, how, is it going to increase inflation?

• 14:53Speaker 04

  Yep.

• 14:53Speaker 03

  It's going to increase prices, even if it's temporarily, how long is temporary? Six months, a year? And how long is it going to take for Congress, if Congress can pass tax cuts? And is that going to offset? Because if, if you have a, if you have tariff where you're bringing in, you're, you're forcing domestic manufacturing.

• 15:14Speaker 03

  Those two goals don't work together. Now you have domestic manufacturing. Where are you going to get your tariffs from? If you're manufacturing everything now in the United States, now where are your tariffs going to come from? So now you've reduced taxes and now you're getting less in tariffs.

• 15:26Speaker 04

  Well, I can argue against that shared by saying that by creating jobs, you will create some type of tax income. Payroll tax, people are going to go and have money. You're going to create jobs where people are going to go and buy on the open market. You're going to collect sales tax.

• 15:41Speaker 03

  Well, yeah, but you could say that if we had high unemployment, but we don't.

• 15:45Speaker 04

  We don't. It's going to take us some years to get the skilled labor that we need in this country, which we do not have today.

• 15:51Speaker 03

  Right. Tariffs don't bring that.

• 15:54Speaker 04

  That's right. Immigration does, but we cannot bring them in anymore.

• 15:58Speaker 03

  That's right. Immigration is a big, a big economic driver, huge. In fact, I believe our country's population would be stagnant or shrinking if it wasn't for immigration. And the demographic problems bring enormous economic challenges. Look at all of the Asian, now all the Asian countries.

• 16:19Speaker 04

  Well, look at, well, European countries.

• 16:22Speaker 03

  European, yeah, Western Europe, Japan, Korea.

• 16:26Speaker 04

  Italy has a big problem.

• 16:28Speaker 03

  Yep. And like they're finding that like you can't, how do you change that? How do you make people have babies?

• 16:35Speaker 04

  You sell houses for a dollar.

• 16:36Speaker 03

  Yeah. And you pay them to have children.

• 16:39Speaker 04

  Yes.

• 16:40Speaker 03

  And then you pay for their, then you pay for the childcare.

• 16:43Speaker 04

  Yep.

• 16:44Speaker 03

  And yeah, you give them a house and.

• 16:47Speaker 04

  I think, I'm not a strategist, policy strategist, but I'm just gonna, it will be hard for me to see them playing with this because the base that voted for President Trump is suffering as much or is going to suffer as much as the rest of the population.

• 17:02Speaker 03

  Yeah.

• 17:02Speaker 04

  And we're going to have midterm elections coming up. In fact, the first test that we're going to have is Florida, and I think the other state is Missouri, where they're going to hold primary.

• 17:11Speaker 03

  Right.

• 17:11Speaker 04

  This week, I believe.

• 17:12Speaker 03

  Yeah.

• 17:13Speaker 04

  I think Florida's starting. Today. Okay.

• 17:15Speaker 03

  Yeah, Wisconsin today had Supreme Court, uh, Supreme Court.

• 17:19Speaker 04

  So that's a, that's a good test for the policies, an early test.

• 17:22Speaker 03

  Yeah, you know.

• 17:23Speaker 04

  Of the presidency of.

• 17:24Speaker 03

  Yeah. Again, it comes down to our, the checks and balances we have in this country. You know, no president should be that powerful. Their, their terms are limited and they're midterms. And, um, you know, every president wants to leave a legacy. They want this S and P 500 to be higher.

• 17:41Speaker 04

  That's right.

• 17:42Speaker 03

  In four years than it was when they started their term. Cause that's what's going to go down in the record books. You can't, can't fudge that.

• 17:48Speaker 04

  Not your library, S and P.

• 17:50Speaker 03

  The S and P 500. Yeah. Yeah. Literally like the, it's just the, the markets and which, which is sort of a reflection on the economy. Cause the, the markets will not continue to go up right now. Like right now, the markets are down just, you know, temporarily they're down. But the markets are looking long-term. They're looking at the fundamentals of the economy because those, that's what affects the profitability of these companies that are in the market.

• 18:12Speaker 04

  That's right.

• 18:13Speaker 03

  That are in the stock market. So dang, we covered a lot there, Sammy.

