Housing Boom a Bust for Some!

The housing market is red hot right now with homes selling for well-above asking price. This has caused home values to skyrocket. For many homeowners, this is a welcomed phenomenon. With interest rates as low as they are, it is an opportune time to tap into that equity through a cash-out refinance or home equity line of credit.

However, this may have the unwelcome result for those needing to file for bankruptcy in Nebraska. Under Nebraska exemption laws, an individual filing for bankruptcy can exempt (protect) up to $60,000 in a home. The $60,000 exemption also applies to proceeds from the sale of a home for six (6) months after the sale. In Nebraska, the homestead exemption cannot be doubled, meaning that a married couple filing for bankruptcy cannot each claim the $60,000 exemption to protect up to $120,000 in equity.

Example: Husband and wife have $70,000 in credit card and medical debt, a home worth $250,000 with a mortgage of $150,000, and household income of $65,000, which has been stagnant for the last 3 years. Over the last 3 years, the home increased in value by $75,000 without any major renovations taking place. The home currently has $100,000 in equity, but only $60,000 of that equity can be exempt (protected). The couple needs to file bankruptcy to stop a garnishment and to address the $70,000 in unsecured debt. Based upon their income and household size (2), they qualify for a Chapter bankruptcy, If they file a Chapter 7 bankruptcy, they risk a Chapter 7 Trustee selling their home, paying $150,000 to the mortgage company, $60,000 to them for the homestead exemption, and distributing the remaining $40,000 to the unsecured creditors. In short, they'd risk losing their home.

The couple has some other choices to explore as alternatives to filing Chapter 7 bankruptcy:

1. Sell the home and settle debts. Sell while the market is hot. With this option, the couple would have funds available to negotiate lump sum settlements of the $70,000 credit card and medical debt. Many creditors will settle debts for 30-60% of the debt.
2. Do a cash-out refinance and settle debts. Assuming the couple qualified for a cash-out refinance, this would be a great time to tap into the equity to address the debts they have.
3. File a Chapter 13 bankruptcy to reorganize debts. Instead of going to each individual creditor to work out a settlement, the couple could file a Chapter 13 bankruptcy a propose a 3-5 year plan of reorganization. In the Chapter 13 bankruptcy, the couple would retain their home, but would have to pay the unsecured creditors an amount equal to the non-exempt equity in their home of $40,000. The issue would be whether they could afford to pay the $40,000 over the duration of the plan.

The housing boom may have the adverse effect for those needing to file for bankruptcy because the homestead exemption in Nebraska is only $60,000, which may not be enough to protect Nebraskan's home in the current housing market.

Deciding whether to file a bankruptcy is a complex and emotional decision. Finding the right attorney to work with you to make that decision is crucial. Instead of worrying what will come next, you should meet with a bankruptcy attorney to discover your options for dealing with your financial situation.

Zoom Cat & the Practice of Law

By now, millions of people have seen the viral video of the cat-filtered attorney appearing in court via Zoom. First, this video is hilarious, bringing much needed levity to the usual stuffy visuals of the practice of law. Second, it illustrates how technological innovation in the practice of law is here and isn't going anywhere.

In the last year, I have not met with one client or opposing counsel in person. I have not physically appeared in any courtroom. I haven't printed one document for a client to sign. Yet, my practice has still functioned and actually thrived. I've continued to gain and serve clients statewide - all through the use of technology.

In bankruptcy court, I had a trial via Zoom, which otherwise would have required all parties to travel to Lincoln. My client would have had to paid me for the two hours of travel to and from the trial, which is customary practice to pay your attorney for travel time. Instead, I commuted downstairs to my basement where I had a proverbial command station setup with an iPad, two laptops, iPhone, and a TV monitor ready to go. I could never have had such a setup in a physical courtroom. I had extra time to prepare for the trial instead of wasting it on commuting, finding parking, and the anxiety of driving to Lincoln from Omaha (a lot can happen driving on I-80).

The 341 Meeting of Creditors, usually the only court hearing in a consumer bankruptcy case, is now being conducted telephonically. In some jurisdictions, these 341 Meetings are being conducted via Zoom or Skype. The typical meeting lasts only 5-10 minutes. I used to jokingly inform my clients that the hardest part about those meetings was finding parking near the Federal Courthouse. Depending upon where a debtor lives, sometimes they'd have to travel several hours to the courthouse to appear in person. Now they don't have to. The purpose of the meeting is still achieved without the person needing to appear physically in Court. Putting 30-40 strangers in a room would seem to be a foolish return to normal. The same could be said of other courtroom formats such as with the traditional cattle call of eviction court.

