Health Savings Accounts & Bankruptcy


My family has a Health Savings Account (HSA) so we can pay for out-of-pocket medical expenses not covered by insurance, although it would be more accurate to call it a health Spending account since we never seem to save much in that account.

The basic idea of an HSA is to give consumers a tax benefit to purchase a high-deductible health insurance plan. Such plans do not cover any medical expenses until the high deductible amount is reached and this is supposed to make consumers more leery of rushing to the doctor to treat minor problems.

Money deposited into a HSA grows tax-free and can be withdrawn tax-free for qualified medical expenses. Individuals may invest up to $3,350 and families may invest $6,750 into an HSA each year.

If the family stays healthy and contributions are made automatically, it is possible to save up a decent pile of money in an HSA.


Unfortunately, there are no court rulings on this topic yet.  However, there are some good arguments to make that the funds should be protected.

Nebraska Statute 25-1563.01 provides the following protection:

In bankruptcy and in the collection of a money judgment, the following benefits shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors: To the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service unless:

(1) Within two years prior to bankruptcy or to entry against the individual of a money judgment which thereafter becomes final, such plan or contract was established or was amended to increase contributions by or under the auspices of the individual or of an insider that employed the individual at the time the individual’s rights under such plan or contract arose; or

(2) Such plan or contract does not qualify under section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code.

Clearly the funds in an HSA are payable on account of illness, so it would seem that the funds should be protected.

How about the 2nd condition that the plan qualify under the Internal Revenue Code sections 401(a), 403(a), 408 or 408A?

The tax qualification of Health Savings Accounts are created in Internal Revenue Code Section 223, but that code section references IRC 408.  Is referring to Section 408 enough to meet the requirement of this protection?  It is impossible to say, but as a general rule exemption laws are to be interpreted liberally.

If an HSA is not protected by 25-1563.01 the funds would certainly be protected under the Wildcard exemption of 25-1552, but that exemption is limited to $2,500.

Until we have a written court opinion on this topic, I would recommend great caution when filing bankruptcy when there are substantial funds on deposit in an HSA.

Image courtesy of Flickr and GotCredit.
Posted in Exemption, Medical Debts

What Happens to an Auto Lease in Bankruptcy?

Ford Mustang Mach 1

Keeping a vehicle in bankruptcy is mission critical.  Clients often ask if their car is safe in bankruptcy or if they have to list the debt.

When it comes to vehicle leases that concern intensifies since a consumer has fewer rights.  Buying a car is similar to marriage, but leases are more like friends with benefits.


There are basically two options for car leases in Chapter 7: the lease may be assumed or rejected.  Most clients elect to continue the lease agreement, and as long as the vehicle loan is paid current and insurance is in place, the leasing company usually agrees to continue the contract.

If the lease is a burden to the debtor it may be rejected.  This can be done formally with written notice to the creditor or it may be accomplished by not signing an assumption agreement.  A lease agreement is deemed rejected unless a agreement to continue the lease is filed with the bankruptcy court within 60 days after the case is filed.

Keep in mind that assuming a vehicle lease in Chapter 7 is voluntary on the part of the debtor and the bank.  The bank is not required to offer a lease assumption agreement, but they generally do if the loan is current.


Auto leases may be retained in a Chapter 13 case or rejected.  Generally speaking, a debtor has more power to keep a lease agreement in Chapter 13, especially if the payments are in default.

Assuming a lease in Chapter 13 requires that delinquent payments be cured in short period of time.  The debtor must file a payment plan with the court that formally assumes or rejects the lease.  If the plan is silent on whether the agreement is being continued, it is deemed rejected 60 days after the case is filed.

The tougher question is whether it is wise to keep a lease that will expire in the middle of the chapter 13 case. When the lease is over the vehicle must be returned and the debtor must find a replacement. It can be very difficult to find a bank willing to extend credit in the middle of chapter 13, and if they do extend credit it is generally at a higher rate of interest.

You need to plan for what happens when the lease expires in the middle of the chapter 13 case.  Do you throw the dice and gamble that you can get financing for a replacement vehicle when the lease expires, or do you surrender the vehicle at the beginning of the bankruptcy?  This is a key item to plan.