• 18:17Speaker 04

  We did. We have a guest actually coming up too.

• 18:19Speaker 03

  Yeah. Leonard Welch is going to join us. He's a bankruptcy law attorney. He is of counsel with Young Wooldridge. We're going to get him on the show right after this break. Stick around.

• 18:27Speaker 00

  Are you curious to learn more about how you can be money wise? Check out the money wise website at moneywiseguys.com to get more info about what we do.

• 18:41Speaker 03

  Thanks for tuning in. We're the Money Wise Show. I'm Jared, your host today with Sammy Abiyawi. We're fortunate now to be joined again by our guest Leonard Welch. He is a bankruptcy law attorney and of counsel with Young Wooldridge. But just for a few more weeks, retirement is right on the horizon. Welcome back, Leonard.

• 19:00Speaker 05

  Thank you very much, Jared.

• 19:02Speaker 03

  It's really good having you. Last time we had a very passionate talk and you have, you have a lot of, you bring a lot of passion about, about bankruptcy. Before we talk about subchapter five a little bit, Sammy and I were just talking in the first segment. Sammy's from Morocco and in Morocco, they have a very different take on debt. Just debt in general is discouraged culturally. It's, it's, uh, what's the word used? Shameful, almost.

• 19:32Speaker 04

  Especially, yeah, especially when you get, if you get to a bankruptcy case. This is not like it is here in the US. So when I first came to the US, I attended banking, I mean, uh, business school and I started learning about bankruptcy, the chapters and all that. And it's, hey, people do it and they just move on and carry on with their lives. It was like a little cultural shift for me and shock.

• 19:55Speaker 03

  Yeah.

• 19:56Speaker 05

  I think there's a real philosophical.

• 19:58Speaker 03

  Why don't you get up real close to that, Mike?

• 19:59Speaker 05

  There's a real philosophical debate about credit in the United States where you have that old school that shuns credit. As you say, in, in the, in the Islamic world, it would be, uh, looked down upon. But there's a, a real thread of the American psyche to translate into the American business system. That you need credit in order to expand the economy. So people borrow money to, uh, either buy consumer goods, uh, or they borrow money to, uh, facilitate the financing of, uh, a business.

• 20:35Speaker 05

  I may be singing to the choir here to the two of you who are financial experts, but studies have shown that the biggest cause of failure in American business isn't dishonesty, laziness, incompetence, those kinds of things. It's under capitalization. And so I was meeting with a man this morning who has a, a construction company. He will be filing a subchapter five case and he has what's called a merchant cash advance loan.

• 21:05Speaker 03

  Oh, yeah.

• 21:05Speaker 05

  These are evil in my mind.

• 21:07Speaker 03

  Yeah, maybe explain that. Uh, my understanding of those is if you're a retailer or, or you buy a bunch of inventory, these manufacturers or these, these suppliers generally want you to carry their products. So they'll sometimes incentivize you by fronting.

• 21:23Speaker 05

  That's correct.

• 21:24Speaker 03

  Fronting the, the, it's essentially a credit. It's like a. Line of credit. So we're going to give you so much of the of our materials and you go knock yourself out and you'll just you'll just pay us back along the way.

• 21:34Speaker 05

  And then they will buy. That's what they at least nominated as is buying the accounts receivable of the business. And in this particular situation, the effective interest rate under this merchant cash advance program is 91%.

• 21:51Speaker 05

  Now, I asked the man point blank this morning, why in the world did you agree to this? He said, Leonard, I was desperate. I needed the money to be able to continue to operate the business.

• 22:01Speaker 03

  Right.

• 22:01Speaker 05

  Now, again, that's kind of a long answer to your your question, but there's a real thought that American business needs credit in order to operate, to buy inventory, to pay payroll, to pay rent, whatever those overhead costs are. I think I I know I told Sherrod the story the last time I was here. I don't think I communicated it on the air, but privately, I told him that when I went to college, I was turned down for a $300 Visa card because the bank where I did my banking told me I was a bad credit risk as a college student. I had a full scholarship. I had a part time job. I owned a Toyota Corolla

• 22:43Speaker 05

  car, free and clear of liens, and I had $500 in the bank in the savings account. And they told me I was a bad credit risk. Today, my children go to the same college and the first week of school, there are all these tables in front of the bookstore saying, please sign up now for pre-approved credit of $1,500 to $2,000.

