The Pendulum Swings: NY Debtors Benefit From New Bankruptcy Exemptions

Legislation was enacted last year that amended the provisions of New York’s Debtor and Creditor Law and Civil Practice Law and Rules (“CPLR”) regarding assets which may be claimed exempt from attachment by judgment creditors or a bankruptcy trustee.1 This article addresses changes to provisions of those statutes and their impact upon a debtor seeking protection under the United States Bankruptcy Code. 2 This author believes that these statutory changes represent the most significant development for financially troubled New York domiciled residents since the United States Congress’ sweeping overhaul of the Bankruptcy Code in 2005.3

Amendment of the Bankruptcy Code in 2005 resulted in enactment of provisions that placed new requirements on consumers seeking bankruptcy protection. To be eligible to file for bankruptcy and obtain a discharge of debts under the 2005 Bankruptcy Amendments, debtors are required to obtain Credit Counseling4 and Debtor Education Certificates.5 Debtors must also produce tax returns6 and produce pay stubs to verify their income.7 Debtors are subject to what has been referred to as a “Means Test Calculation”8 which analyzes income over the six month period prior to the filing and relies upon National and Local Internal Revenue Service expense charts (utilized by the IRS for delinquent tax payers), to establish whether a person has too much money left over at the end of each month to qualify for Chapter 7 relief – where debts are discharged and unsecured creditors are paid only from non-exempt assets.9 If the debtor does not pass the Means Test, she or he will not qualify for Chapter 7. That leaves the debtor the option of filing a voluntary Chapter 13 bankruptcy petition – where creditors are paid over a period of 3 to 5 years under a Chapter 13 plan10 – or trying to fend off collectors and lawsuits by creditors seeking to attach non-exempt assets. Under a Chapter 13 Plan, unsecured creditors must be paid at least as much as they would receive in a chapter 7 from a Trustee’s liquidation of non-exempt assets and no less than the aggregate of the Debtor’s monthly disposable income over the life of the plan.11

For the most part, the legal community has come to grips with satisfying the requirements of the 2005 legislation. The legal fees charged to file bankruptcy generally increased due to the extra work required. The requirements of the 2005 Bankruptcy Amendments prevented some people from filing bankruptcy who may have been eligible under the prior statute. However, the concept of treating debtors equally by adopting standardized expenses was greatly undercut by the Bankruptcy Code’s treatment of mortgages and secured debts under the Means Test. While the Means Test requires the use of National and Local standards for expenses such as rent, clothing and utilities, it allows debtors to deduct the full amount of secured debt obligations they possess. Accordingly, this produced anomalies where a debtor with an income of $150,000 to $200,000 might pass the Means test if they for example, lived in a house where the secured mortgage payment was high and drove an expensive car with a high monthly payment.12 On the other hand a debtor without a home or high secured debt but the same or lesser income might not qualify for bankruptcy. In any event, until recently, many debtors were dissuaded from filing for bankruptcy, only because they had assets that would have been lost to the Trustee because their equity exceeded the allowable exemption. (i.e. homes, savings and cars). The new law changes that.

In 2008 the country experienced the “Great Recession.” Times have certainly changed. The pendulum has now swung in favor of the consumer debtor as our state legislators apparently looked for a way to assist debtors struggling with insurmountable debt and home foreclosures. The New York legislature increased the amount that judgment and bankruptcy debtors can claim as exempt from the reach of creditors. The newly enacted New York legislation is most welcome to struggling consumers faced with losing their jobs, homes, investments and retirement account values. The legislation changes the bankruptcy calculus tremendously.

Under the new laws, New Yorkers can choose between either the New York State Exemptions13 or the Federal Exemption scheme set forth in the Bankruptcy Code.14 There are significant differences between the two schemes. In some instances the New York State exemptions will be appropriate. In other situations, the Bankruptcy Code exemptions will be best. Since the debtor must elect either the New York State or Federal Exemption (one can not pick and choose exemptions from both), a proper analysis of which to choose depends upon the particular facts of the client’s case.

