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Reno, NV  89511

Reno Bankruptcy Attorney

Stephen R. Harris, Esq.

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3 Ways Filing For Bankruptcy Can Save Your Home

3 Ways Filing For Bankruptcy Can Save Your Home

We will spend some time talking about your home because the home is usually the biggest asset that most people have. Also, legislatures have recognized that people must have a place to live and homeownership has always been one of the cornerstones of American life. In fact, the number one reason people file bankruptcy is to keep their homes. Let’s discuss the 4 ways that bankruptcy may be able to allow you to keep your home.

1. The Stopping of a Foreclosure Action

Homeowners fall behind in the mortgage loan payments and they can lose their home through foreclosure. Foreclose is the last option a lender has. Previously, the lender has sent out all manner of notices and threats to get the homeowner to pay up, or make some kind of arrangements to pay, and therefore, it not a surprise when foreclosure proceedings begin.

Since the 2008 mortgage crisis, lenders have invented numerous alternatives to foreclosure. Foreclosure is the process that allows the lender(s) to reclaim the property, and then sell it to get their money back.

Foreclosure laws vary from state to state, but in Nevada, it usually begins when the lender files a lawsuit with the county, called a judicial foreclosure action.   In the case of a non-judicial foreclosure, the lender records a default notice with the county and mails copies of the filing to you.

The default notice will inform the homeowner that the home will be sold through a public auction or trustee’s foreclosure sale. The time between the foreclosure notice and the trustee’s foreclosure sale is usually three to four months. During that time, the homeowner still owns the home. After the auction, the new owner can evict the borrower. So practically, the lender will usually not file foreclosure proceedings until you’re at least 90 days overdue in your payments. Typically it will be another 90 days before the public auction. So this gives the borrower at least four months to solve the delinquency problem. Here is a detailed timeline for you to review in greater detail.

A chapter-7 bankruptcy filing stays or stops, the foreclosure action temporarily until you can arrange a satisfactory solution to the payment delinquency. Your filing gives you options to head off foreclosure in 2 ways:

  1. The official Chapter-7 bankruptcy filing will probably allow you to get rid of most of your other debts and therefore making it much easier to afford the mortgage. If you are current or can get current with mortgage payments, the value of your home may be covered by the state’s homeowner exemption, which in Nevada is $550,000. You can then stay in your home as long as you remain current on your mortgage debt. If the value of your home is more than the available state exemption, your home is subject to sale by the trustee, and that excess is used to pay your creditors.

For example: If your home is worth $600,000, the trustee can force you to sell it, give you a check for $550,000, and the remaining fifty thousand dollars is distributed to your creditors.

  • A Chapter 13 filing offers you another option to make up to the delinquent late payments over a 3 to 5 year bankruptcy plan.  If you are $5000 in arrears on your mortgage, then Chapter 13 allows you to pay off the $5000 over the  3 to 5 year life of your bankruptcy plan. Needless to say, you must remain current with your regular monthly payment during this time. So, if your arrears are $5000, and your plan is 36 months, then you would pay an additional $138.89 ($5,000 divided by 36 months) each month to pay off your arrears.  Remember, you may have eliminated a lot of other debt to make that additional payment affordable, and you get to stay in your home.

In some cases where the home is worth less than the first mortgage and there is a second mortgage on top of that, you may be able to eliminate the second mortgage, therefore making bankruptcy even more attractive.

2. Mortgage Restructuring

The filing for a Chapter-7 bankruptcy gives you the opportunity to take advantage, in some situations in which you may be able to restructure your home mortgage in the following ways:

  • You can propose to suspend payments until you can sell the property and pay off the secured mortgage.
  • Restructure the debt to reduce the interest rate and maybe change the terms.
  • You may be able to eliminate part of a debt in what is commonly called, cram down or strip off, in which Chapter 13 debtors do not pay the full amount of debt, but just the value of the collateral. For example, assume your property is worth $100,000 and has two mortgages. The first mortgage is $75,000 and the second mortgage is $40,000. The first mortgage is fully covered by the value of the property and therefore fully secured. But after you deduct the $75,000 on the first mortgage from the value of the property, only $25,000 remains. You did eliminate all but $25,000 a second mortgage. If you paid a second mortgage $25,000 over the course of your Chapter 13 plan, the mortgage debt is reduced dramatically,  even though you owed $40,000.

