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.

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.

When to File Chapter 13 Bankruptcy in Nebraska

Figuring out when is the best time to file for Chapter 13 bankruptcy doesn’t have to be hard. In many situations, the person dealing with financial distress has been trying to figure out how to handle their debt for months or even years. The person is constantly juggling money, deadlines, and how they’re going to get it all accomplished. Chapter 13 bankruptcy exists as a solution to allow people in Nebraska to consolidate debt and handle it all in one place at one time. The creditors get dragged into the bankruptcy system and must partake in the 3-5-year repayment plan.

There are some factors to evaluate when figuring out whether Chapter 13 bankruptcy is a viable solution for the financially distressed Nebraskan.

1. Good Income, But Not Enough. You always pay your debt on time, but you run into a situation where you never get ahead. The Debt continues to grow with no sign of stopping. On paper, you make good income, but it is not enough to pay down your debt or to build any savings. The Chapter 13 bankruptcy is largely based upon your disposable monthly income or excess monthly income, basically the amount of money you have left over ever month after considering general living expenses.
2. Temporary or Permanent Reduction of Income. You were out of work for a short period of time or now have taken a new job with a significant pay cut. Your income no longer stretches as far as it used to, and you have fallen behind on your bills. You do not have an ability to catch up or get ahead.
3. Behind on Mortgage or Car Loan. For whatever reason, divorce, job loss, death of a love one, etc., you have fallen behind on your mortgage or car loan. You’ve tried to complete the loss mitigation packet with your mortgage company and have gotten nowhere. You’ve tried to work out a deal with your car lender, but they want too much. The Chapter 13 bankruptcy allows you to cure the arrears, the amount you have fallen behind in your 3-5-year repayment plan.
4. Tax Debt. You have recent income tax debt or other tax debt that you cannot afford to resolve through a repayment plan. You can resolve your tax debt by handling it through a Chapter 13 bankruptcy.
5. Status Quo Keeps You in Debt Cycle. Iusually spend some time comparing the Chapter 13 bankruptcy with the alternative, which is the status quo. I call it the “do nothing” approach. You always have the option of doing nothing other than what you’re currently doing. However, there is typically no clear light at the end of the tunnel with this option. For example: I had a client who was faced with $2,500 per month in minimum monthly payments. In a Ch. 13 she was able to repay 100% of her debt through a 5-year repayment plan making monthly payments of $1,000 and will be debt free at the end of the Chapter 13 plan.
6. Asset Retention. In a Chapter 13 bankruptcy, you keep your property. The plan is funded through post-filing excess/disposable income. Pause before you start liquidating your retirement accounts or other assets before considering Chapter 13 bankruptcy as a viable solution to handle your debt. I have seen countless times where a client liquidates assets to handle debt when they could have retained the asset and still handled the debt.
7. Accelerated Debt Recovery. If you successfully complete your repayment plan, you are debt free in 3-5 years. That is a much better situation than paying minimum payments on credit cards indefinitely. I frequently am asked, “how will bankruptcy negatively impact me?” I usually respond with the fact that a Chapter 13 bankruptcy puts you in a better position financially quicker than if you were trying to resolve this with another non-bankruptcy solution.
8. Creditors Must Participate. The bankruptcy automatic stay, the provision in the bankruptcy laws that protects you, prohibits creditors from attempting to collect a debt directly from you. What that means is that all the phone calls, collection efforts, and lawsuit stop. The general unsecured creditors (i.e. medical bills, credit cards, consolidation loans, etc.) must file a claim within 70 days of your case being filed in order to participate in the distribution. If they snooze, they lose. Also, it is a lot easier to deal with all your creditors in one place instead of scattered all over the place.
9. Stop Garnishments. The garnishment laws in Nebraska allow for 15% to 25% of your gross adjusted wages to be garnished. For some people, this involuntary repayment of debt causes you to default on your other debt such as your house or car. It creates a domino effect. You can get into a Chapter 13 to stop the garnishment and propose a repayment plan based upon your budget as opposed to an unforgiving percentage of your income.

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.

Bankruptcy & Foreclosure in Nebraska

In Nebraska, most home foreclosures start with the mortgage company filing a Notice of Default with the Register of Deeds in the county where the home is located. The homeowner then receives the Notice of Default by certified mail. Thirty (30) days after mortgage company files the Notice of Default, it will, through its attorney, publish a Notice of Sale for a minimum of five consecutive weeks. The home is then sold at a foreclosure auction.

This process, called a Trust Deed Foreclosure, is quick because Nebraska state law does not require that your mortgage company file a lawsuit to foreclose as there is not right of redemption. This means that once the foreclosure sale takes place, you cannot reinstate or take back ownership of your home.

A Chapter 13 bankruptcy can be a useful tool if you wish to retain your home. As long as the bankruptcy is filed prior to the foreclosure sale, you will be able to retain your home by paying the mortgage arrearage through a Chapter 13 bankruptcy repayment plan. In Nebraska, you will also be required to make your regular monthly mortgage payment.

For example: You were unemployed for eight months and could not pay your mortgage. You are now $8,000 behind and you have received the Notice of Default. You are now back to work and have started making regular mortgage payments. Because of your current income, you do not qualify for a loan modification. Coming up with $8,000 to bring your loan current is not in your budget. You can file a Chapter 13 bankruptcy, stop the foreclosure, and cure your $8,000 mortgage arrearage through a 3-5 year plan.

