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:
- 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.
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 .
Yes, there are many alternatives to filing bankruptcy, but there are always negatives and positives in trying to find an alternative solution to your financial problems and issues. Below is a list of pursuing possible alternatives and whether or not you need to consider the consequences of using these alternatives versus the bankruptcy filing.
Alternatives to Bankruptcy Filing:
- Restructuring your home mortgage loan(s).
- Taking out a home equity loan to pay debts such as credit card liabilities.
- Using funds from retirement accounts or borrowing against pension plans to lower your outstanding debts.
- Obtaining loans from relatives or friends.
- Taking a second or third job to increase your income.
- Renegotiation with creditors to reduce or extend the term on debts.
- Sell assets to pay down or fully pay debts.
- Do nothing and deal with the consequences of debt collectors and poor future credit ratings.
Because bankruptcy law is so complex, you would be well served to consult with an experienced bankruptcy lawyer to help you understand the consequences of taking any of these alternative routes. If you decide not to file for bankruptcy, an experienced bankruptcy attorney will help you understand the consequences of various kinds of debt that you may have.
In the event of default, the lender can repossess your vehicle and sell it to cover your outstanding car loan. Many times the sale proceeds are not enough to cover the debt, so you lose the car but still have the remaining deficiency balance that you owe. You may return the vehicle to the lender, but it will still negatively affect your credit. You may decide to try to sell the car yourself because you believe you can get more money for it in order to pay off the outstanding loan. Selling your own car generally results in more money for the car than to allow repossession by the lender.
A mortgage lender cannot simply throw you out of your home when you make a late payment. The lender must first go through the foreclosure process to legally reclaim the home. In almost all cases, it will take a minimum of three to four months, and usually much more time than that to foreclose. You can live in the home until the foreclosure is completed. In many cases, you can negotiate with the lender some kind of alternative or modification to the original loan.
Alimony and Child Support
Because these support obligations are not usually dischargeable in bankruptcy, you need to thoroughly examine the effects that bankruptcy will or will not have on your financial future. This is an extremely sticky area that will vary widely, depending on children, custody, your income, previous obligations made under a divorce settlement, and possibly many other factors.
Have you filed all the appropriate tax returns with all the appropriate taxing authorities? If not, it is extremely important to file those tax returns and to find out what your tax obligations are, possible penalties, and interest that you owe, before filing for bankruptcy. Some taxes may be dischargeable or reduced through offers in compromise and other forms of negotiation with the tax collector. More importantly, most net operating losses (“NOL”) disappear after filing for bankruptcy to the extent of discharged indebtedness resulting from bankruptcy.
This is another case where past obligations will not just disappear with the passage of time.
Fines, Fraud and Restitution
Many obligations that are predicated on fraud or arise from fines and restitution orders, generally do not go away in the bankruptcy, and are best to be negotiated with the appropriate litigants or governmental agencies.
Passage of Time
Most debts will eventually expire under a statute of limitations. In many cases, after six years, you may no longer have to pay the debt if the creditor does not sue you within that time period. Unfortunately, if you are sued and a creditor wins, i.e. obtains a judgment against you, some judgments can last as long as 20 years. The real problem here is to figure out when the statute of limitations starts on each kind of debt. Can you deal with debt collectors for years in the future?
This may seem like a lot of information but it is designed to protect you. Give us a call at (775) 786-7600 or (775) 690-9120 for a free and confidential consultation to discuss your financial situation, alternatives to bankruptcy and the many details of filing for bankruptcy whether it be chapter 7, chapter 11 or chapter 13.