There are a few situations where residential mortgages have special protection and/or allow some modifications such as:

  • Loans that are due or will come due, during the next five years, like balloon loans.
  • Loans are secured by other property in addition to your home.
  • Loans that are completely unsecured because the property was fully encumbered by prior mortgages.

3. The Nevada Homestead Exemption

Even in bankruptcy, there are a number of categories of debt that cannot be wiped out. Even though the Nevada Homestead exemption is generous compared to many other states. As a general rule, the equity in your home is exempt from being taken up to the amount specified in the state law; in Nevada, it is $550,000.

BUT, the exemption can have all sorts of limitations such as the following:

  • If you bought your home within 1215 days in chapter-7 bankruptcy your home exemption may not equal the allowed amount of exemptions in your state.
  • There is $125,000 on homesteads if you have been convicted of certain federal securities laws or criminal acts that cause serious injury or death within five years of the bankruptcy.
  • The Homestead exemption may be reduced to the extent that the equity in your home was created with the intent to hinder or defraud creditors within 10 years of the bankruptcy.
  • Your exemption amount may be more than the amount stated by state law because the exemption must be more to cover the costs of selling your home. Commissions and other costs must be paid before your exemption is impaired.
  • Some kinds of residences may or may not be covered by the exemption, depending on the local court. Houseboat residences, for example, have for some time been deemed exempt, but sometimes not.
  • If you rent out part of your home, most courts have found that it does not impair your homestead exemption.
  • If you have lived in your current state for less than two years, the exemption law of your prior residence state may be the one that applies.
  • In most states, you must personally live in the residence to reap the homestead exemption.
  • Joint ownership of a home provides further confusion if only one spouse files for bankruptcy. Except for the eight community property states, when only one spouse files for bankruptcy, the other spouse’s interest in the property does not come into play.

So, I hope it is becoming clear that dealing with homestead exemptions is extremely complicated and one that needs to be discussed in-depth with your attorney.

Your Home Valuation Regarding The Nevada Homestead Exemption

Before we can make any decisions on how to handle your homestead exemption, you need to know how much your home is worth. If you have recently purchased your home, the selling price will be a good starting guide. You may need to hire a real estate appraiser to give you an accurate valuation. It is not wise to use either asking prices of similar homes in your neighborhood or real estate agents’ estimates. They tend to be higher estimates with the bias towards listing your home. After you have a good fair market value, you will need to make adjustments to discover the real net value.

Take the real net value of your home, subtract the cost of selling it, which may be as high as 10%. From that number, subtract the amount owed on any outstanding mortgages and the amount owed on any other liens or judgment, real estate taxes, etc., and this figure will be your real equity. If your real equity is less than your homestead exemption, then this is the amount that you claim as exempt, not to exceed the exemption limit in your bankruptcy.

In conclusion when contemplating the various financial and personal issues involved with filing for any type of bankruptcy please be sure to consult a qualified and experienced Nevada bankruptcy lawyer, especially if you are you in a considering entering into a Chapter-13 bankruptcy plan. Renting your home, moving, making improvements, refinancing, signing a contract to sell can all have serious consequences for debtors.

Please call our office at (775) 786-7600 or (775) 690-9120 and set up an appointment for a free and confidential consultation with me to discuss your financial situation. We will investigate all of your options and alternatives, even those that don’t require you to file bankruptcy at all. Feel free to visit our website at www.harrislawreno.com to learn more about our practice and services here in Reno.

4 Major Details of Filing for Bankruptcy

4 Major Details of Filing for Bankruptcy

To this point, we have given you a general overview of Chapter 7, Chapter 13, and Chapter 11 bankruptcy processes. Let’s look at 4 major details of filing for bankruptcy in order to determine how bankruptcy can best work for you.

1. Exemptions and Non-exemption Property

When you file bankruptcy, all your real and personal property  becomes section 541 property of the bankruptcy estate.

