bankruptcy blog
Protecting Your Property in Nebraska Bankruptcy Part 2 of 3: Bank Accounts, Tax Refunds, and Retirement Accounts.
When faced with the prospect of bankruptcy, you want reassurance, knowing what will happen with your property. In an overwhelming majority of Chapter 7 bankruptcies, the person filing retains all of his or her property, including bank accounts, tax refunds, and retirement accounts. In Nebraska, there are laws called exemptions that you can use to protect your property in a Chapter 7 bankruptcy.
As I discussed in Part 1 of this series regarding exemptions to protect your home and car, for Nebraska exemption laws, changes are on the way. In early February 2018, the Nebraska Unicameral passed Legislative Bill 105 by a vote of 47-0, which significantly changes exemption laws (Nebraska Revised Statutes 25-1552 and 25-1556). The bill is waiting on the governor’s signature to be made law. In a three part series, I will discuss the exemptions as they are now and the presumed impact of the new law.
Bank Accounts
You can use the wild card exemption (Neb. Rev. Stat. § 25-1552) to protect the amount of money you have on deposit in your checking or savings accounts on the date of filing. The amount does not take into outstanding checks that have yet to clear. If you are filing a Chapter 7 individually, you can protect up to $2,500. If you are filing a Chapter 7 with your spouse, you can protect up to $5,000. If the only source of the funds is from Social Security, the amount is protected 100%.
Example 1: You file a Chapter 7 bankruptcy individually and have $4,000 in your account. The money exclusively is comprised of income from wages. You have an outstanding check for $1,200 for rent that your landlord has yet to cash or deposit. As such, you have $4,000 not $2,800 that you need to protect. It is advisable to wait until the check clears and the amount in your account falls below $2,500 and then file your case unless there is an emergency pending such as a wage garnishment.
Under the new law the wild card exemption is set to double from $2,500 to $5,000 per person. This is a significant change that will allow Nebraskans to have a stable base when exiting his or her bankruptcy with a fresh financial start.
Example 2: You and your spouse file Ch. 7 together and have $7,500 in your bank account. Under the new law, you’d be able to exempt those funds 100%. Under the old law you would have had to turnover $2,500 to the Trustee to distribute to your creditors.
Tax Refunds
When you receive your tax refund, it is advisable to deposit that money into a separate bank account other than where your paychecks, child support, Social Security, or business income is deposited. In Nebraska, the Earned Income Credit portion of your tax refund is exempt 100% (Neb. Rev. Stat. § 25-1553). You can also use the wild card exemption to protect your tax refund. Under the new law, you’ll have an additional $5,000 of wild card exemption to use.
Example 1: Your tax refund is $7,500. The earned income portion is $2,500. You deposit the entire tax refund into a separate account. No other money is deposited into the account. You file Ch. 7 bankruptcy individually. You use the Earned Income exemption to protect the $2,500, leaving $5,000 to that you need to protect. You only can protect $2,500 of that $5,000 using the wild card exemption, leaving $2,500 unprotected. Under the new law, you’d be able to protect the entire amount.
Example 2: Your tax refund is the same as in Example 1. Instead of depositing it into a separate account, you deposit it in the account where you also receive your paycheck. You are unable to claim the Earned Income exemption, leaving $5,000 unprotected. Under the new law, you would be able to protect an additional $2,500, still leaving $2,500 unprotected.
Retirement Accounts
In Nebraska, you can protect your retirement account up to an amount reasonably necessary for the support of yourself and any of your dependents (Neb. Rev. Stat. § 25-1563.01). In order to use the exemption, the account cannot have been established or amended to increase the contribution by the individual within the two years prior to filing. The retirement plan must also qualify under section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code.
In effect, this protects most retirement accounts 100%. This is a main reason why it is highly inadvisable to liquidate any retirement accounts to pay your debt. The new law does not change or alter this exemption.
Example: You have a 401(k) with $10,000 that you started three years ago and you are 50 years old. Your retirement account will be protected 100%.
Rest assured that you most likely will be able to protect and retain all of your property. The trustee, the person assigned to liquidate assets in a Chapter 7 bankruptcy, most often cannot claim any property because you are able to exempt or protect it. However, each situation is unique.
Protecting Your Property in Nebraska Bankruptcy Part 1 of 3: House and Vehicle.
When faced with the prospect of bankruptcy, you want reassurance, knowing what will happen with your property. In an overwhelming majority of Chapter 7 bankruptcies, the person filing retains all of his or her property, including house and vehicle. In Nebraska, there are laws called exemptions that you can use to protect your real and personal property in a Chapter 7 bankruptcy.
For Nebraska exemption laws, changes are on the way. In early February 2018, the Nebraska Unicameral passed Legislative Bill 105 by a vote of 47-0, which significantly changes exemption laws (Nebraska Revised Statutes 25-1552 and 25-1556). The bill is waiting on the governor’s signature to be made law. In a three part series, I will discuss the exemptions as they are now and the presumed impact of the new law.
