The Nebraska Bankruptcy Court issued a written opinion on January 6th stating that a debtor who intentionally or negligently fails to list a debt will be denied a discharge of the debt.  A Nebraska debtor who resides in Morse Bluff, Nebraska, was recently denied the right to discharge a $751 auto repair bill that she failed to list on her bankruptcy case.  In Re Flemmer, Bankruptcy Case number 09-41487. 

The debtor filed her Chapter 13 case on May 28, 2009.  She incurred the auto repair bill to Kubic Auto Repair & Tire Service Inc. approximately one year before filing bankruptcy, but she chose not to list the debt and indicated that she would pay the debt outside the bankruptcy payment plan.  However, after Kubic sued her in Small Claims Court and began a garnishment of her paycheck, she attempted to add the debt to her bankruptcy case.

The Bankruptcy Court ruled that although a debtor may amend the list of creditors to add debts and that this particular debtor did not act in bad faith, the debt would nevertheless not be discharged since the creditor was harmed by the delay in amending the creditor list and giving notice of the bankruptcy to Kubic.  By the time the creditor list was amended it was too late for Kubic to file a Proof of Claim or to object to the Chapter 13 Plan, thus the Court ruled that it would be imporper to discharge the debt.  As a result, Kubic was allowed to garnish the debtor’s wages.

When a person signs a bankruptcy petition, they represent to the Court, under penalties of purjury, that they have completely and honestly listed all debts, property, income and expenses. All property transfers within two (2) years of filing bankruptcy must also be listed.  Frequently I hear clients tell me that they want to leave certain debts off the case.  As this case demonstrates, the consequences of not listing all debts can be disasterous.

Frequently I meet with small business owners who own companies that have become so burdened with debt that I describe the corporation as being “toxic.”  Even if business improves and cash flow increases, the corporate entity is so weighted down by bank liens, court judgments, and tax debt, it can never recover.  The business may have a bright future, but the corporate debt is simply too much. 

So, what should a business owner do in this event?  In a word, reincorporate. 

Incorporating a new business has many advantages.  First, the new company is not subject to the bank and IRS liens that exist on the former company.  A frequent problem of the small business debtor is that you cannot build wealth if everything you accumulate–cash, equipment, accounts receivable–is subject to a pre-existing lien.  Even worse, if you attempt to sell or transfer the assets of the old company, the bank may cry foul and accuse the business owner of tampering with their lien and object to the business owner’s bankruptcy discharge.   After all, what good is a lien if it does not prevent the owner from transferring the asset?  Violating a bank’s lien in business assets is considered fraud, and it is a common basis for denying a bankruptcy discharge to a small business debtor.

What the business owner cannot do is to simply transfer all the assets of the old company to the new company without consideration.  That is, if assets from the old company are transferred to the new company, the old company must receive compensation for equal value.  As a general rule, it is best if no assets of the old company are transferred to the new company.  Start the new company with new assets.  There should be a clear “line in the sand” between the old and new companies.  If assets of the old company are mixed with assets of the new company, creditors will claim that the new company is nothing but a continuation of the old company under a new name, and the courts will impose the old company’s liens and debts on the new company.

Discarding the old “toxic” company and incorporating a new entity to carry on a similar business is complex.  The small business owner should work carefully with legal counsel to ensure that the old company’s liens and debt problems do not contaminate the new company. 

 

An unemployed pharmacist in Lincoln, Nebraska lost his battle to save his home from the claim of the Chapter 7 Trustee during a bankruptcy court hearing on January 5.  In Re Bozarth, Bankruptcy Case Number 10-42629.  The homeowner filed his own case and was not represented by an attorney at the hearing. The homeowner testified that he transferred the home into a “self-directed” Individual Retirement Account approximately 10 years ago upon the advice of his banker.  The homeowner’s bankruptcy schedules failed to list the home which was valued by the Lancaster County Assessor at $95,400.

Bankrupty Judge Thomas Saladino questioned how an IRA account could even own real property.  Chapter 7 Trustee, Joseph Badami, originally filed a report with the Court indicating that there were no assets to claim, but two months later he withdrew that report upon receiving information that Bozarth, in fact, was the owner of a home. 

It does not appear that there was any intention of the debtor to conceal the home from the Court, and Bozarth stated that it was his understanding that the transfer of the home to a self-directed IRA account was sufficient to protect the home from creditors.  Now it appears that his home will be sold by the Trustee to pay back his debts.

Chapter 7 Trustees are paid on commission–they have an incentive to investigate a debtor’s assets and property transfers.  The first duty of a bankruptcy attorney is to determine which assets may be at risk to a claim by a Chapter 7 Trustee.  The risk must be explained to the client, and if the risk is too great the debtor should be advised to consider filing Chapter 13 or to not file bankruptcy at all. 

