Nebraska Debt and Bankruptcy Blog

I recently came across an excellent series of videos on the basics of consumer bankruptcy created by the U.S. Courts.  There are nine videos in total, and here is the link to watch them all.

There is a limit as to how much property is protected in bankruptcy, and debtors who own a significant amount of property are frequently tempted to transfer the property out of their name before the case is filed.  Anticipating this temptation, bankruptcy laws give the Chapter 7 Trustee the power to retrieve the transferred property through what are known as fraudulent conveyance laws.  To make matters worse, in most cases I have reviewed involving such transfers, the property would have been protected had it remained in the debtor’s possession. 

What is a Fraudulent Conveyance?

Generally speaking, a Nebraska Chapter 7 Trustee may void transfers of property made within four years of bankruptcy if the property was transferred without receiving something of equal value in exchange.

Bankruptcy Code Sections 544 and 548 provide the rules involving fraudulent transfers, and to succeed in voiding a transfer the Trustee must prove that  “(1) an interest of the debtor in property; (2) was voluntarily or involuntarily transferred; (3) within [four years] of filing bankruptcy; (4) where the debtor received less than reasonably equivalent value; and (5) debtor was insolvent at the time of the transfer or became insolvent as a result thereof. Schnittjer v. Houston (In re Houston), 385 B.R. 268, 272 (Bankr. N.D. Iowa 2008).

New Cases.

Two court rulings impacting Nebraska bankruptcy cases in this area were recently decided.  On November 16, 2007, debtor Mary Joan Lumbar signed a Quitclaim Deed transferring her home to her parents, and then filed a Chapter 7 case on December 24, 2008.  The Minnesota bankruptcy court ruled that even thought the home was transferred for less than fair value, the transfer was protected since had the debtor not transferred the home it would have been protected under the Minnesota homestead exemption.  The Court essentially applied a “no harm, no foul” rule.  However, the Eighth Circuit Bankruptcy Appellate Panel disagreed and stressed the fact that  debtor loses the right to exempt property once it is transferred out of the debtor’s name. Sullivan v. Welsh (In re Lumbar), 457 B.R. 748 (2011).   As a result, a home that would have been protected in the hands of the debtor became unprotected because of an ill-planned transfer.

The second case involved a Nebraska debtor who received a $5,201 tax refund and then paid $1,921.72 to their bank shortly before filing Chapter 7.  In re Anders, 2011 Bankr. LEXIS 5049, Nebraska Case #11-40710 (2011). The Chapter 7 Trustee sought to avoid the payment to the bank, and the debtor objected claiming that the tax refund proceeds were exempt in the hands of the debtor and therefore the payment should not be voidable.  Applying the Sullivan ruling, the Court stated that property ceases to be protected by exemption laws once they leave the debtor’s possession, thus the Trustee was able to recover the payment.  Again, property that would have been protected was lost because it was transferred prior to bankruptcy.

Applying the new rules.

The obvious lesson to be learned in these cases is that a bankruptcy attorney should not only prepare a list of all property currently owned by a debtor, but a list of property that was transferred in the four (4) years prior to bankruptcy.  Question #10 of the Statement of Financial affairs requires a debtor to list all transfers of property made within 2 years, but since the fraudulent conveyance law goes back 2 additional years, a careful attorney should question their client about transfers within the last 4 years.  In addition, if any transfer was made to a Trust controlled by the debtor, the look back period is extended to ten (10) years. 

What happens if a person fails to list a debt on their bankruptcy case?  That exact question was presented to the Nebraska bankruptcy court when debtor Peggy Gonzalez failed to list her landlord as a creditor in a Chapter 7 case (Nebraska Bankruptcy Case 09-81123).  After the bankruptcy case was completed, the landlord sued Ms. Gonzalez for $6,000 of unpaid rent and in response she applied to reopen her bankruptcy case to add the debt.  The landlord objected to reopening the case and argued that since the debt was not listed it was never discharged and that it had the right to sue for the unpaid rent.

In a previous posting I had written about how the Nebraska bankruptcy court ruled that a debt intentionally concealed in a Chapter 13 case was therefore not discharged, however Ms. Gonzalez filed a Chapter 7 case and there were no non-exempt assets claimed by the Trustee in her case, so creditors received no payments at all. 

Bankruptcy Judge Timothy J. Mahoney ruled that since creditors receive no payment in a "no-asset" Chapter 7 case, the landlord's debt was therefore discharged even though the debt was not listed and the landlord received no actual notice of the bankruptcy.

The Court was careful to limit is ruling to the following situations:

1. The case must be a Chapter 7 case. 
2. No non-exempt assets must be available to pay creditors.
3. The debt cannot be a non-dischargeable debt specified in Bankruptcy Code Section 523(a)(2), (4) or (6)  (i.e. debts involving fraud, misrepresentation or malicious injury).