• 23:05Speaker 03

  And here's your free shirt.

• 23:06Speaker 05

  That's right.

• 23:07Speaker 03

  Or your bonus, whatever. Yeah.

• 23:08Speaker 05

  And it's it's just a shame that the credit industry isn't any more careful than it is about extending credit.

• 23:16Speaker 03

  So a couple, a couple of scriptures here, Proverbs 22:7, "The rich rule over the poor, and the borrower is slave to the lender." In Romans 13:8, "Let no debt remain outstanding except the continuing debt to love one another."

• 23:31Speaker 05

  Amen. Praise the Lord.

• 23:33Speaker 03

  Right. I mean, these are, these are, like you said, but America. Has been built on the, on the shoulders of credit.

• 23:41Speaker 05

  It has been.

• 23:41Speaker 03

  It like, it, I told Sammy, this is, you know, credit has, the, the, the, the positive side is it's, it's created the, the most wealthy country on the planet by far in the history of humans. But there's always a kind of a dark side. There's always a double edge to that sword.

• 23:57Speaker 05

  There's no question about that. And I wish, and I have actually spoken several times in the past to the Kern High School District about allowing me to create some type of curriculum for, for consumer education.

• 24:11Speaker 03

  Yeah.

• 24:12Speaker 05

  To go into the high schools to tell them, what is the risk of, of, of credit? What's the high cost of interest? How do you live within a budget? I tell people oftentimes too, that when I was in high school, three different times I was taught, by the time I made it to being a senior in high school, three different times I was taught about the American Revolution. I got it the first time, but I continued to be taught over the years about the American Revolution. Why didn't they teach me how to balance my checkbook? Why didn't they teach me about the high cost of interest? Credit card debt now averages over 21% interest in the United States.

• 24:53Speaker 05

  If you default on your credit card, the interest rate can go up to 31.7% interest. Why aren't the students being told, be careful of this? This is, this is a real problem. And again.

• 25:07Speaker 04

  I, I, as an ex-banker, former banker, I would say it's how the family lives.

• 25:14Speaker 05

  Yeah.

• 25:14Speaker 04

  If the parents are living off credit cards, they're teaching their kids how to live off credit cards.

• 25:19Speaker 05

  No question about it.

• 25:20Speaker 04

  And that's a vicious, vicious cycle that goes on and on and on.

• 25:23Speaker 05

  No question about it.

• 25:24Speaker 04

  Until you teach that kid how to create a budget, balance checkbook, and understand the risks of carrying a credit card.

• 25:32Speaker 05

  And we're brainwashed by advertisement. That, that you sit in front of the television at night and you're inundated with the Capital One credit card account that says, don't leave home without it. And you have a very pretty Jennifer Gardner telling you that you Need to have this credit card to be able to go to the fancy hotel and the fancy restaurant and use that credit card to have these consumer goods and the American public is brainwashed into believing that.

• 25:58Speaker 03

  Yeah.

• 25:59Speaker 05

  It's a tragedy.

• 26:00Speaker 03

  It ties into just, I mean, materialism in general. People feel like the more things they have, the happier they'll be. It's this misconception that, well, I'm really happy if a thousand dollars. I'm going to be way happier if I have a hundred thousand dollars. If I have a million dollars, I'll be even happier. It's like, and and that just, we all know.

• 26:19Speaker 04

  Shopping therapy syndrome. I call that the shopping therapy syndrome where you go out and say, well, I'm gonna go buy some of my stuff, some stuff so I can feel good.

• 26:28Speaker 05

  Now, how can I justify then with everything I've just said? How can I justify being a bankruptcy attorney? And helping people get out from under these situations? Because of my Christian faith, I recognize the fact that people make mistakes. They they make bonehead decisions. And the man I met with this morning with the 91% interest merchant cash advance debt, he made a mistake. He made a mistake. But how do you deal with that mistake? My faith tells me you repent and you move forward and you aren't burdened by the past. You look forward to the future. So that's what I see my role

• 27:08Speaker 05

  as a bankruptcy attorney. I'm not justifying the mistakes that people have made and that they overextended. They made bonehead decisions, but now what are you going to do about it? And I think they should be able to repent, be forgiven, and move forward. And when we're talking about debt forgiveness bankruptcy, they can only go through that process one time every eight years. So there's going to be a rude awakening to the consumer debtor who may not be able to get credit as readily as he or she has in the past by going through a bankruptcy. And then they can't go through the forgiveness process except one time every eight years. So I don't have problems sleeping at night and I I know in my heart that God sustains whatever I'm doing.