The bankruptcy court in Nebraska has been a trailblazer when it comes to adapting to new technologies, being the first jurisdiction to permit electronic/digital signatures in lieu of "wet ink" signatures. The client pulls the document up and his or her phone and -BAM- the document is signed. A process that used to take days or weeks, obtaining client signature, sometimes now can only take seconds. More courts need to recognize that requiring "wet ink" signatures is antiquated, a bygone practice of a different time.

Clients have a much different set of expectations now. Technology has made everything instant (or nearly instant). The legal profession and the courts are notoriously slow to change and to adopt new ways of doing things, but the pandemic has forced adaptation. The pandemic has shown how adapting may have its hiccups (Exhibit A - Zoom Cat), but that making the leap to use of more technology was much closer to realization than many would have thought or wanted to admit. Right now, many consumers can do anything they need from their smartphone. They can pay bills, transfer money to friends, complete and file their tax returns, request prescription refills, schedule car maintenance, schedule an Uber or Lyft ride, etc. I could go on and on, but I think you get the point. Interacting with the Court or an attorney should be that easy. It is confusing that it isn't that easy.

Attorneys will need to adapt or fall by the wayside. Courts will need to continue to adapt by adopting technology to facilitate increased access to justice and efficiency. Numerous court hearings could and should be conducted without the need to physically appear in Court. At this point, it would be plain ridiculous to expect that we can put this cat back in its bag. Zoom Cat is here to stay.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.

Car Repossessions on the Rise!

I do not usually employ scare tactics when discussing bankruptcy. Quite honestly, it only perpetuates the fears and anxieties that people have about bankruptcy, causing a stalling effect in many situations. When people are faced with an emergency, they need to move swiftly and remove barriers for addressing the emergency. With the pandemic lingering into its 11th month, unemployment claims are expected to rise again and new jobs reporting looks bleak. The $600 stimulus check for many families is simply not going to be enough to keep afloat. Financial emergencies are going to be on the rise.

One emergency that is likely to proliferate in 2021, car repossessions. Car lenders have run out of patience (0r maybe compassion) and have jumpstarted vehicle repossessions for defaulted car loans.

You could also cure the default, but chances are you don't have the funds available to do so. A Chapter 13 bankruptcy allows a borrower to retain the vehicle and pay for it in a 3-5 year repayment plan.

1. Reduce Interest Rate. Interest rates on car loans can be as high as 18%, which can add thousands to the amount owed on a loan. In a Chapter 13, you can reduce the interest rate to the prime rate plus 2%. For many, this reduction saves thousands of dollars. You would never have this option outside of a bankruptcy unless you refinanced the loan.
2. Cramdown. If the car loan was obtained more than 910 days before you filed your bankruptcy, then you can do a cramdown, meaning that you pay only the value of your vehicle instead of the amount owed. For example: Let's say you owe $10,000 on your car loan, but your vehicle is worth only $5,000. You would pay $5,000 instead of $10,000. For many people who are underwater on their cars, this can be a huge benefit.
3. Effectively Reduce Your Monthly Car Payment. Let's say that your current vehicle payment is $400/month. You have 24 months remaining, meaning you still owe $9,600 on the remaining months. You are behind 5 months, meaning you have an arrearage of $2,000 for a total due and owing of $11,600. In a Chapter 13, you can effectively spread that payment over a 3-5 year plan (or 36 to 60 months). Spread over 36 months, the modified monthly amount would be $325. Spread over 60 months, the modified monthly amount would be $195. You would never have this option outside of a bankruptcy unless you refinanced the loan.
4. Cure Default. You can catch your car loan up through your Chapter 13 repayment plan. You cannot do this in a Chapter 7 bankruptcy.
5. Stop a Repossession. Once your bankruptcy is filed, something called the automatic stay goes into effect and puts you and your assets into a protective bubble, meaning the car lender cannot repossess your vehicle.
6. Protect Co-Debtors. The automatic stay extends to co-debtors, meaning anyone who cosigned the car loan is also protected.
7. Get Your Car Back. Even if your vehicle has been repossessed, you can get it back if you file Chapter 13 bankruptcy before the vehicle is sold at auction.
8. Handle All of Your Debt. By filing bankruptcy, you are able to handle all of your creditors in one place and at one time. From a mental and emotional standpoint, you no longer have to expend the energy juggling all of your debt.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.

