bankruptcy blog
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.
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 2nd 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 2nd 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.
Learn more about Chapter 7 bankruptcy.
Bankruptcy as a Financial Planning Tool
You want to save more for retirement. You want to save for your kid’s college. You want to plan for your financial future and set financial goals. Standing in the way is your debt. You can’t seem to get ahead or make a dent on the amount of debt you have. It is the ever growing gobstopper. Each month your debt seems to mount even though you never miss a payment. You are current on everything. However, that $50,000 credit card debt is now sitting at $75,000. Everything is maxed out.
As is human nature, we have two immediate responses fight or flight. For the fighters out there, you start searching for ways to solve this problem head on. You start looking at what you have that you could turn into cash to throw at the debt. Maybe it is your retirement account or the equity you have in your house. Maybe it is your mother’s wedding ring. Whatever it is, you’re willing to part with it to deal with the debt problem that you are faced with. That may be a shortsighted response.
A much overlooked financial planning tool is a personal bankruptcy. A bankruptcy is an opportunity for a fresh start, a new financial beginning. It allows you to address your debt and move forward with setting and achieving your financial goals. You no longer feel stuck.
Example 1: John is 50 years old, married, and the guardian of his two minor grandchildren, ages two and five. He qualifies for a Chapter 7 bankruptcy. He has $50,000 in credit card debt and is current on making the payments. However, he has now maxed out all of the cards and is stuck. He and his wife have a goal to start saving something for their grandkids college, but can’t because of their debt. He has $50,000 in a retirement account that he is thinking of withdrawing to pay down his debt. If he does this, he will have $0 saved for retirement and will have to pay taxes on the amount withdrawn. Alternatively, he could file a Chapter 7 bankruptcy and be debt free in as little as 3-4 months. At the same time, he could keep his retirement account in place because it is exempt (protected). The money he was spending making minimum monthly payments on credit cards can now be used to save for his grandchildren’s college.
Example 2: John has $250,000 in his retirement account and a house with $60,000 of equity. He has $100,000 in credit card debt and does not qualify for Chapter 7 bankruptcy because his income is too high. Rather, he qualifies to file a Chapter 13 bankruptcy, which involves a five (5) year repayment plan where he will pay some or all of his debt back. The amount paid on debt depends on John’s income and the value of his assets. At the end of the plan, he will be debt free. John gets to keep all of his assets, including his retirement account and his house, which will most likely continue to accrue value.
If you or someone you know is in financial distress because of debt, bankruptcy should be considered as a viable solution. Liquidating an asset may ultimately do more harm than good. A bankruptcy may allow you to move forward with setting and achieving your financial goals.
Learn more about our legal services.
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:
- You can pay for your financed and leased vehicles through your Chapter 13 bankruptcy.
- You keep all of your property even if that property is not exempt and would be liquidated in a Chapter 7 bankruptcy.
- You can be debt free in 3-5 years.
- You pay most of your attorney’s fees through the plan.
- 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.
- You keep making your monthly mortgage payments directly to your mortgage company.
- 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.
Transferring Property Before Bankruptcy
“I can just give my truck to my brother, right?” Many clients and prospective clients have asked me some variation of this question. The quick answer is an outright “no” because doing so may be a fraudulent transfer.
Under Nebraska State Law, a person cannot simply transfer an asset without receiving reasonably equivalent value in exchange for the transfer if that person is insolvent or if the person becomes insolvent as a result of the transfer. Otherwise, a person would have incentive to transfer all property to another without receiving anything in exchange if they were trying to shield assets from their creditors or from liquidation in a Chapter 7 bankruptcy.
For example: You own a truck worth $15,000. As I have previously discussed, you will be able to exempt $10,000 under the new Nebraska Exemption Laws, leaving $5,000 as unexempt (unprotected) and subject to liquidation in a Ch.7. If you simply re-titled the vehicle in your brother’s name without receiving any payment and then file Chapter 7 bankruptcy, the Chapter 7 Trustee may go get the truck from your brother and undo the transfer.
The look-back period under Nebraska State Law is four (4) years, meaning that your creditors or the Chapter 7 Trustee can look at all transfers made within four (4) years to see whether or not a fraudulent transfer has occurred. Under bankruptcy law, the look-back period is two (2) years.
