bankruptcy blog
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.
Bankruptcy & Domestic Support Obligations
Divorce and debt typically go hand-in-hand. The interplay of bankruptcy and domestic support obligations can be complex. What follows is a brief overview of the impact a bankruptcy has on you if you are the person paying the obligation or the person receiving the support payment.
Person Paying Child Support/Alimony Files Bankruptcy
In Nebraska, you are required to list the recipient of the child support or alimony on the bankruptcy paperwork as a creditor even if you are current on making those payments. This will most likely include the individual you owe, but may also include the state agency assigned to collect the support (i.e., Nebraska Child Support Enforcement). You are required to list in the bankruptcy paperwork the amount that you are actually paying as a deduction from your wages or separately as a monthly expense.
Chapter 7: You cannot discharge or eliminate your legal obligation to pay child support or alimony, including any amounts that you were behind on prior to filing your case. However, the bankruptcy court can make a determination that a property settlement is in the nature of support even if your divorce decree states otherwise.
Chapter 13: In order to have your plan confirmed, you have to certify that you are current on child support and/or alimony payments. To receive your discharge at the end of the Chapter 13 bankruptcy, you have to certify that you made all required support payments during your case. If, at the time you file your Chapter 13 bankruptcy, you are behind on payments, you will be required to pay that amount in full through your plan. In a situation where you have a significant arrearage but can now pay your ongoing support obligations, a Chapter 13 bankruptcy may be your best option.
Filing a bankruptcy does not stop a court proceeding to establish or modify an order for support obligations. It does not stop the collection or payment of support obligations through wage withholding. Your license can still be suspended. Your tax refund can still be intercepted.
Person Receiving Child Support/Alimony Files Bankruptcy
In a bankruptcy, your right to receive child support and alimony are assets that you must list in your bankruptcy paperwork. If the person obligated to pay you support owes you for back support, then you must list that as an asset as well. The Nebraska Chapter 7 and 13 Trustees appointed to oversee your bankruptcy do not consider that asset as collectible. As such, you retain that asset.
You must also list the child support and alimony received as income in your bankruptcy paperwork. If you do not receive the support consistently, then you should notify your bankruptcy attorney who will make sure to include that note in your paperwork.
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.
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.