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Can you keep your motorcycle if you file bankruptcy?  Over the years I have learned that many folks value their motorcycle above all other possessions.  I recently caught the motorcycle bug myself and I am preparing to get my license as I write this blog post.

The answer to the above question depends on several factors.  First, in a Chapter 7 case filed in Nebraska, you may protect up to $4,900 of the equity in the motorcycle if you ride the bike to and from work on a regular basis.  If you are not employed or use another vehicle to travel to and from work, only $2,500 of the equity is protected.  When I say equity, I mean the difference between the value of the bike and amount of the motorcycle loan, if any.  For example, a motorcycle worth $10,000 that is subject to a loan of $6,000 has $4,000 of equity. 

Chapter 7 cases are liquidation bankrupties.  That means that if you have too much equity in the bike the Trustee will claim the bike and sell it to pay your debts.  If you have a 2010 Harley Davidson Fatboy that is worth $14,000 and there is no loan against the title, then the bike will be claimed by the Trustee.  Chapter 7 Trustee’s also will want to know if the bike has been modified and may ask how much chrome has been installed on the bike.  I’ve seen clients who have invested as much as $10,000 or more on aftermarket chrome or other assessories.  It is important that you tell your bankruptcy attorney exactly how much you think the bike would sell for and not hide the value of the accessories. 

Chapter 13 cases do not invole a liquidation so a paid off motorcycle is not at risk, however, whatever creditors would have received in a Chapter 7 liquidation must be paid out to creditors during the course of the Chapter 13 plan.  We call this the “best interest of creditors test” in bankruptcy court.

The tougher issue in Chapter 13 cases is presented when there is a sizable loan on the motorcycle and the bike is not a person’s primary sourse of transportation.  In general, bankruptcy judges dislike situations where a debtor proposes to fully pay a $10,000 to $20,000 motorcycle loan while other creditors are asked to accept 10 cents on the dollar.  This fails the “smell test.”  If you want to keep your “toy” then be prepared for the Chapter 13 Trustee to demand that you pay back a greater portion of your unsecured debt (i.e, credit cards and medical bills). 

The Chapter 13 Trustee frequently object to confirmation of a Chapter 13 Plan that pays a small portion of unsecured debt while a debtor proposes to keep motorcycles, campers, boats, and other nonessential secured debts.  I’ve even had difficulties getting the court to accept plans where a debtor agreed to work extra part-time jobs to justify the recreational vehicle.  Trustees often claim that such plans, even when extra jobs are assumed, lack good faith.  On the other hand, if the amount of the motorcycle loan is not too high, say, under $5,000, and a decent amount of the unsecured debt is being repaid, then debtors are allowed to keep those wonderful motorcycles.

 

 

 

 

Upon the filing of a bankruptcy petition, all collection activity is immediately stopped, including ongoing lawsuits and wage garnishments.  What few people or their attorneys are aware of, however, is the power of bankruptcy to recover garnished wages and bank accounts that take place in the 90 days prior to filing bankruptcy.

In a recent case, the Nebraska Bankruptcy Court ruled that debtors have the power to recover garnished bank account funds taken within 90 days of filing bankruptcy.  In the Matter of Tina Travis, (2010 Bankr. LEXIS 2732), $4,655.35 was garnished from her bank account approximately one month prior to filing bankruptcy.  The debtor was able to exempt $2,227.29 of those fund under the Nebraska Wildcard exemption of 25-1552 and reported that amount on Schedule B of the assets schedules as an “Involuntary Preference Payment.”  Preference payments are defined as garnishments exceeding $600 that occur within 90 days of filing bankruptcy.  (See Bankruptcy Code Section 547).

The Chapter 7 Trustee was able to recover the garnished funds, and then proceeded to object to the debtors exemption claim.  However, Bankruptcy Judge Timothy J. Mahoney ruled that under Bankruptcy Code Section 522(g), the debtor’s right to recover these funds is superior to that of the Chapter 7 Trustee if the debtor has available exemptions to protect the garnished funds. 

If you have been garnished by more than $600 within 90 days of filing bankruptcy, it is very important to tell this to your bankruptcy attorney so that the proper action may be taken to recover the funds. 

 

 

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Just about the top priority of most of my clients is protect their vehicle.  The good news is that Chapter 13 repayment plans not only protect the family vehicle, but they also include additional powers to make the loan payment more affordable.

One of the greatest powers of Chapter 13 is the right to “cramdown” the amount of the auto loan to the value of the vehicle.  For example, if you owe a $20,000 car loan but the vehicle is only worth $10,000, then you only have to pay $10,000 for the vehicle in Chapter 13 if the vehicle was purchased more than 910 days (about 2 & 1/2 years) prior to filing bankruptcy.  However, if the loan was used to purchase the vehicle and was issued in the 910 days prior to filing bankruptcy, all of the loan must be repaid unless the vehicle is used in a business. 