New Chapter 11 Subchapter V Option for Small Business

The ongoing pandemic is crushing small businesses. For the lucky businesses that obtained PPP loans, EIDL, and state grant money, the true financial impact may have been delayed. For other less-fortunate businesses that did not receive such relief, the situation is dire.

Thankfully, there is a new-look Chapter 11 bankruptcy called Subchapter V specifically designed for small businesses that went into effect February 19, 2020. To qualify, the business must be "engaged in commercial or business activities" with total non-contingent liquidated secured and unsecured debt of less than $7.5 million. (The CARES Act increased the debt limit from $2,725,625 for a one-year period).

The Subchapter V Chapter 11 bankruptcy is supposed to support small businesses and provide a more cost-effective and efficient process to facilitate reorganization. The traditional Chapter 11 bankruptcy works pretty poorly for small businesses because it is expensive and overly burdensome. Also, small businesses are commonly privately owned "mom and pop" type businesses, meaning they'd like to retain control and ownership of the business. The traditional Chapter 11 bankruptcy makes that difficult if not impossible in most situations.

Key Features of Subchapter V

1. Subchapter V Trustee. The Trustee is appointed in each case to serve the role as mediator, facilitator, and monitor of the case. This is a brand new role created just for the Subchapter V bankruptcy. I welcome the addition because the small business Debtor will benefit from the additional support.
2. Debtor-in-Possession. The owner remains in control of the business. This is crucial to a small business because typically the business and the owner are quite frankly one-in-the-same.
3. No Absolute Priority Rule. The owner retains ownership of the business. In a traditional Chapter 11 bankruptcy, the small business has to deal with the absolute priority rule, which is typically a hurdle they can't overcome. With the elimination of the absolute priority rule, the Debtor has to commit disposable income to the plan to comply with the "cram down" provisions. This means that general unsecured creditors will most likely get paid pennies on the dollar and allow the owner to retain ownership, which is a big win for small businesses.
4. Required Status Conference and Report. The Debtor has 60 days to hold a status conference and 14 days beforehand to file a report regarding efforts to obtain consensual plan. The goal of the Subchapter V is increased speed and efficiency that I hope leads to increased collaboration with creditors to give the small business a chance to reorganize.
5. Only Debtor May File Plan. The Debtor doesn't have to be looking over its shoulder wondering if a creditor/creditors committee will submit a competing plan.
6. The Debtor has 90 days to file a plan. This is pretty quick as compared to maximum 300 days in a traditional Chapter 11. Once again, the quicker a plan can be confirmed, the less the Debtor spends on case administration.
7. No Disclosure Statement. In a traditional Chapter 11, the Debtor must prepare and file a separate disclosure statement to accompany the plan. Reducing requirements reduces the cost of navigating the Subchapter V.
8. No US Trustee Fees. Traditionally, the Debtor has to pay quarterly fees to the US Trustee's Office based upon distributions that the Debtor makes during the course of the bankruptcy. For a small business where every dollar makes a difference in operating and reorganizing, these fees can be overly burdensome to the point where the Debtor has to forego an expense that would propel the business forward. Not having these fees frees up funds for the small business to operate and reorganize.
9. Plan May Modify a Claim Secured Only by Debtor's Principal Residence. If the funds of the debt secured by the primary residence were used for business purposes, the claim can be modified. This is a provision borrowed from Chapter 12 farm bankruptcies. This is a major benefit because the Debtor can remove the lien in part or in whole depending upon the value of the residence and the amounts of senior liens on the residence. The Debtor can also modify the interest rate
10. Delayed Payment of Administrative Expense Claims.In a traditional Chapter 11, the Debtor must pay administrative expense claims as of the effective date or in the ordinary course of business, which can seriously impede cash flow. In the Subchapter V, the Debtor may spread out the payments of administrative expense claims over the duration of the plan, which ameliorates a cash flow crunch.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.

