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:
- 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.
- 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.