The bankruptcy law is designed to not leave you impoverished and destitute. It leaves you with the basic necessities of life in order to enable you to get a new start. These necessities are exemptions or so-called exempt property that are beyond the reach of creditors. The other assets that you have are the non-exempt properties. The non-exempt assets are the ones that the bankruptcy trustee may take or demand turnover on behalf of the creditors.

Determining which assets are exempt and which assets are nonexempt is a complicated process, especially under the amendments of the 2005 bankruptcy law.  Thirty-four states have opted out of the federal bankruptcy exemption scheme, and theoretically have their own list of exempt assets. Nevada is one of those states that allows you to use the state exemption instead of the federal exemptions. There are 16 states that allow you to use either the federal or the state exemptions, and you can then choose which ones are best for you. 

Every state allows different exempt assets. In Nevada,  exempt assets are listed under NRS 21.090, which is entitled, Property Exempt from Execution. Here is a summary of major Nevada exemptions:

  • $15,000 equity interest in an automobile, and in a joint filing up to $30,000 against one car or up to $15,000 for each car.
  • Up to $550,000 of equity in your homestead residence. To claim this exemption you not only have to own the home, but you also have to live in it at the time you file the bankruptcy petition.
  • One gun and two guns if a joint bankruptcy. You might have one gun that’s worth $50,000, but it would still be exempt from creditors, notwithstanding the high value on the one exempt gun.
  • Up to $500,000 in a retirement account or pension or unlimited exemption in ERISA per IRS Code 408 or 408a under the IRS Code.
  • $12,000 of household goods and clothing. Including a wedding ring. Usually, wedding rings are considered family keepsakes. That means you can have a wedding ring worth hundreds of thousands of dollars and argue that it is a family keepsake. If both husband and wife are filing for bankruptcy, you can stack (or double) the exemption for a joint filing. Valuations of these household goods are based upon the fair market value at the time of the bankruptcy filing. You can use thrift shops or auction values, which are usually a tiny fraction of their original retail value.
  • Up to $16,150 of personal injury awards and all other amounts would go to the bankruptcy trustee.
  • Social security and disability incomes are exempt.
  • Up to $5,000 in a private library, art, family pictures, musical instruments, keepsakes, and jewelry.
  • Up to $10,000 in tools of your trade or to carry on business.
  • Up to $4,500 in farm equipment and supplies.
  • Up to 75% of the disposable earnings per week, or 50 times the minimum hourly wage.
  • All money, benefits, privileges, or immunities accruing in any manner growing out of life insurance. The cash surrender values of that insurance would be exempt.
  • Any vehicle equipped or modified to provide mobility for a person with a permanent disability.
  • Any prosthesis or equipment prescribed by a physician.
  • The money for a 529 education plan.
  • All money and other benefits paid pursuant to the order of a court for the support, education, and maintenance of a child or a former spouse
  • Up to $1000 in a “wild card” exemption, of cash, stocks, bonds, etc.
  • Proceeds received from a private disability insurance plan.
  • Money in a trust fund for funeral or burial services.
  • Unemployment compensation benefits received pursuant to NRS 612.710.
  • Child welfare assistance provided pursuant to NRS 432.036.
  • Stock in a Corporation with less than 100 shareholders, but any dividends from that stock are not exempt.
  • Uniforms for doing your job.
  • Rent deposits that you have with landlords as security for rented property.

This is not all the exemptions, but you can see the list is quite extensive and will not leave the bankrupt petitioner destitute. Nevada residents will probably stay with their state exemptions, which in most cases are more generous than the federal ones, and probably more generous than most other state exemptions.

2. The Critical Concept of Valuation

Household goods and similar items are usually valued at what a secondhand or thrift store would ask for similar items. Automobiles can be valued by Kelly blue book or by numerous websites for automobiles in or similar condition. Real estate should be similar to properties that have sold for in the community. Assessed values can be obtained through your local tax assessor as an additional guide. Real estate listing prices almost always tend to be higher than real values, so don’t rely on them.