  1. Tax Returns.     2 years of tax returns.  If you have lost your returns, complete IRS form 4506.  You can obtain that form on the IRS webiste at www.IRS.gov.  If you have not prepared your tax returns, do so now.  The bankruptcy case will automatically be dismissed if you fail to file the returns within 30 days after filing bankruptcy. 
  2. Paycheck Stubs & Other Income Statements.  Provide 6 months of pay stubs.  If you have thrown these away, obtain a payroll report from your employer.  Bankruptcy attorneys must provide proof of your past 6 months of earnings, and even though your most recent paystub tell us how much you have earned, it does not prove an average of the past 6 months.  Child support or Social Security or Retirement income statements are also necessary.  In short, your attorney needs all documents proving your income.
  3. Bank Statements.    Six months of bank statements from every account you are on is required.  You must identify the source of every deposit.  Write down the source of the deposit (paycheck, child support, Social Security, gift, etc) next to the deposit.
  4. Credit Counseling Certificate.  Before you can file bankruptcy you must obtain a pre-bankruptcy credit counseling certifiate.  The cost of these courses varries from $25 to $50.  You may take the course online.  A list of the approved credit counseling agencies may be found at http://www.justice.gov/ust. 
  5. Bills, Lawsuits, Collection Letters, etc.   Provide your attorney with copies of all your bills, collection letters, and lawsuits.  Write down the name and address of bills you are missing.  The basic power of bankruptcy is to Notify your creditors that you filed and that they can no longer contact you.  If the creditor is not notified the bankruptcy is ineffective.
  6. Divorce Decrees.  It is extremely important to provide your attorney with a copy of your divorce decree.  Special notice must be given to your ex-spouse if the decree is still “active.”  If child support is still being paid or if co-signed debts still exist or other divorce obligations are still active, notice to the ex-spouse is absolutely required. Also, if your ex-spouse owes you money, that is an asset which must be listed in the bankruptcy.
  7. Retirement Accounts.    Provide a recent statement showing the balances of your retirement accounts.
  8. Claims Against Others.  List all claims for injuries, worker’s compensation, auto accidents, etc.  Warning:  If you fail to list a claim you have against someone else on the bankruptcy schedules, you may forfeit the claim.  If you can sue someone for any reason, tell your bankruptcy attorney and list the claim on your list of property.
  9. Life Insurance.    If you have a life insurance policy that has a “cash surrender value” provide a statement of the surrender value.  Whole or Universal policies usually have a cash value.
  10. Home Appraisals & Tax Statements.  Provide a copy of your most recent real estate tax assessment statement or home appraisal. 

It’s tax season again, and in the bankruptcy world that means only one thing–people are loosing their tax refunds to Chapter 7 Trustees again.   The sad part is that this should almost never happen.  This is the result of sloppy legal work.  Yet, year after year I witness helpless debtors lose their tax refunds because their bankruptcy attorney failed to take the time to properly list the refund on the bankruptcy schedules and to determine if the refund was exempt or not. 

The problem with filing bankruptcy cases in the months of November to April is that the tax returns are often not filed, and the bankruptcy attorney must estimate the amount of the refund.  Tax refunds can change from year to year due to a change in income or the number of dependents claimed or other factors such as early retirement withdrawals.  The best indicator of the amount of the refund is found by examining the prior year’s tax return.  Is the income the same?  Are the number of dependents the same?  Is the filing status the same?  Does a divorce decree provide for claiming a dependent in alternating years?  Was there a business loss to offset wage income?  Clearly, there are many factors that can change the amount of a refund from year to year. 

In Nebraska, two exemption laws protect tax refunds.  The “Wildcard” exemption of Neb. Rev. Stat. 25-1552 protects up to $2,500 ($5,000 for married debtors) of any personal property, including tax refunds.  The other exemption statute is found at 25-1553 which protects federal and state Earned Income Credit refunds. 

The problem is that the wildcard exemption of 25-1552 is also used to protect bank accounts, guns, vehicles, and other personal property.  Bankruptcy attorneys frequently forget to schedule the tax refunds when they file cases in November and December, and they use up the wildcard exemption on other assets.  So, what is the first question a Chapter 7 Trustee asks when the debtor finally appears for their court appearance in January?  You guessed it, “What is the amount you expect to receive for your tax refund?”

Chapter 7 Trustee’s are paid on a commission basis.  That means that they are paid to take unprotected property away from a debtor so that something can be paid to the creditors.

The best practice is to prepare all tax returns prior to filing the bankruptcy so that the amounts of the tax refunds can be determined.  If you cannot exempt all of the refund, the best option is to wait to file the bankruptcy until the refunds have been received and spent. 