If you are facing a foreclosure and do not wish to retain your home because you owe more than it is worth, it needs costly repairs, or you can no longer afford  the mortgage payment, filing a Chapter 7 or Chapter 13 bankruptcy can protect you from the risk of your mortgage company suing you for potential deficiencies.

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Chapter 7 Bankruptcy: Five Common Misconceptions

1. Chapter 7 bankruptcy will ruin my credit for 7 years

It is true that the bankruptcy is reported for up to 7 years after you file your bankruptcy. However, it does not negatively affect you for that long. At the end of your Chapter 7 bankruptcy, you will be debt free (with some exceptions like student loans), which positively impacts your credit. I’ve had clients finance car and home purchases without issue after their bankruptcy cases.

2. I’m going to lose my house and car

This almost never occurs . In Nebraska, you can protect and keep your home as long as you are current on payments when you file and your home has $60,000 or less in equity.

As for your car, you can retain and keep it, if you’re current on payments and your vehicle has less than $10,000 in equity. This is because in Nebraska, you can use the vehicle exemption, which is $5,000, and the wild card exemption, which is $5,000, to protect one vehicle. For a couple filing the Chapter 7 bankruptcy jointly, those amounts can be doubled.

3. Filing bankruptcy is only for people that are behind on making payments

You don’t have to be behind to file bankruptcy. Actually, the best time to look into whether to file is prior to or soon after defaulting on payments.

Example: Your monthly minimum payments are $1,000. You were able to keep up with the payments until your former girlfriend decided she was going to move out. With less income coming into your household, you won’t be able to make next month’s credit card payments.

4. I make too much money to file Chapter 7 bankruptcy

The bankruptcy law includes something called the Means Test, which takes an average of your monthly income for the last six (6) months from all sources (excluding Social Security income), annualizes it (multiplies by 12), and compares it to the median income for your household size. If you’re below the median, you are good to go with a Chapter 7 bankruptcy. If you are above median, you usually are not. However, the Means Test has a 2^nd step if you’re above median income that takes into account qualified and allowed expenses (i.e. child support payments, taxes, child care, etc.). Sometimes you may still qualify for a Chapter 7 bankruptcy after this 2^nd step even though initially your income was “too high”.

5. If I file, my spouse has to file bankruptcy with me

You are allowed to file a bankruptcy without your spouse. Sometimes this makes a lot of sense. Two common scenarios are when your debt was incurred prior to marriage or you have business-related debt that is only in your name. If you are married and decide to file Chapter 7 bankruptcy without your spouse, you may still have to provide your spouse’s income and assets. However, your spouse’s identifying information, such as Social Security number and name do not have to be disclosed.

There is a lot of misinformation and fear on the internet regarding Chapter 7 bankruptcy, much of which is false and keeps people from using a viable solution to address their debts and move forward.

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Learn more about Chapter 7 bankruptcy.

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When Filing Chapter 13 Bankruptcy Makes Sense

A chapter 13 bankruptcy, which involves a 3-5 year repayment plan, is almost always a better option for the financially distressed than the current status quo.

I use the analogy of the ever-growing gobstopper. Without filing bankruptcy, you pay your monthly minimum payments on your credit cards. Because you’ve made those payments, you end up running out of disposable cash before your next paycheck. As a result, you use your credit cards again to pay for basic living expenses.

For example: Your monthly minimum credit card payments are $950. A large chunk of that goes towards interest. Before your next pay day, you run out of cash and have to charge $950 for new tires and summer soccer registration for your kids. The gobstopper is bigger the next month even though you started it off by taking a big chomp out of it. On top of paying those monthly minimum credit card payments, you have a monthly vehicle payments totaling $400, medical bills totaling $150 per month, and a monthly student loan payment of $400. You pay $1,900 per month on debt, but are not getting anywhere.  You make $4,500 take-home pay per month, but feel as though you are living paycheck to paycheck.

You may never reach a point where you are unable to pay your minimum payments. However, if you look at the back of your credit card statement, you will find a little section that shows you how much you will eventually pay in interest and how long it will take to pay off the balance interest if you only pay the minimums, assuming you make no new purchases.

Now let’s add some more layers and see what a Ch. 13 bankruptcy would do in this scenario:

• You owe $21,000 on a car loan, which includes the total interest you would pay over the lifetime of the loan
• You owe $5,000 in medical debt
• You owe $15,000 on credit cards
• The estimated attorney’s fees to be paid in your Ch. 13 is $4,000
• The Chapter 13 Trustee receives up to 10% of the payout, which is $4,500
• If you were to pay 100% of all of your debt back, the total payment would be $45,000, which can be paid over 5 years.
• The monthly payment would be $750/month for 60 months.
• Even adding the student loan payment of $400 only brings the monthly total to $1,150, which is much better than paying $1,900/month.

The benefits of filing are that:

1. You can pay for your financed and leased vehicles through your Chapter 13 bankruptcy.
2. You keep all of your property even if that property is not exempt and would be liquidated in a Chapter 7 bankruptcy.
3. You can be debt free in 3-5 years.
4. You pay most of your attorney’s fees through the plan.
5. You typically pay less than 100% of unsecured debt through the plan without interest. The unsecured debt you don’t pay gets discharged (eliminated) at the end of your plan with some exceptions like student loans and some tax debt. If, through your plan, you only paid 50% of your credit card and medical debt, the other 50% would be discharged, meaning you would not be liable for paying that once you made your last plan payment.
6. You keep making your monthly mortgage payments directly to your mortgage company.
7. You make one payment a month that handles all of your debt (except for your mortgage payment and student loan payments). In most cases that payment is paid directly from your paycheck, which is convenient and stress-free.

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