3. Secured Creditors and Your Assets

Some creditors have a great interest in your assets because you have given them extra protection when you made the original agreement with them. These are your “secured” creditors. A good example is your home. You may have bought it for $300,000, but you borrowed $250,000 along with your $50,000 down payment to purchase it. There may be a few other creditors, like the IRS, or support obligations that have special priority interest also (We will talk about those in a later section).

Chapter 7, Chapter 13 and Chapter 11 bankruptcy filings each treat  your assets differently. In Chapter 7, you will lose your non-exempted asset. In Chapter 13, you either make payments over the life of your reorganization plan to pay back the value of those non-exempt assets to the creditors, or you give the non-exempt assets  up to the  standing trustee.

The standing trustee then sells the non-exempt assets and distributes the net proceeds to your allowed creditors on a pro rata basis. The repayment plan may take as long as five years. In Chapter 11, your renegotiate the values of assets and make a plan to pay off the creditors  over a period of time, sometimes as long as 8 years.

Secured creditors are those that have liens on your real or personal property. A lien is simply a claim on the property that secures the lender’s interest until you fulfill your agreement to pay  for the loan in full. After the loan is paid for, the lien is released and you own it free and clear.

In bankruptcy, if the lender has a lien on your real and/or personal property, he has a prior right to be paid before bankruptcy wipes out your obligation to that lender. The lender usually “perfect” their security interest in the assets by recording their lien in public records, either a deed of trust for real estate or a UUC-1 for personal property.  If a lien is not perfected, the bankruptcy trustee has the power to eliminate non perfected liens.

There are two kinds of liens:

  1. Consensual liens are those that you voluntarily grant to someone else. They may be for personal property like furniture and automobiles, or they may be for real property, which is usually referred to as deeds of trust or mortgages. In both cases, you borrow money from someone and give them a lien or security interest in certain property until you pay the lender off.
  2. The other kind of lien is a non-consensual lien. This type of lien you never volunteered for, but the law gives creditors a lien to secure something. A perfect example of this is the real property tax on your home or investment property. Another example is when a court enters a judgment against you, they might receive a lien against your property to secure the judgment.

This is important because many times debtors filing bankruptcy have a judgment lien recorded against their homestead and that judgment lien prevents the debtor from claiming their full exemption. The bankruptcy court, the debtor can then file a motion to set that judgment lien aside, assuming that judgment lien impairs the debtor’s exemption.

You usually cannot cancel a security lien, but you can reaffirm their interest, and pay it off over 3 to 5 years in a Chapter 13 case. In Chapter 7 bankruptcy you can redeem the property by paying for it within 30 days of the 341 meeting. In either case, you wind up by keeping the property.

The concept of liens is important because, in bankruptcy, your personal liability is eliminated, except the lien still secures creditor’s interest in the property. In other words, they can still repossess the property until you pay for it.

Bankruptcy gives you special powers and options to remove liens from some exempt items.

We said previously when you file bankruptcy, everything becomes property of the bankruptcy estate, unless exempt. This means not only “things”, but also any “interest” you might have in them. For example:

  • Any proceeds from the sale or rental of property. If you receive rents, they belong to the estate. The trustee will usually allow you to use rents to pay for the expenses, like the mortgage, taxes, repairs, insurance, etc.
  • Inheritance rights arising within 180 days of the filing date.
  • Martial property divisions with 180 days of filing.
  • Any property you transferred within two (2) years of the petition date.
  • Any debts or tax refunds that are owed to you.

4. What Do You Own?

Your “interest” in property may not be what it initial appears to be. For example, if you jointly own property, your interest is in the part, not the whole. You might be in a real estate partnership with three other people, and only your part is subject to the jurisdiction of the bankruptcy.

If you own a car worth $20,000, but you have secured loan against it for $15,000, then your interest is really only the difference of $5000. The loan has a priority or secured  claim on the balance.

A home is frequently owned by both spouses. In Nevada, because it is a community property state, the home become property of the bankruptcy estate (unless exempt), even if the other spouse does not file for bankruptcy (more on home ownership later).