 

One of the most common questions asked is whether it is better to file Chapter 7 or Chapter 13.   Our firm’s position is that if you qualify for Chapter 7 and if there is little risk of your property being liquidated, then Chapter 7 is the better way to go.  The goal is to complete the bankruptcy process as fast as possible, and Chapter 7 cases are completed in about 90 days whereas a Chapter 13 payment plan takes 3 to 5 years to complete.  Also, Chapter 7 cases are generally about one-half to one-third of the cost of a Chapter 13 case over time, but they are more expensive in up front fees since there is no payment plan to pay the attorney fees.  In Chapter 13 cases, attorney fees are typically paid out of the 3 to 5 year plan, but since Chapter 7 has no payment plan these fees are due in full before the case is filed.  Generally speaking, Chapter 7 cases are faster and more dangerous because of the risk of having the bankruptcy trustee liquidate property, and Chapter 13 cases are slower but safer.

            Some of the factors considered in deciding what chapter to file include:

  1. Income Level:  If the household income is above the state median income figure for a given household size, then a person may be required to file a Chapter 13 plan.  In short, if you make too much money you cannot file Chapter 7.  Instead, you must repay some or all of the debt—depending on your income—in a 3 to 5 year Chapter 13 payment plan. 
  2. Prior Bankruptcy: You cannot file a Chapter 7 case if you have filed a previous Chapter 7 case in the past eight (8) years or if you received a Chapter 13 Discharge in a cases filed in the prior six (6) years.
  3. Foreclosures & Repossessions:  Chapter 7 cases do not stop mortgage foreclosure actions or auto repossessions, at least not for more than a few weeks.  All bankruptcy cases stop creditors temporarily, but only a successful Chapter 13 payment plan can permanently stop a home foreclosure or auto repossession.  So, if your home is in foreclosure or if you are behind on the mortgage payment you should only consider filing Chapter 13.  Again, Chapter 13 is slower but safer.
  4. Equity in Property:  State exemption laws protect your property from creditors, but only a limited amount of property is protected.  Every state has a different amount of protected property.  For example, in Nebraska $60,000 of your home equity is protected if you lived as a married person in the home or if you raised minor children in the home or if you are age 65 or older.  But if you have more than $60,000 of home equity, then you could lose the home in a Chapter 7 Liquidation bankruptcy.  There are similar limits to equity in your vehicle and other property.  Again, Chapter 13 is  safer but slower.
  5. Income Tax Debts:  There are some advantages to paying income tax debts through a Chapter 13 Plan, including the fact that such debts are not typically paid back with interest.  Discharging income tax debts is very, very complicated, and many tax debts are not fully discharged by a Chapter 7 case.  Thus, the IRS may resume its collection efforts and wage levies after the Chapter 7 case is over.  Chapter 13 avoid this problem by paying the nondischargeable tax debt through a payment plan.  Again, Chapter 13 is slower but safer.
  6. Personal Preference:  Many people actually want to pay their debts and prefer the orderly Chapter 13 legal system of dividing payments to creditors.  Outside of bankruptcy creditors are racing each other to collect their money as fast as they can, and often one creditor gets the advantage at the expense of the others.  Chapter 13 payment plans not only help the debtor get out of debt, but it organizes the payment to the creditors in a fair and equitable manner.
  1. Failing to list all Creditors:  If you do not list a creditor, the debt will not be discharged. You should list all creditors, even if you have a co-debtor or intend to repay.  Intentionally failing to list creditors you favor is perjury. 
  2. Getting a Second Mortgage Instead of Filing Bankruptcy:  Many clients put off the inevitable by getting a second mortgage to pay off debt and then end up losing their home when they cannot afford the mortgage payments, or filing bankruptcy and being burdened by the second mortgage.
  3. Waiting Too Long:  It is human nature to put off unpleasant events. Wage garnishment, foreclosure and repossession can all be stopped by filing your case beforehand.
  4. Reaffirming Burdensome Debt:  Do not reaffirm (keep) loans that are unreasonable. Doing so will make it difficult or impossible for you to recover financially.
  5. Dipping into Retirement Funds.  Too many people consume their retirement savings before they wind up in bankruptcy.  These funds would have been protected in bankruptcy.
  6. Filing when you have a substantial Tax Refund pending.  The exemption for tax refunds is limited. You should discuss these with your attorney before filing.
  7. Large credit usage shortly before Filing.  If you have had significant cash advances, balance transfers or other large credit use within three months of filing, they should be discussed with your attorney beforehand. You should not use any credit cards once you decide to file. 
  8. Paying large amounts to family before Filing.  These “preferences” can be taken back from your family member and distributed to all creditors.
  9. Transferring Assets.  Assets transferred in anticipation of filing bankruptcy may be recovered by the estate.  Bankruptcy trustees can undo fraudulent transfers that occur within 4 years of filing bankruptcy. 
  10. Missing the Hearing.  If you do not attend your hearing, your case may be dismissed with costs to you. You must bring photo ID & proof of social security number to your hearing.

