When faced with the prospect of bankruptcy, you want reassurance, knowing what will happen with your property. In an overwhelming majority of Chapter 7 bankruptcies, the person filing retains all of his or her property, including bank accounts, tax refunds, and retirement accounts. In Nebraska, there are laws called exemptions that you can use to protect your property in a Chapter 7 bankruptcy.
As I discussed in Part 1 of this series regarding exemptions to protect your home and car, for Nebraska exemption laws, changes are on the way. In early February 2018, the Nebraska Unicameral passed Legislative Bill 105 by a vote of 47-0, which significantly changes exemption laws (Nebraska Revised Statutes 25-1552 and 25-1556). The bill is waiting on the governor’s signature to be made law. In a three part series, I will discuss the exemptions as they are now and the presumed impact of the new law.
You can use the wild card exemption (Neb. Rev. Stat. § 25-1552) to protect the amount of money you have on deposit in your checking or savings accounts on the date of filing. The amount does not take into outstanding checks that have yet to clear. If you are filing a Chapter 7 individually, you can protect up to $2,500. If you are filing a Chapter 7 with your spouse, you can protect up to $5,000. If the only source of the funds is from Social Security, the amount is protected 100%.
Example 1: You file a Chapter 7 bankruptcy individually and have $4,000 in your account. The money exclusively is comprised of income from wages. You have an outstanding check for $1,200 for rent that your landlord has yet to cash or deposit. As such, you have $4,000 not $2,800 that you need to protect. It is advisable to wait until the check clears and the amount in your account falls below $2,500 and then file your case unless there is an emergency pending such as a wage garnishment.
Under the new law the wild card exemption is set to double from $2,500 to $5,000 per person. This is a significant change that will allow Nebraskans to have a stable base when exiting his or her bankruptcy with a fresh financial start.
Example 2: You and your spouse file Ch. 7 together and have $7,500 in your bank account. Under the new law, you’d be able to exempt those funds 100%. Under the old law you would have had to turnover $2,500 to the Trustee to distribute to your creditors.
When you receive your tax refund, it is advisable to deposit that money into a separate bank account other than where your paychecks, child support, Social Security, or business income is deposited. In Nebraska, the Earned Income Credit portion of your tax refund is exempt 100% (Neb. Rev. Stat. § 25-1553). You can also use the wild card exemption to protect your tax refund. Under the new law, you’ll have an additional $5,000 of wild card exemption to use.
Example 1: Your tax refund is $7,500. The earned income portion is $2,500. You deposit the entire tax refund into a separate account. No other money is deposited into the account. You file Ch. 7 bankruptcy individually. You use the Earned Income exemption to protect the $2,500, leaving $5,000 to that you need to protect. You only can protect $2,500 of that $5,000 using the wild card exemption, leaving $2,500 unprotected. Under the new law, you’d be able to protect the entire amount.
Example 2: Your tax refund is the same as in Example 1. Instead of depositing it into a separate account, you deposit it in the account where you also receive your paycheck. You are unable to claim the Earned Income exemption, leaving $5,000 unprotected. Under the new law, you would be able to protect an additional $2,500, still leaving $2,500 unprotected.
In Nebraska, you can protect your retirement account up to an amount reasonably necessary for the support of yourself and any of your dependents (Neb. Rev. Stat. § 25-1563.01). In order to use the exemption, the account cannot have been established or amended to increase the contribution by the individual within the two years prior to filing. The retirement plan must also qualify under section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code.
In effect, this protects most retirement accounts 100%. This is a main reason why it is highly inadvisable to liquidate any retirement accounts to pay your debt. The new law does not change or alter this exemption.
Example: You have a 401(k) with $10,000 that you started three years ago and you are 50 years old. Your retirement account will be protected 100%.
Rest assured that you most likely will be able to protect and retain all of your property. The trustee, the person assigned to liquidate assets in a Chapter 7 bankruptcy, most often cannot claim any property because you are able to exempt or protect it. However, each situation is unique. At Koenig│Dunne, one of our experienced bankruptcy attorneys will review your assets and inform you how to protect your assets through a bankruptcy.