In conclusion, there is always a lot to think about when contemplating filing for any type of bankruptcy. At Harris Law Practice we have been providing financial protection and guidance in the Reno area for the last 45 years. I am here to help. Bankruptcy may not be your only option. Let’s explore all of the alternatives to filing bankruptcy and possibilities that could exist for you.

Let me work with you. Please make an appointment at 775-786-7600 or 775-690-2190 for your free, confidential and personal consultation to talk things over .

8 Common Alternatives to Filing Bankruptcy

8 Common Alternatives to Filing Bankruptcy

First, we will look at the alternatives to filing bankruptcy and the pros and cons of each alternative for filing bankruptcy in detail.  Potential filers may use one or all of the below-detailed suggestions to restructure their finances in order to avoid filing bankruptcy.

1. Getting Help From Your Family

Family help may be an alternative for you, but you must be careful not to make a bigger mess and create a possible lifetime of resentments. Unless you change your habits and restructure your finances, the problems that got you into possible bankruptcy will likely not change. If you use your family’s money, be sure the money is used wisely and you don’t wind up in bankruptcy anyway. If you have a nonexempt asset, you might want to give them a security interest in the asset, so that if you are not able to pay them back and you wind up filing for bankruptcy, then the family loans are protected by the valid security interest in non-exempt assets.

2. Selling Assets

If you have significant non-exempt assets that can be sold to pay off your debts, it might be wise to do so, since you will probably lose them in the bankruptcy anyway, assuming those assets are not transferred out prior to the Petition filing. The assets that you should sell are known as nonexempt assets. These are assets that are not protected under the bankruptcy or State exemption laws.

If you do sell nonexempt assets, do so at a fair market price. Do not repay friends and relatives if there’s any possibility of bankruptcy prior to one (1) year filing bankruptcy. They may be forced to repay that money to the bankruptcy trustee.  Section 547(b).

Exempt assets are those that you will probably be able to keep even if you are filing bankruptcy. So don’t let the creditor force you into selling an exempt asset.

  • In Nevada, your home equity is protected up to $550,000.
  • Your individual retirement accounts up to $500,000
  • An automobile up to $15,000 in value
  • Household and personal belongings up to $12,000 in value.
  • One gun

Nevada property exemptions.  Property exempt from execution listings are found in NRS 21.090 and are briefly described as follows:

  • Pension, retirement, or IRA, 1 gun, private libraries, works of art, musical instruments up to $5000 in value.
  •  Farms trucks, farm stock, farm tools, farm equipment, and supplies not to exceed $4500 in value.
  • Professional libraries equipment supplies and tools, inventory, material seized to carry on the trade or business of the debtor not to exceed $10,000 in value;
  •  for any work income, 75% of the disposable earnings of a judgment debtor during that week, or 50 times the minimum hourly wage prescribed by certain federal fair labor standards act provisions.
  • all money benefits privileges or immunities occurring or in any matter growing out of any life insurance.
  • all money and other benefits paid pursuant to the order of a court of competent jurisdiction for the support, education maintenance of a child.
  • all money and other benefits paid pursuant to the order of a court of competent jurisdiction for the support and maintenance of the former spouse [alimony].
  • payments in an amount not to exceed $16,100, received as compensation for personal injury, not including compensation for pain and suffering an actual pecuniary loss.
  • payments received pursuant to the federal Social Security act.
  • any personal property not otherwise exempt from execution not to exceed $1,000 in total value, also known as the wildcard exemption.
  • the stock of the corporation described in subsection 2 of NRS 78.746 except as set forth in that section.

Every state is somewhat different in their approach to exemptions and the values for those exemptions.  Nevada is considered a more generous state for allowing the debtor’s exempt property. The other States that have generous homestead laws are Florida, Texas, Massachusetts, and Oklahoma.

3. Lower Credit Card Interest Rates

There is a possibility you may be able to move credit card balances from high-interest rate cards to lower ones. Sometimes this can have a significant effect in lowering your monthly cash outflows, but what ultimately happened is that you wind up extending the terms of the balances that you do owe. Be careful about opening new credit card accounts to pay off old ones. If the new account was opened within the year of your filing bankruptcy, the credit card company may attempt to claim it was fraud and tried to prevent you from discharging that debt.