• 27:53Speaker 03

  You're doing good work.

• 27:54Speaker 05

  I think so.

• 27:55Speaker 03

  Statistics also show that those who Do declare bankruptcy, the vast majority of them do not do it again. So there is, there is a, there are repeat offenders. But it still appears that depending on what state you're in and probably because there's different state laws that manage the bankruptcy rules.

• 28:16Speaker 05

  There's different state laws that, that at least manage what kind of assets a person can protect in the bankruptcy process. But when you're dealing with a conservative population base is present in central California, you're right that when a person goes through it one time, there are not that many repeat offenders because people in Bakersfield and Fresno, throughout the valley are a very traditional based population and they don't, they don't savor the idea of going through bankruptcy.

• 28:50Speaker 03

  Yeah.

• 28:51Speaker 05

  It just may be a necessary evil that again results in an ability to look to the future and not be burdened with the past.

• 28:58Speaker 03

  Well, there has to be some way to deal with it. And I think you've mentioned in the past, some of the issues with, with historically when we didn't have bankruptcy.

• 29:06Speaker 05

  Oh, yeah.

• 29:06Speaker 03

  It was pretty draconian.

• 29:08Speaker 05

  It was in England and the founding fathers looked at England as an example and in England, if you couldn't pay back your debt, they threw you in jail.

• 29:16Speaker 03

  Right.

• 29:16Speaker 05

  And then said, okay, fine. You'll get out of jail when your friends, family and well wishers come and bail you out by paying your debt.

• 29:23Speaker 03

  Right.

• 29:24Speaker 05

  The founding fathers said, no, that's not a real good system. That doesn't really seem very effective in paying back debt. So in the constitution, the, the actual constitution that was enacted in 1789, there's a provision in the original constitution saying that there would be a uniform system of bankruptcy laws in the United States. The founding fathers said, there's got to be some alternative to debtor prisons. So there are not debtor prisons. But it's interesting to me too, how often. People ask me today in 2025, if I don't pay back my credit card debt, or if I don't pay back my car loan because it's too expensive and I have to surrender my car, am I going to go to jail? I said, no, you're not going to go to jail.

• 30:09Speaker 05

  This has nothing to do with jail.

• 30:10Speaker 03

  Yeah.

• 30:11Speaker 05

  It has to do with debt.

• 30:12Speaker 03

  Right.

• 30:13Speaker 05

  And there are no debtor prisons in the United States. Praise the Lord for that.

• 30:17Speaker 03

  Yes, yes, I agree. Is there a scenario where somebody is going through a bankruptcy process where it could be criminal, or it could be?

• 30:26Speaker 05

  Absolutely. If you lie, cheat, and steal.

• 30:28Speaker 03

  Okay. So it's fraud.

• 30:30Speaker 05

  That's right.

• 30:31Speaker 03

  Now you're fraud. Now we're, yeah, so.

• 30:33Speaker 05

  But even as, as basic as filling out the bankruptcy papers themselves, if you lie on your bankruptcy papers, you don't disclose all of your assets, you don't disclose payments that you've made to creditors within short periods of time before you file bankruptcy, you commit five different federal crimes that can all send you to jail.

• 30:53Speaker 03

  Yeah.

• 30:54Speaker 05

  So the, you won't be going to jail for having a credit card debt that you can't pay, or a car loan that you can't pay, but you'll go to jail if you're the perpetrator of some type of fraudulent scheme, where you've done bad things before the bankruptcy. But more importantly, if you haven't been truthful with the system, if you haven't been truthful with the bankruptcy system itself, you'll get in deep trouble.

• 31:18Speaker 03

  Where do you see this happening? Do you see where people think they can hide assets, or, you know, where do people get in trouble with?

• 31:27Speaker 05

  All of my clients are pure.