What is Chapter 7 Bankruptcy?

A Chapter 7 is a bankruptcy where a Chapter 7 Trustee claims and liquidates a Debtor’s non-exempt assets to pay debt. In exchange, the Debtor receives a discharge with some exceptions like student loans and domestic support obligations.

When a person files for bankruptcy they are required to list a bunch of financial information, including what they own (assets), what they owe (debt), income, and expenses. All of the assets are put into a "bin" that is called property of the estate. The goal is for a person to protect as many assets in their "bin" as possible using exemptions. When an exemption is claimed, the person effectively removes the asset from the "bin" and puts it on their "shelf".

When it comes time to handover the "bin" to the Chapter 7 Trustee, the goal is for the "bin" to be empty or filled with assets of minimal or inconsequential value. If there is nothing in the "bin", the Chapter 7 Trustee has nothing to claim an interest in and liquidate to pay debt. If there are only assets of minimal or inconsequential value, the Chapter 7 Trustee will most likely abandon those assets to your "shelf". If there is anything of value, the Chapter 7 Trustee will claim that asset, remove it from your "bin", and place it on his "shelf" to then sell/liquidate to pay your creditors. In an overwhelming number of Chapter 7 bankruptcies, the Trustee claims no assets. As such, the person filing for Chapter 7 bankruptcy retains all of his or her property.

The ultimate goal of the Chapter 7 bankruptcy is to obtain the discharge, which eliminates the filer's legal obligation on his or her debts. The person fills a "box" with all of his or her debts, including but not limited to credit cards, medical bills, car loans, payday loans, mortgage loans, and loans owed to family and friends. Certain debts are pulled out of the "box" and put on the shelf, meaning those debts survive the bankruptcy and are non-dischargeable. The goal is to have as much of the debt stay in the "box" and be incinerated once the discharge is granted. Some debts that come out of the box are student loans and child support obligations to name a few.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.

Chapter 13 Bankruptcy: A Helpful Tool

When the foreclosure moratorium ends at the end of this month, thousands of individuals will be faced with the stark reality that a foreclosure is looming.

In addition, many forbearance programs, a process where a lender agrees that an individual doesn't have to make a payment for a period of time, will also be expiring soon. Individuals who communicated with their lender to ensure that they didn't have to make monthly mortgage payments may have been given wrong or misleading information. Some lenders are putting the payments that should have been made on the back-end of the loan, effectively extending the loan. However, some lenders will be requesting a lump sum equal to the payments that would have been due and owing up front once the forbearance ends.

Here is how a Chapter 13 bankruptcy can help you in Nebraska:

1. Stop Foreclosure. With the bankruptcy being filed, you enter the protective bubble called the automatic stay. Creditors must stop the foreclosure process the second your bankruptcy is filed. You then can bring your mortgage current through your plan.
2. 3-5 Year Plan. You put forth a plan that lasts 3-5 years. At the end of the plan, you are debt free!
3. Handle Creditors Unwilling to Work with You. Creditors are essentially dragged into your bankruptcy. A creditor has 70 days to file a claim. If they don’t, they don’t get any payments and are eliminated 100%.
4. Easy Wage Withholding. If you’re employed, the plan payment is made from a wage withholding, meaning you no longer have to run around each month trying to figure out how and when you are going to make payments on your debt.
5. Asset Protection. Creditors can’t take your property, garnish your wages, or repossess a vehicle while you are in the bankruptcy making plan payments. You retain your property.
6. Protect Co-debtors. The Ch. 13 automatic stay extends to co-signors or guarantors on your debt.
7. Eliminate Non-Support Obligations. In a Ch. 13 bankruptcy you can eliminate non-support obligations stemming from a divorce decree. If you are left paying a property settlement but no longer have the funds or income to do so, a Chapter 13 may be a great solution.
8. Cram down a Car Loan. If you owe more than your vehicle is worth and you acquired the car more than 910 days ago, you can do what is called a cram down, meaning you only pay what the vehicle is worth in your plan instead of what is owed.
9. Pay Only a Percentage of Debt Back. In many cases, you only end up paying a percentage of your general unsecured debt (i.e. credit cards and medical bills) back. For example: You have $100,000 of credit card debt. You may only pay 50% or $50,000 back. The other 50% gets eliminated (discharges) at the end of your plan.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.