4. Restructure Your Home Mortgage

Usually one of the largest expenses that you have is mortgages on your home. If you can restructure the mortgage terms, it may give you more cash to pay your regular monthly bills. Begin negotiations with your lender as soon as possible. Most banks and mortgage companies don’t really want your house back, they want the money that is outstanding on the loan. Foreclosure is a huge hassle for everyone involved, so they are usually willing to look at alternatives.

Every government agency has programs designed to avoid foreclosure. If your home is insured by the Federal Housing Administration, Veterans Administration, Farmers Home Administration, or HUD, contact them to see what programs they may have available that is best for your situation. Since the 2008 housing valuation bust, these governmental agencies and bank lenders have created numerous new programs for homeowners to avoid foreclosure.

If you have significant equity in your home, you will almost always get more proceeds by selling it yourself rather than letting it go into foreclosure.  But remember, the equity in your home will be protected in bankruptcy up to the state homestead amount.  If you’re facing foreclosure, it’s well worth the attorney’s fee to discuss your home and the bankruptcy ramifications on your house.

Be careful about using home equity loans to pay your debts. Home equity loans are secured by your home and may place it at risk if you cannot pay the loan. Home equity loans do have the advantage that they are usually tax-deductible and the interest rate is lower than credit cards. The trap that many people fall into is that they pay off their credit cards, increase their mortgage payments, and then begin using the credit cards again. So, they eventually wind up with more debt than they had started with and now their home is at risk also.

5. Negotiating With Your Creditors

Although this sounds good, in most practical situations, especially with credit cards and consumer debt, renegotiating with your creditors seldom works.  Work out agreements are the most valuable when you have significant nonexempt assets available to pay off your debts, but you need time to make the appropriate arrangements.

6. Using Retirement Plans

Using retirement plan monies is almost always a bad idea for several reasons.

  • Retirement plan monies are almost always protected in bankruptcy.
  • Most debts that you would pay with your retirement plan monies would be wiped out in bankruptcy anyway.
  • If you withdraw retirement plan monies early, there may be serious tax due.
  • If you don’t repay retirement plan loans, that non-repayment will also incur tax penalties.

7. Threat of Bankruptcy

Part of negotiating with creditors can include the threat of bankruptcy. Sometimes the threat of bankruptcy will give you additional leverage in an offer to pay less than you owe. If the creditor thinks the bankruptcy will completely wipe away the debt he might be willing to accept a greatly reduced settlement on the balance you owe. If you hire a bankruptcy attorney to handle the negotiations, it becomes evident to the creditor that you might fulfill your threat.

Be careful about threatening bankruptcy to secured creditors where you are behind in payments, like automobile loans, because you might wake up one morning and find the car has been repossessed.

8. Moving to Another State

Finally, one of the last alternatives to filing bankruptcy is the simplest but can be fraught with many problems in the future. Occasionally, moving to a different state and simply ignoring the bill collectors, can make financial sense.

Moving to a different state requires a creditor to comply with a different set of laws to collect the debt. If you have few assets, do not care about your credit rating, and most of your income comes from social security benefits, welfare or unemployment, you might decide to totally ignore your past financial problems. This decision will probably require you to change your lifestyle, by not having assets in your name, limiting bank accounts, and dealing more with cash and money orders.

If you are sued, and a judgment is entered against, you may have to worry about bill collectors finding what little you do have. You must be careful about having bank accounts because the judgment holder or a collector can seize all the money in them. In some cases, these judgments can go on for as long as 20 years. So, do not make this choice lightly.

In conclusion, there is always a lot to think about when contemplating filing for any type of bankruptcy. At Harris Law Practice we have been providing financial protection and guidance in the Reno area for the last 45 years. I am here to help. Bankruptcy may not be your only option. Let’s explore all of the alternatives to filing bankruptcy and possibilities that could exist for you.

Let me work with you. Please make an appointment at 775-786-7600 or 775-690-2190 for your free, confidential and personal consultation to talk things over .