• 31:28Speaker 03

  Yeah, of course, of course they are. Talk about other clients.

• 31:31Speaker 05

  The things I hear at the coffee shop.

• 31:34Speaker 03

  Yeah, yeah.

• 31:35Speaker 05

  Yeah, I think that's, that's a, a common problem, that if, if there are problems, that would be in hiding assets, not disclosing.

• 31:46Speaker 05

  All of the debtor's assets because the debtor is able to protect a large amount of assets in a bankruptcy case so that they are able to achieve what the bankruptcy law calls a fresh start. As one famous Supreme Court case said that the bankruptcy law doesn't want to throw people on the scrap heap of debt by not being able, by taking everything they own and not leaving them with the necessities of life. So, but people get tempted to hide assets, not disclose or undervalue an asset. Well, how much do you think your car's worth? Oh, I think it's worth $50.

• 32:23Speaker 03

  Junker.

• 32:24Speaker 05

  Well, it's, yeah, it's really worth $5,000.

• 32:26Speaker 03

  Right.

• 32:27Speaker 05

  Those kind of things you work against.

• 32:29Speaker 03

  Yeah.

• 32:30Speaker 05

  And that's another thing that's very important for the attorney. The attorney has to have a commitment to the truth. And when a client says, well, how much do you want me to tell you my car's worth? All I want you to do is tell me the truth as to what it's worth.

• 32:46Speaker 03

  Right.

• 32:47Speaker 05

  But if you have a lawyer who doesn't have a moral compass and will perpetuate that type of dishonesty, then it's a bad thing.

• 32:55Speaker 03

  Yeah, you're not, you're not, yeah, that's, that's not a good situation.

• 32:58Speaker 05

  That's right.

• 32:59Speaker 04

  In the case of a client, maybe having a small business, not having, just a client in general, that happens to have a trust, a family trust, either revocable or irrevocable, does, does having such vehicle protect you from a bankruptcy?

• 33:17Speaker 05

  No. There is in California, it, the principle in the law, and this is what you see in most trust situations, what's called a self-settled trust. That means the person who created the trust, who's the trustee or the supervisor of the trust, and the beneficiary of the trust, that is a self-settled trust. And the bankruptcy law is very clear that that type of instrument has no effect at all in a bankruptcy case. But it's another thing that people think because of what they hear at the coffee shop or what they read on the internet where, oh, just put my assets in a trust and that'll keep them away from creditor collection actions. That's wrong.

• 33:58Speaker 05

  I went to a seminar one time in Los Angeles where it was talking about asset protection and the speaker, a very famous attorney from Los Angeles, said that what things like trusts do or other type of instruments, if we call them that, vehicles, it just makes it more difficult for a creditor to get at the assets, but ultimately the creditor will be able to penetrate the assets. But if it's more difficult for the creditor to get at those assets, it facilitates settlement. So I may owe the creditor $100 and if the creditor knows that he or she is going to

• 34:40Speaker 05

  have to jump through all of these legal hoops in order to get the asset to pay the $100, it's going to facilitate settlement discussion. So the person who owes the money says, "Well, I have this in a trust or in a limited liability company or some other kind of thing. Shouldn't we be able to work something out?" And that type of settlement is facilitated. So it's not all bad, but that's another long answer to your question. Do not be tricked into believing that just by putting your assets into a particular instrument like a trust, that, "Oh, now I'm protected."

• 35:19Speaker 03

  You don't have to worry about it. Now, let's talk subchapter 5.

• 35:22Speaker 05

  Let's talk subchapter 5.

• 35:24Speaker 03

  Last time you were on the show, you mentioned that this is a fairly recent pathway for small businesses.

• 35:31Speaker 05

  That's right.

• 35:32Speaker 03

  So, yeah.

• 35:33Speaker 05

  Small business is defined as of today as a business that has less than $3.4 million of what's called aggregate debt, total debt. And it's a person, whether it's a corporation, limited liability company, partnership, individual, who's engaged in business, doing some type of commercial activity. Well, for many, many years, Congress recognized, or at least the bankruptcy industry recognized the fact that the traditional reorganization case in Chapter 11 didn't work well for small businesses. It worked fine for Red Lobster, who recently went through a Chapter 11, or PG&E that went through two Chapter 11s, or way back in the old

• 36:16Speaker 05

  days when Sherrod was a boy, PG&E, or Texaco, excuse me, went through Chapter 11.

