bankruptcy blog
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.
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.
What to Expect in Your Bankruptcy
Filing for bankruptcy does not have to be stressful. Hiring an experienced bankruptcy attorney can ensure that your path towards a fresh start is a smooth one.
Getting Started
The first step is to schedule a free initial consultation with one of our experienced bankruptcy attorneys. During the consultation, the attorney will listen to your story, addressing your questions and concerns regarding your financial distress. By the end of the consultation, you will find relief knowing your bankruptcy options for dealing with your debt, which are typically a Chapter 7 or Chapter 13 bankruptcy.
Attorney’s Fees and Filing Fee
In a Chapter 7 bankruptcy, the attorney’s fees and filing fee must be paid prior to drafting and filing your case. In a Chapter 13 bankruptcy, only a portion of the attorney’s fees and the full filing fee are due prior to filing your case. The majority of attorney’s fees are paid as a part of your Chapter 13 repayment plan. Our Accounts Manager will take the time to ensure that you understand the fees to be paid and the scope of our representation.
Financial Information and Documentation
In any bankruptcy, you are required to provide information pertaining to property you own, debts, income, and expenses. Typical information to provide includes pay stubs, bank account statements, and tax returns. Also, you will be required to complete a Credit Counseling Course within 180 days prior to filing. Once all requested information has been received, the bankruptcy paperwork can be drafted and reviewed with your bankruptcy attorney.
Case Filed
After you sit down with your bankruptcy attorney to review and sign the paperwork, you are ready to file your bankruptcy. Once filed, your creditors receive notice and the bankruptcy laws prohibit them from contacting you or otherwise attempting to collect a debt. You will have to appear one time at court for the First Meeting of Creditors. The bankruptcy trustee, who is assigned to oversee your case, conducts the meeting. We support you to answer the trustee’s questions regarding the documents that we will have reviewed prior to filing.
The Discharge Eliminates Your Debt
At the end of your case, the goal is to discharge or eliminate as much debt as possible. Some debts cannot be discharged, including student loans, some tax debts, and domestic support obligations (child support and alimony). In a Chapter 7, the court typically discharges your debt approximately three months after you file. In a Chapter 13, the discharge is entered once you make the final payment of your 3 to 5 year plan.
Til Debt Do Us Part
One of the main stressors leading to divorce is debt. Debt may be a main point of contention before, during, and after divorce. You and your former spouse may have decided to split all of your debt 50/50. You may have kept only the debts in each of your respective names. Your spouse may have agreed to refinance the home mortgage to remove your name. The multitude of outcomes depends on the unique facts of your case. However, no matter the outcome, you believe that you resolved the debt issue once and for all when your divorce decree was finalized. If only it were that easy.
What does a divorce decree really do with debt?
Removing the romance, marriage and divorce is simply an agreement between two people. Debt is typically owed to a third party. A divorce decree states how the marital and non-marital debt is to be handled between the spouses. It does not impact the third party creditor’s rights. If, in the future, one spouse does not follow the decree, the creditor who is owed the money does not care what your decree says. They weren’t a party to the divorce
For example, suppose as a part of the divorce, Spouse A agreed to pay 100% of a joint credit card. In the future, Spouse A becomes unemployed and stops paying the credit card payment. The credit card company will seek payment from Spouse B as well. It won’t take into consideration what Spouse A and Spouse B agreed to as a part of the divorce.
What happens when a person files for bankruptcy after a divorce is final?
The federal bankruptcy law’s impact on divorce-related debt can be daunting and confusing. Many times, Spouse B receives the bankruptcy notice without any forewarning from Spouse A.
If you are Spouse B, you have no idea what this means and how it impacts the debts you had dealt with in your divorce. Your spouse agreed to pay 100% of the credit cards that were in both your names. Chapter 7 and Chapter 13 bankruptcy treat divorce-related debts in different ways.
In a Chapter 7, the filing ex-spouse may be able to discharge or eliminate his or her obligation to the credit card company. However, the filing ex-spouse is not exempt from the obligation to the non-filing ex-spouse to repay 100% of the credit card debt pursuant to the divorce decree. The person filing the bankruptcy may not ultimately receive as a fresh of a start as originally thought.
In a Chapter 13, the outcome is different. The filing ex-spouse can discharge their obligation to both the credit card company and the non-filing ex-spouse to pay 100% of the credit card debt pursuant to the divorce decree. This is sometimes referred to as the super-discharge. It may be the main motivating factor for filing a Chapter 13 over a Chapter 7.