House
In Nebraska, the homestead exemption allows the person filing the Chapter 7 bankruptcy to protect up to $60,000 of equity in his or her primary residence (Neb. Rev. Stat. § 40-101). It also allows for the protection of up to $60,000 of sales proceeds from the sale of the primary residence for a period six months as long as those proceeds are not commingled (Neb. Rev. Stat. §§ 40-113, 40-116). In short, most individuals filing for Chapter 7 bankruptcy retain their homes because all of the equity is protected. The new law does not impact the homestead exemption.
Example 1: Your primary residence is worth $150,000 with a mortgage owed of $100,000, meaning you have $50,000 of equity. You are able to protect your home because the homestead exemption allows you to protect equity in your home up to $60,000. If this were, however, a rental property that you do not live in, you would not be able to protect the home using the homestead exemption.
Example 2: The sale of your primary residence closes on February 28, 2018. From the sale, you receive net proceeds of $40,000. Instead of using those funds to purchase a new home, you deposit them into an account where no other funds get deposited. You file Chapter 7 bankruptcy three months later. You are able to exempt the entire $40,000. If you deposited that money into an account where you also have your paycheck deposited, you would not be able to protect those funds with the homestead exemption.
Vehicle
In Nebraska, there is currently no specific vehicle exemption. In order to protect your vehicle, you have to use a combination of the “tools of trade” exemption (Neb. Rev. Stat. § 25-1556(4)) and the ”wild card” exemption (Neb. Rev. Stat. § 25-1552). The tools-of-trade exemption allows you to protect up to $2,400 of equity and the wild card exemption allows you to protect up to $2,500 of equity. If you are filing with your spouse, you each have available your own exemption. In order to utilize the tools of trade exemption on your vehicle, you must use the vehicle as work transportation or in your business.
Example 1: Your truck is worth $10,000 with a vehicle loan owed of $8,000, meaning you have $2,000 of equity. If you use the truck as transportation for work, you can protect the $2,000 of equity because the tools-of-trade exemption allows you to protect equity up to $2,400.
Once the new exemption law goes into effect, there will be a vehicle specific exemption where you can protect up to $5,000 in a vehicle. Gone is the requirement that the vehicle be used as work transportation or in your business. This significantly benefits the elderly and disabled who do not work or run a business. Additionally, the wild card exemption has doubled from $2,500 to $5,000. The wild card exemption can be used on any personal property. If you are filing with your spouse, you each have available your own separate vehicle and wild card exemptions.
Example 2: Now let’s say your truck is worth $18,000 with a loan owed of $8,000. With equity of $10,000, you’d lose your vehicle under the current law because you’d only be able to protect $4,900 of the equity. However, under the new law you’d be able to protect your vehicle because you’ll have $10,000 worth of exemptions ($5,000 vehicle exemption and $5,000 wild card exemption).
Rest assured that you most likely will be able to protect and retain all of your property. The trustee, the person assigned to liquidate assets in a Chapter 7 bankruptcy, most often cannot claim any property because you are able to exempt or protect it. However, each situation is unique.
Bankruptcy: A Fresh Start
You walk out of your house in the morning to find that your vehicle is not in the driveway. You look again, discovering that it has not suddenly reappeared. Bewildered, a multitude of thoughts rush through your head. Was it stolen? Did it get repossessed? How will I get to work? What do I do now?
You just started your new job after being unemployed for several months. During that time, you fell behind on your bills, using up most of your savings and cashing out a retirement account. You had to decide whether to make your car loan payment or feed your kids. You chose the latter. Your ex-spouse only sporadically pays the court-ordered child support payment of $500. He now owes you close to $60,000.
You’re the responsible one. You juggle it all. You’re doing the best you can.
For the last couple of months your phone has been blowing up nonstop with calls from creditors. Past-due notices and final requests are stockpiled on your kitchen table. Each dollar and debt is tracked on a notepad. You have been figuring out how you could make this all work. It is overwhelming.
You walk back inside and look for your car loan statement to find a number to call because you’re worst fear has come true, your car lender repossessed your car. You know exactly where it is. The person on the other side of the phone explains that you can cure your car loan with a $2,500.00 payment today. You don’t receive your first paycheck for two weeks and have $1,000 in your bank account, the last remaining from your tax refund. You have rent, utilities, and groceries to pay for, which will eat up that money.
You are not alone. In the first three months of 2017, 966 bankruptcy cases were filed in Nebraska. The reasons for filing a bankruptcy run the gambit from overwhelming medical debt to a sudden loss of income. Considering bankruptcy is a smart decision if you are having difficulty paying your debt on top of your monthly living expenses, including items such as your rent, mortgage, groceries, and car insurance.
You may qualify to file a Chapter 13 where you retain all of your property and pay some or all of your debts though a payment plan that lasts 3-5 years. A Chapter 13 can help you save your car or house if you have fallen behind. You may qualify to pay only a portion of your unsecured debt (medical bills and credit cards) without interest, which is a paramount benefit of the Chapter 13 bankruptcy.
You may qualify to file a Chapter 7 where you can keep all of your property and eliminate all of your debt with some exceptions like student loans, child support, and most tax debt. By filing a Chapter 7, you would receive the benefit of a fresh financial start, allowing you to move on to rebuild your credit sooner rather than later.
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.
You’re not in this alone.