Most lease agreements allow the debtor to buy the vehicle at the end of the lease.  The purchase price is usually set at the vehicle’s estimated value at the end of the lease.  However, most lease options provide that the purchase price must be paid in full immediately in one lump-sum payment.

Outside of bankruptcy, most banks will finance the lease option balloon payment, but that is not the case in the middle of chapter 13.  In the middle of Chapter 13 cases banks rarely finance the balloon payment. So, the debtor has to be prepared to deal with this problem.


May a debtor finance the lease purchase option through the Chapter 13 Plan?  In a word, no.  Although I have seen this done once in a Nebraska bankruptcy case and once in a Florida case, this only worked because the creditors did not pay attention to the chapter 13 plan and it got approved.  A debtor cannot force the lender to accept payments on the lease option purchase price.


If a debtor defaults on the chapter 13 payment then the bankruptcy trustee will not be able to pay the regular car lease payment as well.  Such a default will give the lender the ability to repossess the vehicle during the chapter 13 case after obtaining court permission.  This can be quite a problem since a debtor must continue to pay the unpaid lease balance even if the vehicle is repossessed.  (See In re Masek).  Once a debtor agrees to assume a lease in a chapter 13 case they must pay off the lease in full, whether the car is repossessed or not.  For this reason, one has to be very careful about assuming a lease in chapter 13.


Image courtesy of Flickr and Spanish Coches.


Posted in Chapter 13, Chapter 7, Leases, Reaffirmation Agreement Tagged with: , , ,

Agreements Not to File Bankruptcy


Is an agreement not to file bankruptcy enforceable?  Can you sign away your right to file bankruptcy?

A recent client asked that very question.  His payday loan agreement specifically stated that he could not discharge the loan in bankruptcy.  Contracts commonly state that a debt survives bankruptcy. Are those agreements valid?

Generally speaking, agreements to waive your right to file bankruptcy or to exclude a debt from bankruptcy are unenforceable and violate public policy.

Any attempt by a creditor in a private pre-bankruptcy agreement to opt out of the collective consequences of a debtor’s future bankruptcy filing is generally unenforceable. The Bankruptcy Code preempts the private right to contract around its essential provisions.” In re Pease, 195 B.R. 431, 434-35 (Bankr. D. Neb. 1996)

Terms in a contract that prohibit a person from filing bankruptcy are never enforceable.  Agreements that certain debts cannot be included in bankruptcy are also void.

In larger business bankruptcy cases, there is limited authority for a creditor to negotiate away some of the bankruptcy protection against collateral securing a business loan, but that is limited to larger business bankruptcy cases typically involving single-asset entities.  (For example, a corporation that owns a single apartment complex.)


This provision is typically included in many payday loan agreements.  Does it have any legal consequence?  If you file bankruptcy after signing an agreement with this provision, does it mean you have committed fraud if you file a case?

First, if you are currently in a bankruptcy case and take out a payday loan, the debt is not discharged anyway since it was incurred after the case was filed.

What about the 2nd part of this statement–the part about not planning to file bankruptcy and then filing a case soon afterward?

Taking out a loan when you plan on filing bankruptcy is a bad idea. The creditor can object to discharging the debt if you knew you would be filing bankruptcy at the time the loan was made.   However, many folks desperately take out loans so that they can avoid filing bankruptcy in the first place, so the timing of the loan is not always conclusive as to a person’s intent.

It seems like payday loans and bankruptcy go hand in hand.  Such loans are the last stop before surrendering to the debts.  It is a desperate and final effort to keep the cash flow going, and lenders know their customers are just a step away from declaring bankruptcy.  For this reason they attempt to scare customers that filing bankruptcy after receiving a payday loan is fraud and that it cannot be discharged or that it is a crime to write a check with insufficient funds on deposit.

Can you contract away your right to file bankruptcy?  The answer is a resounding No!

Image courtesy of Flickr and Steve Snodgrass.