• 36:23Speaker 03

  Yeah.

• 36:23Speaker 05

  But it didn't work well for the small business. So in February of 2020, Congress finally was able to enact this thing called Subchapter 5, a subchapter of Chapter 11 for small businesses. Well, this is February of 2020. Then COVID hit, and all of a sudden, Congress, in a bit of inspiring activity, recognized that they needed to do something to help small businesses who are now faced with the pandemic. They quickly passed an increase in that debt limit to $7.5 million that came into the law in April of 2020.

• 37:06Speaker 05

  They moved very quickly. That was a great thing. So this was only intended to be a temporary increase in the debt limit, and it was set to sunset, set to end, the $7.5 million amount in June of 2024. So Senator Charles Grassley from Iowa, a very prominent Republican, and Senator Richard Durbin from Illinois, a very prominent Democrat, proposed legislation to make the $7.5 million debt limit extended for four years. And it looked like it was going to pass. Bipartisan support, everything was good.

• 37:47Speaker 05

  The American Bankruptcy Institute, who's kind of the godfather of bankruptcy law, was very active in supporting this extension of the debt limit. But Senator Rand Paul from Kentucky, by himself, through procedural maneuvering, was able to keep that legislation from even being voted on. So the debt limit went back to around $3 million in June of 2024. And today, on April 1 of 2025, the debt limit increased to 3.4 million. So if you're engaged in commercial activity and you have less than 3.4 million dollars of total debt, you're eligible for a Subchapter 5.

• 38:32Speaker 03

  So we got to take a break here. And after that, we'll have a couple of minutes to maybe explain a little bit more.

• 38:38Speaker 05

  I can hit the highlights of that very, very quickly.

• 38:40Speaker 03

  That sounds great. We're Money Wise, we're going to be right back.

• 38:42Speaker 00

  Are you nearing retirement and currently working with a financial advisor? Are you not sure if you're invested appropriately? Call our offices at 661-847-1000 to sit down with a Money Wise financial advisor.

• 38:58Speaker 03

  Thanks for tuning in. I'm Sharad Waite, your host. Today with Sammy Abiyawi. We're joined and been joined by Leonard Welch. He is an attorney. He's of counsel with the law firm Young Wooldridge. And he is a bankruptcy expert. And we left the last segment talking about Subchapter 5. So this has only been in place about five years. You're given a great history of the, essentially it's for small businesses or businesses that have less than 3.7 million or 3.5.

• 39:30Speaker 05

  3.4.

• 39:31Speaker 03

  3.4 million. That might change, sounds like, in the future. We'll see. But so really, it's geared towards small, small business. That's the criteria, is just the amount of debt, right?

• 39:40Speaker 05

  That's correct.

• 39:41Speaker 03

  Okay, so how is this different then from Subchapter 11?

• 39:44Speaker 05

  Regular chapter, traditional chapter 11.

• 39:46Speaker 03

  Regular, traditional, yeah.

• 39:47Speaker 05

  Traditional Chapter 11 is a business reorganization. Subchapter 5 is a part of Chapter 11. But the traditional Chapter 11 has some very...

• 39:58Speaker 05

  Very burdensome regulations in terms of how the case is actually handled. And also some very creditor friendly provisions in terms of what the debtor would have to show in order to get a repayment plan approved by the court. In effect, the unsecured creditors that did not have collateral have veto power over a repayment plan in the traditional Chapter 11. What that translates into is the success rate in the traditional Chapter 11 in the United States is about 26%.

• 40:31Speaker 03

  Does that mean that 26% of companies that go through this subchapter 11 process disappear?

• 40:40Speaker 05

  No, 26% are able to have a repayment plan approved by the court.

• 40:44Speaker 03

  Oh, the courts go, okay, yeah, we're gonna, we're gonna prove this.

• 40:47Speaker 05

  Support this repayment.

• 40:48Speaker 03

  The rest of them, what happens?

• 40:50Speaker 05

  Either get thrown out of bankruptcy, dismissed, or most of them end up in Chapter 7 liquidation.