There are three (3) key questions here:  1) Was the loan obtained to purchase the vehicle?  2) Was the loan made within 910 days of filing bankruptcy?  3) Is the vehicle used in the operation of a business?

Regardless of when the loan was obtained, Chapter 13 law permits the debtor to reduce the loan interest rate as well.  According to a Supreme Court decision, debtors must only pay 2% more than the prime interest rate. (See TILL V. SCS CREDIT CORP. 541 U.S. 465 (2004))  Currently the Prime Rate is 3.25%, so debtors are reducing their auto loan interest rates to 5.25% in the Chapter 13 payment plan. 

It is not uncommon to discover that the monthly payment of a Chapter 13 is actually less than what a person pays on their monthly auto payment. 

Nebraska Bankruptcy Judge Thomas Saladino has issued a written opinion protecting funds held in an Individual Retirement Account (IRA).  Creditor First National Bank of Wahoo objected to Troy Euse’s claim of an exemption protecting $163,000 held in his IRA account and another $240,000 in a 401(k) retirement account, case number 10-43179.

The debtor claimed that the retirement accounts were exempt under Nebraska Statute 25-1563.01 and under the federal exemption of 11 U.S.C. 522(b)(C).  First National claimed that Nebraska opted out of the federal exemption statute and that only the Nebraska exemption statute applied to IRA accounts.

Nebraska Statute 25-1563.01 exempts “[t]o the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service. . . ”   The bank argued that the IRA account was not “reasonably necessary” for the support of the debtor given the existence of the 401(k) plan, the age of the debtor, and future earnings capacity of the debtor.

The Bankruptcy Court ruled that even though Nebraska did opt out of the federal exemption scheme, the federal exemption of 522(b)(3)(C) was still available to Nebraska debtors.  The Court stated that that any retirement fund that is exempt from taxation under the Internal Revenue Code is also protected from creditors under Bankruptcy Code Section 522(b)(3)(C).  Thus, IRA accounts are exempt under the federal and Nebraska exemption statutes.

This ruling effectively eliminates arguments made by creditors about whether all or a portion of an IRA account is reasonably necessary for the support of a debtor since the federal exemption does not depend on whether the amount of the retirement is reasonable or not.  All that is requiried is that the retirement account not be subject to federal taxation.

In addition, the Nebraska retirement exemption did not apply in situations where a retirement account was established or was amended to increase contributions within two (2) years of filing bankruptcy.  Chapter 7 Trustees have routinely questioned debtors about whether they increased their retirement contribution percentages within the two years prior to filing bankruptcy.  However, the Court’s opinion in the Troy Euse case seems to put those questions to rest, as long as the contributions were made to a tax exempt account.

The Euse decision marks a clear victory for debtors worried about protecting their retirement accounts in bankruptcy.

I think most bankruptcy attorneys would agree that Student Loans are the single most difficult debt to discharge in bankruptcy.  This is because Section 523(a)(8) of the Bankruptcy Code prohibits the discharge of student loans unless the debtor can show that it imposes an “undue hardship” on the debtor and the debtor’s dependents.   Proving that such a loan imposes an undue hardship in bankruptcy court is extremely difficult and expensive, requiring the filing of an Adversary Proceeding and a bankruptcy trial.  Most applications to discharge a student loan are unsuccessful.

Recently, the Nebraska Bankruptcy Court discharged an $84,799 student loan debt owed by 45-year-old Linda Kloos, Adversary Case Number 08-8060.  Ms. Kloos earned $1,657 in take-home pay each month, and her husband received $817 in Social Security Disability income.  Both the debtor and husband suffered from ongoing medical problems including back injuries, hypertension, depression, knee problems, heart ailments, and obesity. 

Prior to filing bankruptcy, the debtor consolidated her student loans through the William D. Ford Direct Loan Program.  The loan provided for an Income Contingent Repayment Program (ICRP) over 25 years, and whatever balance not repaid at the end of the loan would be “forgiven.”  However, such debt forgiveness sometimes results in taxable income.

In reviewing this case, the Court took into consideration several factors, including:

  1. The age of the debtor.
  2. The physical and mental health of the debtor.
  3. The fact that the debtor had participated in an Income Contingent Repayment Program for almost 8 years prior to filing bankruptcy.
  4. The fact that the debtor’s income was not likely to increase in the foreseeable future.
  5. Expenses of the debtor were not likely to decline over time.
  6. The Income Contingent Repayment Program did not make a meaningful dent in the loan balance.
  7. The debtor faced a significant tax burden when the income contingent program ended.
  8. The debtors relied on charity on a monthly basis to meet basic living expenses.