Posted in Omaha Bankruptcy Attorney, Payday Loans

File Response to Lawsuit Even When You Owe the Debt


I see way too many Default Judgments being awarded to creditors.  Judgments are wrecking balls that obliterate the walls of your financial house.

Judgments give creditors the power to garnish up to 25% of your paycheck and 100% of your bank account.  Once that happens it becomes impossible to pay the rent, daycare, or car payment.  A financial death spiral ensues and that is when I meet a lot of new clients–at the breaking point.

There is a terrible assumption that it is somehow dishonest or wrong to fight against a lawsuit when you know you owe the money.  It seems like lying to oppose a lawsuit that is basically correct–you owe the money.

Here is why you need to file a written response to a lawsuit even when you owe the money:

  • YOU NEED TIME.   For no other reason, filing a written response to the lawsuit will delay a judgment for at least 60 to 90 days. When you fail to file a response the creditor gets a default judgment within 30 days, but if you file a response they have to go through extra steps that drag out the process.  With that extra time you may be able to pay off the debt before it becomes a judgment or perhaps you will be able to work out a payment plan with the creditor.
  • THE AMOUNT THEY SAY YOU OWE IS INFLATED.   Does a single aspirin really cost $20?  Are medical creditors “piling on” the charges?  Has the credit card company charged excessive interest?   Even if you agree that you owe a debt, are they suing for the correct amount?  Filing a response gives you the opportunity to challenge their accounting.  
  • HEALTH INSURANCE SHOULD HAVE PAID THE BILL.  Are you being sued for a debt that health insurance should have covered?  Was a claim filed?  Have you appealed the denial of a claim?  A recent client had to be transported by a medical helicopter and the insurance company denied the $30,000 flight as being “unnecessary.”  Creepy, right? The client appealed and won.  If you can drag out the lawsuit perhaps you will find enough time to get insurance to pay the debt.
  • NEGOTIATE THE DEBT.  Collection companies just want to get paid, and they want to be paid with the least amount of effort.  By filing a response you make their job more difficult and expensive.  After filing a response reach out to the collection attorney and offer a settlement.  Offer 50% of the balance payable in 30 days or whatever you think is fair. Start a conversation.  They best way to start the process is to email the collection attorney.
  • STATUTE OF LIMITATIONS HAS EXPIRED.  Most debts expire after 4 to 5 years of no payments being made on the account.  Perhaps you are being sued by a junk debt buyer who purchased a credit card account you held 7 years ago during a prior marriage.  The Nebraska statute of limitations laws give you an affirmative defense.  In fact, if you have been sued on an expired debt you may have a claim against the collector for violating the Fair Debt Collection Practices Act (FDCPA) and you may be entitled to damages plus reimbursement for attorney fees.  However, you must respond to the lawsuit and specifically claim this defense.

How do you respond to a court summons?

  1. The response must be in writing.
  2. The response must be filed with the clerk of the court.
  3. The response must be filed within 30 days of receiving the Summons.
  4. A copy of the response must be mailed to the creditor’s attorney.

Read this article to learn how to respond to a court summons in Nebraska.

Image courtesy of Wikipedia and Ammodramus.

Posted in Collection Agency Lawsuits, Debt Buyer Lawsuit, Debt Settlement, Default Judgment, Garnishment, Medical Debts Tagged with: , , ,

Cheap Bankruptcy Attorney


You are searching for a cheap bankruptcy attorney.  I get it.  Money is tight.  You need those garnishments to stop right now but you can’t come up with the money to file bankruptcy. All bankruptcy attorneys do the same basic function, so why not hire the cheapest guy out there?

In fact, there is some truth to this thinking.  All bankruptcy attorneys do perform the same basic function.  They list your debts, property, income and expenses on the bankruptcy petition and attend the court hearing with you.  So why not hire a cheap Omaha bankruptcy attorney?

In my experience, the most expensive you will ever hire is a cheap bankruptcy attorney.

Cheap bankruptcy attorneys work alone.

