The housing market is red hot right now with homes selling for well-above asking price. This has caused home values to skyrocket. For many homeowners, this is a welcomed phenomenon. With interest rates as low as they are, it is an opportune time to tap into that equity through a cash-out refinance or home equity line of credit.
However, this may have the unwelcome result for those needing to file for bankruptcy in Nebraska. Under Nebraska exemption laws, an individual filing for bankruptcy can exempt (protect) up to $60,000 in a home. The $60,000 exemption also applies to proceeds from the sale of a home for six (6) months after the sale. In Nebraska, the homestead exemption cannot be doubled, meaning that a married couple filing for bankruptcy cannot each claim the $60,000 exemption to protect up to $120,000 in equity.
Example: Husband and wife have $70,000 in credit card and medical debt, a home worth $250,000 with a mortgage of $150,000, and household income of $65,000, which has been stagnant for the last 3 years. Over the last 3 years, the home increased in value by $75,000 without any major renovations taking place. The home currently has $100,000 in equity, but only $60,000 of that equity can be exempt (protected). The couple needs to file bankruptcy to stop a garnishment and to address the $70,000 in unsecured debt. Based upon their income and household size (2), they qualify for a Chapter bankruptcy, If they file a Chapter 7 bankruptcy, they risk a Chapter 7 Trustee selling their home, paying $150,000 to the mortgage company, $60,000 to them for the homestead exemption, and distributing the remaining $40,000 to the unsecured creditors. In short, they’d risk losing their home.
The couple has some other choices to explore as alternatives to filing Chapter 7 bankruptcy:
- Sell the home and settle debts. Sell while the market is hot. With this option, the couple would have funds available to negotiate lump sum settlements of the $70,000 credit card and medical debt. Many creditors will settle debts for 30-60% of the debt.
- Do a cash-out refinance and settle debts. Assuming the couple qualified for a cash-out refinance, this would be a great time to tap into the equity to address the debts they have.
- File a Chapter 13 bankruptcy to reorganize debts. Instead of going to each individual creditor to work out a settlement, the couple could file a Chapter 13 bankruptcy a propose a 3-5 year plan of reorganization. In the Chapter 13 bankruptcy, the couple would retain their home, but would have to pay the unsecured creditors an amount equal to the non-exempt equity in their home of $40,000. The issue would be whether they could afford to pay the $40,000 over the duration of the plan.
The housing boom may have the adverse effect for those needing to file for bankruptcy because the homestead exemption in Nebraska is only $60,000, which may not be enough to protect Nebraskan’s home in the current housing market.
Deciding whether to file a bankruptcy is a complex and emotional decision. Finding the right attorney to work with you to make that decision is crucial. Instead of worrying what will come next, you should meet with a bankruptcy attorney to discover your options for dealing with your financial situation.