The most difficult obstical to obtaining a discharge of student loans is the Income Contingent Repayment Program.  In fact, the existance of these programs makes is darn near impossible to discharge student loans in most cases since most debtors have not sought out such programs prior to filing bankruptcy. 

As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Congress required that all persons take a credit counseling course before they are allowed to file a bankruptcy case, and another credit education course after the case is filed.  So, everyone filing bankruptcy these days must take two courses and file a Certificate with the bankruptcy court for each course. 

Credit Counseling is big business these days.  The cost of taking a credit counseling course is usually $50 per debtor for each course.  For a married couple, this has increased the cost of bankruptcy by nearly $200. 

Not all credit counseling agencies may offer bankruptcy counseling.  The agency must be approved by the United States Trustee’s Office, and they have provided a website of the approved agencies. 

I recently went through the list of approved agencies, and the good news is that the cost of the pre-bankruptcy course is down to as little as $5.  Here is a list of the some of the cheaper credit counseling agencies approved by the U.S. Trustee in Nebraska:

Cost

One of the most significant powers of a Chapter 13 bankruptcy is the power to strip off a wholly unsecured second mortgage lien.  If your home is worth less than the amount of the first mortgage balance, you may be able to cancel the second mortgage lien in Chapter 13.  With the dramatic decline of home prices in the past few years, lien stripping actions have become much more common in the Nebraska Bankruptcy Court.

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Example:  Let’s assume you own a home that is worth $100,000 today, and that you owe $110,000 on the first mortgage and an additional $30,000 on a second mortgage.  Because the home is worth less than the balance of the first mortgage, the entire second mortgage is unsecured and may be abolished in a Chapter 13 case.  That’s right, the entire second mortgage would be eliminated.  However, if the home was worth, for example, $115,000, then none of the second mortgage would be cancelled since it attaches to some of the home equity.  In order for lien stripping to be successful, the debtor must prove that the second mortgage attaches to absolutely no equity in the home. 

Lien stripping a second mortgage on a primary residence is authorized under Bankruptcy Code Section 506, and the relief is not available in Chapter 7 cases pursuant to the the Dewsnup Supreme Court decision. In order for the procedure to be successful, the bankruptcy filer must prove that the second mortgage does not attach to even one dollar of equity.  The second mortgage must be wholly unsecured.  It is generally required that the debtor prove the value of their residence by providing an appraisal.  Additional evidence is provided by the County Assessor’s valuation and by reviewing sales of other homes in the area.  Some cases involve a “battle of appraisals” where the mortgage company and the debtor obtain appraisals showing differing values.  Ultimately, the Bankruptcy Court has the power to determine the value of the home and whether a second mortgage attaches to any equity.

In Nebraska, lien stripping requires the fling of an Adversary Proceeding in the Bankruptcy Court (See Bankruptcy Rule 7001).  An adversary proceeding is basically a lawsuit filed against the mortgage company requesting the Court to determine the home’s value and the amount of the mortgage and other liens.  The second mortgage company has the opportunity to respond to the adversary proceeding and may challenge the lien stripping if it feels that the debtor is understating the home’s value. 

Lien stipping a second mortgage is just one example of the greater power of a Chapter 13 case in comparrison to the quick discharge process of Chapter 7. 

A good bankruptcy attorney should never “sell” bankruptcy.  That is not why people come to my office.  What they want and need is honest advice about how to get out of debt.  Bankruptcy is a powerful tool to eliminate debt, but there are other methods to solve the debt problem.  At the first meeting with a client the attorney should spend a lot of time outlining the debt problem and then organize the possible solutions.  I think what people are looking for when they meet with their attorney is somebody who can look at their problem from the outside and give them an honest assessment of what they should do.

So, how do you know if bankruptcy is the right answer to a debt problem?  Well, the best answer to that question is to ask the following: If you are not filing bankruptcy, how much will it cost each month to really get out of debt? 

A good rule of thumb is to divide the total debt by 48 months and then ask yourself if you can make that payment for the next 4 years.  For example, if you are $12,000 in debt, can you afford to pay $250 per month to avoid bankruptcy?  If you are $20,000 in debt, can you afford to pay $417 per month?  This is not an exact calculation because you have to factor in interest, but it is a good estimate of what you must pay to really get out of debt.  If you know in your heart that you cannot afford that payment, then consider filing bankruptcy.  I call this the Rule of 48.

There are many fine institutions that help people avoid bankruptcy by establishing a Debt Management Plan, such as Consumer Credit Counseling Service of Nebraska (www.CCCSN.org).  However, you must make sure that the program pays ALL of the debt, not just a few select credit card balances.  It seems like I see a lot of folks using a credit counseling service for some of the debts, but then they are being garnished for the debts not covered.  To avoid bankruptcy you must pay all debts, not just some of them.