Cheap attorneys can’t afford to pay rent at a decent law office, so they wind up isolated in a cheap office suite or they work out of their home.  They are isolated.  They lack colleagues to talk to and therefore they don’t get the chance to talk about your case before filing it.  Great bankruptcy attorneys work in teams.  They help each other, they teach each other and they have their buddies review cases before the pull the trigger and file a case. Older colleagues share their horror stories and help young attorneys avoid the same mistakes they made.

Cheap attorneys take wild risks and are often clueless about the risks they take.  They lack experience and are desperate for money, so they cross their fingers, say a prayer and file the case hoping everything “works out.”  At the other end of the line is the experienced and aggressive Chapter 7 Trustee who is paid on a commission when he finds unprotected assets, tax refunds, voidable payments to family members, and unprotected business assets. The cheap attorney is no match for the experienced Trustee.

Cheap bankruptcy attorneys lack resources.

Great bankruptcy firms share overhead and they are able to hire the best staff, the best computer technology and legal research resources.  They purchase specialized credit reports to ensure all creditors are listed and they pay for expensive online court subscriptions to search for lawsuits, garnishments, judgments and liens.  They purchase specialized background reports to ensure all assets and property transfers are reported on the bankruptcy schedules.

Cheap attorneys cut corners to save costs.  They often report only the debts provided by their clients and fail to pay the additional expense to acquire credit reports, asset reports and legal research.  They are frequently surprises in court when the Trustee asks questions about asset transfers they failed to uncover.

Cheap bankruptcy attorneys lack quality-check systems.

Great firms spend years training their attorney and paralegal staff.  They establish standard procedures to ensure that every case is prepared correctly. They hold regular meetings to review procedures, new cases, and they use quality control checklists. They continuously attend and sponsor legal education courses and share their knowledge with their team.

Cheap attorneys frequently lack any staff let alone an experienced one. They do much of the paperwork themselves and they have nobody to review their work.  They never bother to establish quality control systems since there is no team to manage.  In the process, they overlook small details that turn into big problems.

Cheap bankruptcy attorneys lose assets.

About 30 days after the bankruptcy case is filed you must attend a meeting with the bankruptcy trustee.  The meeting is held at the federal courthouse, and the meetings are public.  We all get to watch each other in this profession.  We see who does good work and we witness those cheap attorneys who basically run their clients into a grinder.  Cheap attorneys lack experience and training.  They constantly lose tax refunds because they fail to anticipate the amount and timing of the refund.  They loose vehicles because the file to properly value the vehicle.  They fail to ask their clients important questions and the bankruptcy trustees often uncover voidable transfers to family members and business associates.  Bankruptcy trustees know who these cheap attorneys are and they instinctively attack their cases because they know the attorney did not perform a detailed investigation of the debtor.

Cheap bankruptcy attorneys often lack insurance.

Nebraska does not require attorneys to purchase professional insurance  Cheap attorneys frequently cannot afford the premium. Cheap attorneys often lack significant personal assets so they are not worried if they make a big mistake–they have nothing to lose.

Want to hire a cheap bankruptcy attorney?  Think again.  The most expensive attorney you will ever hire is the cheapest one out there.

Image courtesy of Flickr and Eric E. Castro.

Posted in Chapter 7, Fraudulent Transfer, Garnishment Tagged with: , ,

Will Filing Bankruptcy Stop an Eviction in Nebraska?


My Landlord is trying to evict me because I defaulted on my payment arrangements.  My hands were tied because I didn’t get a paycheck for 2 weeks in a row.  Will filing bankruptcy stop the eviction?

The short answer to this question is Yes, filing bankruptcy will stop an eviction.  But what happens next? Is it worth the cost? How long does it stop the eviction?

When a bankruptcy case is filed a federal order immediately comes into existence that stops all collection action, including evictions, garnishments, repossessions, creditor phone calls, etc.  We call this order the Automatic Stay because it automatically comes into existence when the case is filed.

Evictions in Nebraska can completed within about 3 weeks!