Under bankruptcy law, you may be denied your discharge (elimination of legal obligation on your debts) if you transferred property within the one year prior to filing with the intent to hinder, delay, or defraud a creditor. A creditor would have to bring a lawsuit (called an adversary proceeding) against you to have the Bankruptcy Court determine that you should be denied a discharge. Even though these are uncommon actions that creditors bring, it is still something to be mindful of.
For example: If you gave title to your brother without him paying for it, you would have to list that in your eventual bankruptcy paperwork. A creditor that is paying attention may use that as evidence that you should be denied your discharge.
You can avoid these issues by doing one of the following:
- Receive proper value for the transfer. Your brother can buy your truck for $15,000.
- Undo the transfer. Have your brother transfer the truck’s title back to you.
- File a Ch. 13 bankruptcy. You can repay the value of the transferred asset to your creditors through a 3-5 year repayment plan.
- Wait to file. If you cannot do one of the above actions, you can choose to wait beyond the reach of the look-back period.
Protecting Your Property in Nebraska Bankruptcy Part 3 of 3: Tools of Trade, Jewelry, and Household Goods.
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 property, including tools of trade, jewelry, and household goods. 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 and Part 2 of this series, changes are on the way for exemption laws. In early February, the Nebraska Unicameral passed Legislative Bill 105 by a vote of 47-0, which significantly changes Nebraska exemption laws. The governor has signed the bill and it will become law sometime late July 2018. In the last part of this series, I will discuss the exemptions as they are now and the presumed impact of the new law regarding tools of trade, jewelry, and household good.
Tools of Trade
Currently, you can exempt $2,400 worth of tools of the trade. As discussed in Part 1 of this series, vehicles are currently included.
Example 1: You own and operate a cabinet-making business as a sole proprietor and are unmarried. Your tools are worth $10,000. Under the current law, you’d only be able to protect $2,400 of that value with the tools of trade exemption. You could also use the wild card exemption to protect another $2,500. That would leave some of your tools exposed to being liquidated to pay your creditors.
Under the new law, the tools of trade exemption will be $5,000. It will no longer cover vehicles because the law explicitly excludes vehicles as a tool of the trade. The wild card exemption also doubles to $5,000.
Example 2: You have the same tools as stated above. Under the new law you’d be able to exempt all of your tools, meaning you could continue operating your cabinet-making business without having to replace equipment after your Ch.7 bankruptcy concludes.
Jewelry
In Nebraska, you can protect jewelry as an immediate personal possession for 100% of the value. This includes weddings rings, earrings, and inherited jewelry such as grandma’s broach. The new law does not change or impact this exemption.
Example: You own a wedding band worth $5,000. You are able to protect that ring 100%.
Household Goods and Furniture
In Nebraska, you can protect household goods and furnishings valued at $1,500 total. If you and your spouse are filing, you can double the exemption to $3,000. Using garage sale or Craigslist values, it is highly unlikely that you have household goods and furniture exceeding $3,000 in total value. If you do, you can always use any available wild card exemption to further protect your property.
Example 1: You and your spouse have furniture and household goods valued at $2,500. When you file your joint Ch. 7 bankruptcy, you will be able to protect that property because you can protect up to $3,000 of household goods.
Under the new law, the exemption doubles to $3,000 per person. If you and your spouse file, you can double the exemption to $6,000.
Example 2: The total value of all of your household goods and furniture is $9,000, which includes some higher-valued antiques that your mother gave you when she moves into the long-term care facility. You and your spouse file Ch. 7. Under the current law, you’d be at risk of losing some of those items in a Ch. 7 bankruptcy. Under the new law, you’d be able to exempt $6,000 of the property with the household goods and furniture exemption. If you have available wild card exemption, you’d be able to protect the other $3,000 worth of value.
Rest assured that you most likely will be able to protect and retain all of your property in a Chapter 7 bankruptcy. The trustee, the person assigned to liquidate assets in a bankruptcy, most often cannot claim any property because you are able to exempt or protect it. However, each situation is unique.