• 40:55Speaker 03

  Oh, there you go. Yeah, they'd just be liquidated, right?

• 40:58Speaker 05

  That's correct.

• 40:59Speaker 03

  If they're thrown out, then it's just, they're thrown back to the wolves, right? Just go figure it out, because you don't qualify for this.

• 41:05Speaker 05

  That's exactly right.

• 41:06Speaker 03

  The only other option then would be subchapter 7, which is just liquidation. Now you're getting rid of assets.

• 41:10Speaker 05

  That's correct. That leads us to the point of why this law was enacted. It was because Congress recognized the fact that the traditional Chapter 11 was not working for small business. Small business has a dear place in the heart of the American psyche. And again, it's not just the psyche, but it's also the economic reality.

• 41:29Speaker 03

  Right, it's the biggest employer.

• 41:30Speaker 05

  That's right. So, what subchapter 5 does in essence is say to the creditors, as long as the debtor pays you as much as they would pay in a liquidation case, and they pay what's called their projected disposable income, their profit, for a three to five year period of time, you're no worse off by going forward with a repayment plan under those terms than you would be if the business closed and was liquidated.

• 41:59Speaker 03

  Yeah.

• 42:00Speaker 05

  And on the downside of liquidation, people lose jobs, people stop buying inventory, they stop doing the kinds of things that the economy needs in order to continue to evolve. So, the subchapter 5 repayment plan case divides the world into three kinds of creditors. Secured creditors that have collateral, who typically are paid in full. Priority creditors, who are typically taxes, who are paid in full over a three to five-year period of time, and what I call the mob, the unsecured creditors, creditors that do not have collateral and who are not considered special or priority in the law. And those, that group, that large group of people, have to be paid as much as they

• 42:43Speaker 05

  would get in Chapter Seven and the projected disposable income. Real quick example of this, I represent a hay processor, hay harvesting company, south of town. The hay processing company had about a million dollars of debt when the case was filed. In a Chapter Seven case, if the case had closed, the unsecured creditors would have gotten paid $120,000 from the liquidation of the company's assets. There were also $120,000 of payroll taxes. We're now getting ready to enter year five of the five-year repayment plan. The $120,000 of taxes are being paid in full with $2,000 a month.

• 43:26Speaker 05

  The secured creditors that have liens on the company's harvesting equipment, trucks, things like their inventory, their assets, they're getting paid in full. And the unsecured creditors, who were a million dollars when the case began, they're going to share pro rata in $120,000 paid over five years. You say, "Well, that's just highway robbery. These poor unsecured creditors are getting abused." No, they're not. If it had been in Chapter Seven, they would have gotten zero.

• 43:59Speaker 03

  Right.

• 44:00Speaker 05

  And in the meantime, the harvesting company continues to employ people, continues to buy fuel, continues to pay repair bills, continues to keep this going, and the farmers get their crops harvested. It's a win-win situation. That is Subchapter Five, win-win.

• 44:16Speaker 03

  That's a great, great example of that. And unsecured debt is unsecured.

• 44:21Speaker 05

  No collateral.

• 44:22Speaker 03

  It's no collateral.

• 44:23Speaker 04

  There's not even a UCC filing, just unsecured.

• 44:27Speaker 05

  Unsecured.

• 44:28Speaker 03

  And usually, you're paying high interest, the terms are terrible on that.

• 44:32Speaker 05

  In Subchapter Five, you pay zero.

• 44:34Speaker 03

  You don't pay interest. Oh, that's it's just a repayment plan.

• 44:38Speaker 05

  Of that principal amount.

• 44:39Speaker 03

  Wow.

• 44:39Speaker 05

  Right.

• 44:40Speaker 03

  Wow.

• 44:40Speaker 04

  So it's pro, it's pro small business, it sounds like.

• 44:42Speaker 05

  Pro small business, pro survival. And again, if the critics don't like it, then just think again what the alternative is. The business goes out of business, people lose their jobs.

• 44:54Speaker 04

  Economy stops.

• 44:56Speaker 05

  The business person doesn't buy more fuel, doesn't pay for repair bills.

• 45:00Speaker 03

  Right.

• 45:01Speaker 05

  Doesn't buy inventory, doesn't do these kinds of things. That again, when you're talking about businesses in Bakersfield or in Fresno, this is the heart of our economy.