In Nebraska, the eviction process is very swift.  When a payment default on a lease agreement occurs the landlord will send the tenant a Three Day Notice to Quit.  If the delinquent rent is not paid within three days, the landlord has the right to file an eviction lawsuit (called a “Forcible Entry & Detainer”) .  Once the eviction lawsuit is filed, the court will schedule an eviction hearing, typically within 14 days.  On the day of that hearing the court will sign an eviction order (called a Writ of Restitution) and the sheriff will then be called to carry out the eviction.  So, evictions in Nebraska can completed within about 3 weeks.

Filing Bankruptcy Before the Landlord Obtains a Judgment of Possession.

If a bankruptcy case is filed before the eviction hearing is held, the eviction is placed on hold.  However, the landlord may file a motion with the bankruptcy court to obtain permission to continue with the eviction and the bankruptcy court will typically grant this request unless the tenant is able to cure the default quickly. If the landlord files this motion the bankruptcy court will scheduled a hearing within 30 days on average.

How quickly must the past due rent be paid?  It varies from case to case, but more than likely the tenant will be required to pay future rent on time and then cure the existing default within a short period of time.  The court will take into consideration many factors such as the length of the tenancy, the frequency of default, the debtor’s current income level and job tenure, whether minor children or elderly persons reside in the home, and the likelihood of the default being paid quickly.

As a practical matter, you must take into the consideration the cost of filing bankruptcy.  To file a Chapter 7 case the entire court fee and legal fee must be paid in advance.  The typical chapter 7 case costs $1,200 to $1,500 in Nebraska.  So, if a tenant is behind $800 on rent, it would be wiser and cheaper to pay the rent than to file bankruptcy.  Chapter 13 cases are 3 to 5 year repayment plans and the cost of filing is much less, typically around $400.

Filing Bankruptcy After the Landlord Obtains a Judgment of Possession.

Nebraska law does not permit a tenant to cure a rent default after an eviction order is entered, so filing bankruptcy after a judgment of possession is entered is not helpful.  Unless the eviction judgment allows for the curing of the default (something I have never seen in Nebraska) filing bankruptcy after the Writ of Restitution is entered will not stop the eviction.

Will filing bankruptcy wipe out the debt to the landlord?

Yes, bankruptcy will discharge the debt owed to a landlord for past and future rent.  If a judgment for money has been given to the landlord, the bankruptcy will be able to discharge that judgment as well.

Will bankruptcy allow me to terminate my lease early?

Bankruptcy will discharge any unwanted executory contract, such as a rental agreement or vehicle lease. So, if you wish to terminate your lease, even if you are current on the payment, the bankruptcy will discharge the lease obligation.  If the landlord has been provided notice of the bankruptcy, the lease agreement is discharged and the agreement is basically converted to a month-to-month tenancy.  If you continue to pay rent and the landlord accepts the payment you may continue to reside in the property until you or the landlord elect to end the relationship.  To end a voluntary month-to-month rental agreement usually requires 30 days written notice to the other party.

Legal Aid Landlord & Tenant Handbook.

Legal Aid of Nebraska has written a wonderful handbook regarding landlord and tenant rights.  The handbook has lots of useful information on how to respond to an eviction lawsuit.  If you are being evicted or if you are just having problems with a difficult landlord, this handbook is a must read.

Image courtesy of Flickr and Mark Turnauckus.



Posted in Chapter 13, Chapter 7, Eviction Tagged with: , , , ,

Lawsuit Served on 10 Year Old Daughter


The Constitution guarantees certain rights, one of them being due process of law. And a large part of the process requires that each party to a lawsuit be given notice.  The legal process is designed to be an open process were everyone is given an opportunity to be heard.  To deny someone notice of a legal proceeding is to deny their right to due process guaranteed under the Constitution.

When a client complained about a judgment entered against her without her knowledge we checked the court record to see if she was correct.  We hear this complaint all the time, and it usually means the client moved and the court summons was sent to a former address.  This case was different.  She owned her home and had lived there for years.  Why didn’t she receive notice?

The court records indicated that a copy of the summons was left with the client’s daughter. The only problem was, the daughter was 10 years old and she tossed the lawsuit on top of a stack of her mother’s papers and forgot to tell her mom. Oops, the kid forgot to let mom know that she had just been sued.  Kids are so forgetful!

