Clients always tell me that they need to file bankruptcy but they don’t want to lose their home or car. Lots of people think that they lose all the property if they file bankruptcy as a penalty for being in debt.
Over the past 18 years I’ve seen many foreclosure cycles, but nothing like the “perfect storm” we have faced in the last 4 years. The subprime lending practices utilized by just a few lending companies about a decade ago became so profitable that larger mortgage companies began to copy their programs. Foreclosure departments became “profit centers” and banks invented new fees and charges to assess their customers. The practices have become so bad that Attorney Generals in all 50 states have combined efforts to investigate these seedy mortgage practices. As reported by Andrew J. Nelson in the Omaha World-Herald, Nebraska Attorney General Jon Bruning will participate in the investigation.
Generally speaking, the vast majority of people who file bankruptcy in Nebraska keep their home. However, the protection extended to the family home is limited, and people can lose their home when they file bankruptcy if they are not careful.
To begin with, it is important to note that every state has a list of property that is protected in bankruptcy. These laws are called Exemptions, and every state has a different list of exempt property. In Nebraska, a person’s home is protected by the Homestead Exemption (Neb. Rev. Stat. 40-101).
The law reads as follows: A homestead not exceeding sixty thousand dollars in value shall consist of the dwelling house in which the claimant resides, its appurtenances, and the land on which the same is situated, not exceeding one hundred and sixty acres of land, to be selected by the owner, and not in any incorporated city or village, or, at the option of the claimant, a quantity of contiguous land not exceeding two lots within any incorporated city or village, and shall be exempt from judgment liens and from execution or forced sale, except as provided in sections 40-101 to 40-116.
The “sixty thousand dollars in value” means sixty thousand of “equity.” For example, if your home is worth $160,000 and you owe $100,000 on the mortgage loan, the $60,000 of home equity is protected. Most people who are filing bankruptcy do not have more than sixty thousand of equity, so the home is usually protected.
However, to qualify for the exemption a person must be married or the head of the household or age 65 or older. Nebraska Statute Section 40-115 defines “Head of Family” as follows:
The phrase head of a family, as used in sections 40-101 to 40-116, 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.
The first job of a bankruptcy attorney is to carefully review whether a person is entitled to claim the homestead exemption. If there is no equity in the home (i.e., if the home is not worth more than the balance of the mortgage loans), then the homestead exemption does not come into play. If there is equity, then the bankruptcy attorney must determine how much equity exists. Is there more than sixty thousand of equity? How was the property valued? By appraisal? By county assessor value? By most recent sale? By sales in the neighborhood? A key skill of the bankruptcy attorney is to question the answers of his or her client who is often reluctant to disclose a home’s value for fear of losing it. However, this type of client often places their home at risk by not completely disclosing a home’s value to their attorney.
It is important to understand that Chapter 7 is a “Liquidation Bankruptcy” and that Chapter 7 Trustee’s are paid on a commission basis. That means that the Trustee has a financial incentive to uncover unprotected assets. If you understate your home’s value in a Chapter 7 case and the Trustee figures this out, you may very well lose the home. If there is no home equity or if the equity does not exceed sixty thousand and is protected by the homestead exemption, the Chapter 7 Trustee will not claim the home. I have represented thousands of customers in Chapter 7 who kept their home, but I have a profound respect and a healthy fear of the Trustee.
Chapter 13 Bankruptcy is a 3 to 5 year payment plan, and one of the major advantages of Chapter 13 is the special power to stop home foreclosure actions and to allow the home owner to establish a payment plan to bring the loan current. If you are behind on the mortgage payment you should file Chapter 13.
Another benefit of Chapter 13 is that the Trustee does not have the power to liquidate assets, so if you have more than sixty thousand of equity, you should probably file Chapter 13 instead. Very often I advise my clients to file Chapter 13 when I am concerned about the amount of unprotected equity in a home.
Will you lose your home if you file bankruptcy in Nebraska? The answer should always be no as long as you are current on the mortgage payment and choose the right type of bankruptcy. The Nebraska homestead law can be complicated at times, and you need to hire an attorney who is familiar with the law and the cases interpreting the law in the Nebraska bankruptcy court. Assessing the risk of losing an asset is one of the primary duties of a bankruptcy attorney.