Ted Baer, heir to the J.L. Brandeis & Sons department store fortune, may inherit millions of dollars in five years according to an article published by reporter Joe Ruff in the Omaha World-Herald . 

Ted Baer stands to inherit about $16 million dollars. However, the Chapter 7 Trustee, Thomas Stalnaker, has indicated that he will claim Baer’s interest in the trust and distribute the money to his creditors. Baer listed $14.7 million of debt on his bankruptcy papers filed with the court.

Nebraska College of Law professor William Lyons has speculated that Baer may have elected to file bankruptcy now to protect his future inheritance. Ted Baer’s attorney believes the trust funds are not part of the bankruptcy estate and therefore cannot be claimed by the creditors or the Trustee.

Courts have disagreed as to whether funds in a trust account become property of the bankruptcy estate at the termination of the spendthrift trust. In the case of William W. Britton, the Connecticut bankruptcy court ruled that the Chapter 7 Trustee could seize the assets of a trust when the spendthrift trust terminated. O’Neil v. Fleet Natl Bank (In re Britton), 2003 Bankr. LEXIS 1354. See also In re Crandall, 173 B.R. 836 (Bankr. D. Conn 1994). These cases indicate that the bankruptcy estate is comprised of all property interests, although some may be contingent and not subject to possession until sometime in the future. Other courts have taken the opposite view. In the case of Joseph Newman, the 10th Circuit Court of Appeals ruled that the future right to spendthrift trust assets was not property of the bankruptcy estate. Magill vs. Newman, 903 F.2d 1150 (10th Cir. 1990).

It is not clear at this time how the Nebraska bankruptcy court will rule on this matter, but given the attention this case has generated in the press, there will be a lot of pressure on the court to allow creditors access to the trust fund. Whatever decision reached by the court will certainly be appealed and the final answer may not be known for several years.

One question that has not been answered is why Baer’s attorneys chose to file under Chapter 7 where Trustees are paid on commission to seek out and sell assets to pay creditors instead of electing to file under Chapter 11 where a debtor is not forced to liquidate their assets. Perhaps they felt that money in a Spendthrift trust was absolutely beyond the reach of creditors, but that seems like a fairly huge gamble involving a winner-take-all result. Dangling assets before a Chapter 7 Trustee is never wise, as this case fully demonstrates.

 

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.

Hardly a day that goes by that I do not speak to a new client who says that they hired a debt settlement company to take care of their credit card debts but none of the debts were settled despite making all their payments and now they are being sued and garnished by the credit card companies.

Under a debt settlement program a person is told to stop paying their credit cards and to send the settlement company a monthly payment that will go into a “settlement fund.” In general, credit card companies will settle their accounts for about 40% of the outstanding balance depending on the age of the account and the likelihood of collecting the full balance. So, the idea here is to save up about 40% of what you owe by skipping the regular credit card payment and diverting the money to a debt settlement savings account. In addition, the debt settlement company usually charges a 15% “settlement fee” plus other “account maintenance fees”, so you really need to save up 55% to 60% of the account balances.

 Does this work? Almost never. The problem is that most folks can’t save 40% of what they owe fast enough before they get sued for not paying the account. Most banks will turn the account over for litigation after six to twelve months of no payments. If you stop paying your creditors you will get sued, it is just a matter of when. Debt settlement is a race to save enough money to settle before the creditor sues. And this is why debt settlement companies almost never deliver on their promises because virtually all your money goes to pay their fees before any money is deposited into the settlement fund.

SmartMoney reporter Aleksandra Todorova writes in a July 9, 2010 column that “many creditors, once they know a client is working with a debt-settlement company, will escalate the account, meaning that they send it to a collection agency sooner or sue you.”

As a general rule, if you don’t have at least one-third of what you owe in a settlement fund within six to nine months, the program will never work. And this is why over 90% of debt settlement programs are doomed from day one.

Oh, did I mention that if you settle your debts for less than what you owe this can be taxable income reported to the IRS? Yeah, if you are lucky enough to settle a debt the credit card company will probably send the IRS a 1099-C Form (Cancellation of Debt Form). Depending on your situation, the forgiven debt may be taxable.

If you want to settle your debts do yourself a favor and don’t hire a settlement company. Hire yourself, but only do this if you can save enough cash in 6 to 9 months to have at a bare minimum of one-third of what you owe in a separate bank account. If you want to hire someone to help settle, hire a licensed attorney in your community.