You can guess the rest of the story.  Since mom didn’t know she had been sued there was no written reply made to the lawsuit. After 30 days the creditor filed a motion for a Default Judgment and the next thing you know a Judgment Lien was slapped against mom’s home.

Can the Sheriff serve a summons on my kid when I’m not home?

It depends. Nebraska law indicates that the Sheriff may leave the summons with a person of suitable age and discretion who resides in the home.  Is a 10 year old a person of suitable age and discretion?  My guess is no.  If the kid were 16 or 18 that would be a different story, but a 10 year old clearly lacks sufficient age and discretion to understand the consequence of being served with a summons.

Can a judgment based on faulty service be set aside?

Yes, the judgment may be set aside if the court approves a Motion to Vacate Judgment.  In a recent Nebraska Supreme Court case of Capital One Bank vs. Lehmann the court indicated that a judgment based on lack of proper service may be set aside at any time.  If a judgment was based on defective service or if service was never made because you moved to a different address, a motion to vacate the judgment should be filed.

What should I do if I receive a Summons?

In short, if you are sued a written answer must be filed with the Clerk of the Court within 30 days of receiving the summons.  This article explains the process of filing a written response.

Image courtesy of Flickr and Jolante van Hemert.

Posted in Default Judgment Tagged with: ,

How Much Can The IRS Garnish?

IRS Garnishments Omaha, NE

The maximum amount a judgment creditor may garnish from a paycheck is 25%, but the IRS is not subject to state exemption laws and they may garnish almost all of a person’s paycheck.

In fact, IRS wage garnishments are not really based on what they can take as much as it is on what the taxpayer is allowed keep.

For example,  in 2015 a single parent of two kids who files as Head of Household may protect only $409 of wages per week. If they earn $1,000 per week, the IRS garnishes $591.  If that same parent earns $2,500 per week, the IRS garnishes $2,091.  Instead of placing a limit on the percentage of wages the IRS may take, the federal tax laws simply establish a flat amount they IRS cannot take.

What should you do if you receive an IRS Wage Levy?

Fill out an IRS Collection Statement.

The IRS can reduce the amount of the wage garnishment if you complete an Collection Information Statement, IRS Form 433-A.  Until you complete and submit this form, the IRS has no clue if you are single or married or a parent or disabled.  This form allows you to enter your monthly income and expenses.  The IRS will set your monthly deductions based on your income level and the number of people in your household for most expenses, but certain expenses, such as medical expenses, will be allowed in full if you can document the expense.

Call the IRS to set up an Installment Agreement.

After completing form Form 433-A, call the IRS to set up a payment agreement.  Hopefully the amount Form 433-A says you have to pay is less than what the IRS is currently garnishing.  If you are unable to complete the form the IRS will work with you over the phone to complete the schedule.  Call the IRS at 1-800-829-1010 to set up the payment agreement.

What if you call a crabby IRS agent who makes you uneasy?  Just hang up the phone and call back a few minutes later.  A different person will answer the phone.  In life, some people are nice and helpful, and some are . . . something else.  Find a nice person who will help you.  Most folks at the IRS are nice and helpful.  Some are . . . something else.

File Chapter 7 Bankruptcy.

Individual income taxes that were filed by you more than 3 years ago can probably be discharged in a Chapter 7 bankruptcy case.  It is important to know when the taxes were filed, whether an extension to filing the taxes was filed, and whether the taxes were filed by you or by the IRS.  If the IRS filed a substitute return because you did not file a tax return, the bankruptcy will not discharge he tax.

File Chapter 13 Bankruptcy.

In cases where your income is too high to qualify for chapter 7 or in cases where the taxes cannot be discharged in chapter 7, you may want to consider filing chapter 13.  In a chapter 13 case the tax debt that cannot be discharged may be paid back at a minimal interest rate (3%) over 3 to 5 years.  Filing Chapter 13 will stop the wage garnishment and a monthly payment to the court trustee will be based on your real living expenses instead of the IRS budget guidelines.