A good bankruptcy attorney should help their client identify all the possible solutions to the debt problem.  The initial consultation should be free, and nobody should try to “sell” you a bankruptcy. 

How much of your wages may a creditor garnish in Nebraska? How many garnishments may be placed on a paycheck at any one time?  These are two common questions I receive on a weekly basis.

There are limits to how much any one creditor may garnish under Nebraska and Federal law.  Nebraska Statute 25-1558 provides that the maximum wage garnishment shall not exceed the lesser of the following amounts:

  • Twenty-five percent of his or her disposable earnings for that week;
  • The amount by which his or her disposable earnings for that week exceed thirty times the federal minimum hourly wage prescribed by 29 U.S.C. 206(a)(1) in effect at the time earnings are payable; or
  • Fifteen percent of his or her disposable earnings for that week, if the individual is a head of a family.

The above limits do not apply to child support garnishments or federal or state tax garnishments.  In other words, you may be garnished for a creditor judgment plus child support plus a tax garnishment at the same time.  However, you may only be garnished for one civil court judgment at a time.

A private creditor may not garnish wages until they obtain a judgment.  To obtain a judgment the creditor must file a lawsuit, serve you with a copy of the lawsuit, and give you an opportunity to file a written answer to the lawsuit.  Typically, a person has 30 days after receiving the lawsuit to respond in writing to the Court.  Verbal responses are not sufficient–it must be in writing and it must be filed in the Court.  Failure to file a written response to a lawsuit will entitle the creditor to a Default Judgment.  Once a judgment is entered the creditor may begin garnishment actions.

These limits apply to wage garnishments only and not to garnishments of bank accounts or self-employment earnings.  Creditors may garnish 100% of a bank account or self-employment earnings unless another exemption statute applies. 

The filing of a bankruptcy petition immediately protects a person’s wages, bank accounts, and other assets.  Under certain circumstances, wages and other garnishments occurring in the prior 90 days may be returned if the proper action is taken by the bankruptcy attorney, although most bankruptcy attorneys fail to do this. 

 

 

Chapter 13 cases provide for a monthly payment to a bankruptcy trustee over a 3 to 5 year period of time.  Generally, a person files Chapter 13 when their income is too high to qualify for Chapter 7 or if they are disqualified from filing Chapter 7 due to a prior bankruptcy being filed in the past 8 years or if there are certain assets that would be liquidated in Chapter 7.

There are four basic factors which determine the amount of the monthly Chapter 13 payment:

  1. Difference between Income and Expenses:  A person must pay the difference between their net take-home pay and their basic monthly living expenses.  A budget must be submitted to the Court showing all monthly income and expenses.  This sounds simple enough, but since income can vary from month to month with overtime and bonus pay that is not guaranteed, it is important to measure income by averaging out the highs and lows of the income over a long period of time.  Also, what is considered a “basic living expense?”  Well, that answer varies from judge to judge and from trustee to trustee.  Is a $200 monthly cell phone charge a basic living expense?  How about $300 per month expense for tobacco use?  Much litigation in Chapter 13 surrounds how to measure income and what expenses are reasonable.
  2. Tax & Child Support Debts:  A requirement of all Chapter 13 Plans is that they fully pay back all Priority claims, which basically are comprised of child support and income tax debts. Not all income tax debts are considered to be “priority debts.”  Generally, only income tax debts incurred within three years of filing bankruptcy are classified as priority debts, however, there are many special rules and exceptions to this rule.
  3. House, Auto  & Other Secured Debts:  The Chapter 13 Plan in Nebraska must provide for payment of the auto loans for any vehicle a person wishes to keep.  Some states allow the debtor to pay the auto loan outside the bankruptcy plan, but Nebraska requires these loans to be paid in the plan.  If a person is behind on their mortgage payment and wishes to keep the home, the Plan must provide for payment of the past due payments with interest over the course of the plan.  Furniture loans (i.e., The Nebraska Furniture Mart credit card) must be paid through the Plan as well. 
  4. Liquidation Analysis:  Chapter 13 Plans must pay to unsecured creditors at least as much as they would have received if a person’s non-exempt property were sold in a Chapter 7 case.  For example, if person had $20,000 of non-exempt equity in their home (only $60,000 of home equity is protected in Nebraska to qualified individuals), the Chapter 13 Plan would have pay at least that much to the unsecured creditors during the life of the plan.

Many clients wrongly assume that all debts must be paid back in the Plan.  This is not true.  Although some plans pay back 100% of the debt, the majority of plans pay back a small portion of the unsecured debt and some plans pay virtually nothing.  The amount of the monthly Chapter 13 payment is generally determined by application of the four factors listed above.