The Court went on to say that it is not even necessary to reopen the bankruptcy case if the above factors are present.  The debts are simply discharged--whether listed or not--unless the creditor can show that had it received notice the outcome would have been different.

The Nebraska Bankruptcy Court has ruled that an unmarried debtor who resided in his home with his long-time girlfriend cannot protect the equity in his home under the Nebraska Homestead Exemption.  See In re Chrisman, Nebraska Bankruptcy  Case 11-41281-TJM.  The debtor, Mark Chrisman, filed Chapter 7 in May of 2011 and listed a home located in Scottsbluff, Nebraska worth $58,000.

The Nebraska Homestead Exemption protect up to $60,000 of the equity in a home for the following debtors:

• Married couples, with our without children.  This protection continues even if one spouse dies or if the couple divorce.  If you ever resided in the home as married person the Homestead Exemption remains in effect.
• Individuals who are age 65 or older.
• Single persons who qualify as "Head of Family."

Nebraska Statute 40-115 states that "[t]he phrase head of a family . . . includes within its meanings every person who has residing on the premises with him or her and under his or her care and maintenance:

1. His or her minor child or the minor child of his or her deceased wife or husband;
2. A minor brother or sister or the minor child of a deceased brother or sister;
3. A father, mother, grandfather, or grandmother;
4. The father, mother, grandfather, or grandmother of a deceased husband or wife;
5. An unmarried sister, brother, or any other of the relatives mentioned in this section who have attained the age of majority and are unable to take care of or support themselves; or
6. A surviving spouse who resides in property which would have qualified for a homestead exemption if the deceased spouse were still alive and married to the surviving spouse."

To claim the Homestead Exemption a debtor must actually live in the home on the date the bankruptcy petition is filed.  The Courts often struggle with the issue of whether a debtor actually had supported a dependent in the home, and the Courts often look to such evidence as tax returns and other legal documents to see if the debtor claimed another person as a dependent prior to filing bankruptcy. 

Since Chapter 7 cases involve the liquidation of nonexempt property, a debtor should be absolutely certain of whether they qualify for the Homestead Exemption prior to filing a case.  Keep in mind that there is no liquidation of assets in Chapter 13 cases and that might be a better alternative if the exemption is in doubt.

The 8th Circuit Bankruptcy Appellate Panel has allowed a debtor who was ineligible to receive a discharge in a Chapter 13 case to strip wholly unsecured liens filed against a debtor's homestead.  In the case of In re Fisette, No. 11-6012 (8th Cir. BAP Aug. 29, 2011), the debtor was ineligible to receive a discharge because he had received a discharge in a Chapter 7 case filed within four years of filing Chapter 13.  Bankruptcy Code Section 1328(f) prohibits a court from granting a Chapter 13 discharge if a debtor had received a discharge from a previous Chapter 7 case filed within 4 years of filing Chapter 13. 

This case is significant for two reasons:

1. The case settles a disagreement among the bankruptcy courts of the 8th Circuit (Minnesota, North Dakota, South Dakota, Missouri, Iowa, Nebraska and Arkansas) as to whether bankruptcy courts could strip wholly unsecured second mortgage liens (i.e., the home is worth less than the balance of the first mortgage). 
2. Lien Stripping is allowed even in cases where a debtor is ineligible to receive a discharge because of a prior Chapter 7 bankruptcy.

Michael Fisette owned a home that he valued at $145,000 on his bankruptcy schedules, but the balance of his first mortgage loan exceeded the value of his home.  He also had a second and third mortgage loans that caused the home to be worth substantially less than the loans against it.  Given the nationwide trend of lower home values, it made little sence for Mr. Fisette to keep his home unless the 2nd and 3rd mortgage liens could be terminated.

Lien Stripping is a power that exists in Chapter 13 cases but not in Chapter 7.  The ability to strip a junior mortgage lien is one of the critical factors to consider when deciding what type of bankruptcy to file.  The ability to strip a junior lien is often the key factor in deciding whether to keep a home.

Bankruptcy attorneys should give special attention to cases where it appears that very little if any equity is attached by a second mortgage.  In cases where the value of the home is almost equaled by the balance of the first mortgage, the debtor should be encouraged to obtain an appraisal of the home.  Other significant factors to consider include the following:

• Tax Assessment value of home.
• Date the home was purchased.
• Purchase price of the home.
• Amounts invested to improve the home.
• Significant repairs required.
• Sales prices of homes in nearby neighbors.
• Condition of adjacent homes.

Lien stripping in Nebraska requires the bankruptcy attorney to file an Adversary Proceeding in the Chapter 13 case.  Basically, you have to sue the junior mortgage company to request the Court to determine the value of the home and the amount of each lien.  I see too many debtors blindly filing Chapter 7 cases without considering the tremendous benefit of stripping that home equity line of credit or debt consolidation second mortgage.