Get a Transcript of the Taxes You Owe.

Nebraska bankruptcy attorneys must be certain of what type of tax you owe, the day the tax was filed, the assessment date of the taxes, and the identity of the person who filed the taxes.  To verify this information we obtain an Account Transcript from the IRS.  You can get an Account Transcript by the calling the IRS and requesting an account transcript of each year you owe taxes or you can complete IRS Form 4506 and fax or mail that to the IRS.

In the Omaha area the IRS office is located at 16th & Capital Street and in Lincoln, Nebraska the IRS is located at 15th & O Street.  These forms may be obtained for free at either location and you may speak with an IRS Revenue Officer to establish a payment plan.  Don’t be afraid, they are nice people.

Image courtesy of Flickr and Ryan.

Posted in Exemption, Garnishment, Tax Debt Tagged with: , ,

How do I take my primary residence out of a chapter 7 bankruptcy?

Chapter 7 Bankruptcy Omaha, NE
My husband and I filed Chapter 7. Our primary residence was supposed to be excluded from the bankruptcy, but 2 years later we realized it had been included. How do I fix this and what issues would this cause should I decide to sell the property?

Can you exclude a mortgage from the bankruptcy?

In a word, no.  You can never exclude a mortgage or any other debt from the bankruptcy.  All debts must be listed and when you file bankruptcy you sign a document stating that you have, under penalties of perjury, listed all of your debts.

What people mean when they want to exclude a debt from bankruptcy is that they want to continue to pay the debt and keep in good standing with the creditor.  Typically, debtors wish to keep their mortgage and car loans out of the bankruptcy process.

Reaffirmation Agreements are legal agreements that are filed in Chapter 7 bankruptcy cases to essentially pull out a debt from the bankruptcy discharge.  The agreement is signed by the debtors, the creditor, the debtor’s attorney and is approved or disallowed by the bankruptcy judge.  Once approved by the bankruptcy court, a reaffirmation agreement removes the debt from the bankruptcy discharge.

If a Reaffirmation Agreement is not filed, is that fixable later?

The bad news is that this problem is not fixable.  Once a Chapter 7 case closes it is impossible to file a Reaffirmation Agreement, even if the case is reopened.  Although you may keep a home even if a reaffirmation agreement is not filed, the bank will no no longer report to the credit bureaus if the loan is paid on time.  That can cause dramatic problems when you attempt to refinance a mortgage loan when interest rates drop.  Debtors find it extremely difficult to refinance a mortgage loan that is not reaffirmed.

Is my bankruptcy lawyer at fault for not filing a reaffirmation agreement?

Although some lawyers may be at fault, the majority of the problem lies with the mortgage company.  Most banks simply do not offer reaffirmation agreements to their customers unless the customer demand the agreement.  We request that the bank send our clients a reaffirmation agreement in every single case we handle, but it seems like we receive agreements in less than 25% of the cases unless the client consistently calls the mortgage lender for the agreement. Reaffirmation agreements are voluntary.  Neither the bankruptcy lawyer nor the bankruptcy court can force the bank to offer an agreement.

Does this problem occur in Chapter 13?

This problem does not occur in chapter 13 since reaffirmation agreements are only used in chapter 7 cases. In a chapter 13 case the mortgage loan is reinstated at the end of the case so this problem never occurs when a debtor makes all required payments.

Can I sell my home if I do not reaffirm the mortgage?

Yes, you can sell the home even if the mortgage loan was not reaffirmed.  You may also keep the home and pay off the mortgage with the normal monthly payment even if the loan is not reaffirmed.  A reaffirmation agreement has only one benefit: continued credit reporting.  There really is no other benefit to reaffirming a mortgage loan.   However, that good credit reporting is darn important when refinancing the mortgage or when trying to buy a new home without the prior mortgage payments being reported.  Most clients prefer to reaffirm the mortgage.

For more information on this topic, contact our Omaha bankruptcy attorneys or Lincoln bankruptcy attorneys.

Image courtesy of Flickr and Wonderlane.

Posted in Chapter 7, Reaffirmation Agreement Tagged with: ,

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