• 45:12Speaker 03

  Yeah.

• 45:12Speaker 05

  It's not, it's not the big oil company. It's not the, the, the big people.

• 45:17Speaker 03

  Publicly traded companies that have access to global capital. It's the, you're right, it's the small businesses.

• 45:23Speaker 05

  My construction companies.

• 45:24Speaker 03

  That's right.

• 45:24Speaker 04

  We're talking about the largest employers in the United States, small business.

• 45:27Speaker 03

  Small business.

• 45:28Speaker 05

  That's right.

• 45:28Speaker 03

  It, it's crazy that this just barely passed. I mean, how many years have we gone without this avenue for small businesses?

• 45:35Speaker 05

  Well, 1789 was when the bankruptcy system came in.

• 45:38Speaker 03

  Things COVID?

• 45:39Speaker 05

  And it's, and it's.

• 45:40Speaker 03

  Do we thank COVID for this?

• 45:42Speaker 05

  It becomes part of the law in 2020.

• 45:43Speaker 03

  Yeah, and it seems phenomenal, it seems like common sense. I guess the people who don't like it would be the mob, it'd be the unsecured debtors, right? Cause everybody else wins in this situation.

• 45:53Speaker 05

  I think it's more a philosophical thing where again, Rand Paul, who is not my favorite politician, he's just so rigid in his view of right and wrong, that to him, expanding the availability of bankruptcy relief was just, it was just repugnant to him. And so he just, he went into these procedural blocks to keep it from happening. It's philosophical.

• 46:20Speaker 03

  Do you see it changing potentially down the road? Is there still efforts to increase that, that limit?

• 46:25Speaker 05

  Yeah, my, my favorite senator in the, or favorite senator in the Senate, Richard Durbin from Illinois, has already reintroduced legislation to get that debt limit back up to 7.5 million. The American Bankruptcy Institute is trying to move it to 10 million.

• 46:42Speaker 03

  But then they just need to index it. They get it up to a reasonable rate, have it indexed for inflation or what be, but.

• 46:49Speaker 05

  Congress is too busy doing other things right now that doesn't think that this lifeline for small business is really that important.

• 46:57Speaker 03

  So you see small businesses where they're just over that limit. They're over that 3.4 million. It doesn't take much to run a business to accumulate debt. I mean, homes accumulate that kind of debt.

• 47:10Speaker 05

  Then they have to get creative. They have to sell some of their assets to reduce debt. They need to go make compromise agreements with some of the creditors to reduce debt. They just need to do everything they can to qualify because the benefit of a Subchapter 5 case versus a traditional Chapter 11 is just night and day.

• 47:31Speaker 03

  Yeah, I take back what I said that unsecured debtors wouldn't like this because they would like this better than Subchapter 7 where they get nothing.

• 47:38Speaker 05

  But you have to educate them though because they have the philosophical bent too that says, like H E L L, I'm going to take less than 100%. I'm going to dig my heels in. And that's why the traditional Chapter 11 had such a small or has such a small success rate because many, many unsecured creditors who have veto power in the traditional case, they just say no. They curse and they won't support the repayment plan. Well, in Subchapter 5, you're able to take the stick off of the woodpile and hit the donkey over the head and say, okay, this is what's going to happen. And it's interesting how little back push you get from unsecured creditors in Subchapter 5.

• 48:19Speaker 03

  Once they get that on the noggin, they get it. Well, Leonard Welch, thank you so much for coming on the show again. We wish you all the best in your upcoming retirement. But you did such a great job explaining Subchapter 5. I think it was great service to our listeners. Thank you so much.

• 48:36Speaker 05

  Thank you very much.

• 48:37Speaker 03

  You want to catch Sammy tomorrow. He'll be on Scott Cox Show tomorrow morning on 96.1 FM, our sister station at 7:30 in the morning. Sammy and Scott Cox are going to talk Woolworths.

• 48:48Speaker 04

  Woolworths tomorrow.

• 48:49Speaker 03

  Talk, go over the menu, talk about the fries, all that.

• 48:52Speaker 04

  Get people excited about the sauces.

• 48:53Speaker 03

  Remember this, be smart, be safe, and always be money wise.