The biggest boon to debtors is the increase in the New York homestead exemption from $50,000 to $150,00015 for residents of Nassau and Suffolk counties.16 The exemption is available over and above consensual mortgage and tax liens. The debtor must reside in the home and have lived there for the requisite time period prior to the filing of a bankruptcy. If a husband and wife file bankruptcy, the combined homestead exemption is $300,000. Most homes have lost significant value over the past three years. At the same time, there has been an increase in mortgages and home equity loans (often obtained to pay credit card debt or sustain lifestyles based upon prior income levels that no longer exist). As a result, it is rare that a debtor in financial distress has equity exceeding the $150,000/ $300,000 levels. The filing of a bankruptcy petition can preserve the debtor’s equity in, and ownership of, his home. All the homeowner has to do is be sure to be current on his existing mortgage or have entered into a modification or forbearance agreement with the lender such that the house is not at risk of foreclosure. If the residence were to be sold at a foreclosure sale, there is no homestead exemption. Even if there were to be a surplus after a mortgage foreclosure, the funds would arguably be non-exempt personally and subject to attachment by a judgment creditor. In the event the debtor is unable to afford the home and faces a foreclosure (where equity over and above the mortgage could be lost and property sold for a distressed price at a fire sale), the Debtor should consider filing a bankruptcy petition to stay the foreclosure and preserve equity that would otherwise be lost. In a bankruptcy case, the property can, with court authorization, be sold through a broker or at a controlled auction where values can be maximized. The Debtor could seek to do this through a Chapter 13 or Chapter 7 case. Even if there is insufficient equity to satisfy a full homestead exemption, the Debtor may ask the Trustee to sell the property in return for an agreement, approved by the bankruptcy court, where the Debtor agrees to accept a reduced homestead exemption so that money is made available for unsecured creditors. (If there is no benefit to creditors, the Trustee will not sell the property). In view of real estate values and the inability of many debtors to afford the homes that they live in, this has become a viable option that benefits both the debtor (receipt of homestead exemption), secured creditor (mortgage is paid off) and unsecured creditors (receive a distribution). In some instances debtor’s counsel and the Trustee may be able to convince the bank to agree to take less money on their mortgage to avoid the foreclosure process, which in Nassau and Suffolk Counties can take as long as two years to complete.

The alternative Federal Homestead Exemption is limited to $21,625 for an individual or $43,250 combined exemption for a filing husband and wife.17

If one does not need to take advantage of the $150,000 New York State Homestead Exemption, the Federal Exemption scheme offers a generous Wild Card Exemption – which does not exist under New York law – that can be applied against any asset owned by the Debtor. In other words, the Wild Card can be applied toward an asset – even for which no independent exemption exists. The Wild Card is $1,150 plus any unused amount of the homestead exemption up to $10,825.18 Thus a debtor without a home could claim $11,975 in cash or use some portion of the exemption to supplement an existing exemption amount such as a motor vehicle,19 a personal injury case20 or exempt otherwise non-exempt antiques, artwork or coin collection. The exemption can be sprinkled and applied to different assets to maximize exemptions. On the other hand, the State Exemption for cash is limited to $5,000 per person (subject to certain deductions for other assets claimed as exempt).21 Significantly, the state cash exemption is only available if a no homestead exemption is claimed.22

Most retirement benefits, 401(k) plans, IRA and social security benefits remain exempt under both the State and Federal Exemptions.23

We live in a time of depressed real estate values and high unemployment and underemployment. Struggling homeowners with lost jobs or diminished income, and unmanageable debt, with home equity under the $150,000/ $300,000 level, may now be able to obtain debt relief while keeping most, if not all, of their assets, including their home. With proper planning, even those without a home can now save assets previously lost to creditors, such as large balances in bank accounts or vehicles with substantial value over prior exemptions.

Andrew M. Thaler is a partner of Thaler & Gertler LLP, a Chapter 7 Panel Trustee and former Chair of the NCBA Bankruptcy Committee.

1. L.2010 c. 568 eff. Jan 21, 2011
2. 11 U.S.C. Section 101 et. seq.
3. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 “BACPA”
4. 11 U.S.C. Sections 109 (h) and 521(b)
5.11 U.S.C. Section 727(a)(11)
6. 11 U.S.C. Section 521(e)(2)(A)
7. 11 U.S.C. Section 521(a)(iv)
8. Official Form B22A (Chapter 7)
9. See 11 U.S.C. Section 707 (b) – Under the “Means Test” a debtor subtracts standardized expenses and certain allowable actual expenses, such as secured debt. A debtor who in actuality has no money left over at the end of the month after payment of actual expenses, might not be eligible for Chapter 7 bankruptcy because the standardized expenses allowed under the law are less than actual expenses, thereby theoretically leaving phantom money available to pay creditors.
10. 11 U.S.C. Section 1325(b)(4)
11. 11 U.S.C. Section 1325(a)(4) and (b)((1)
12. 11 U.S.C. Section 707(b)(2)(A)(iii)
13. See NY Debt & Cred Section 285
14. See 11 U.S.C. Section 522
15. See NY CPLR Section 5206 – Prior to 2005 the homestead exemption was $10,000 at which time it was increased to $50,000. The new legislation triples the exemption for residents of Nassau and Suffolk County. Depending on the county of the debtor’s residence, the exemption ranges from a low of $75,000 to a high of $150,000.
16. Per CPLR Section 5206(a) $150,000 per debtor in Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester and Putnam Counties. $125,000 per debtor in Dutchess, Albany, Columbia, Orange, Saratoga and Ulster Counties. $75,000 per debtor in all other counties
17. 11 U.S.C. Section 522(d)(1)
18. 11 U.S.C. section 522 (d)(5)
19. The motor vehicle exemption in New York was raised from $2,400.00 to $4,000 – See NY Debt & Cred Section 285. The Federal exemption is slightly lower at $3,450.00 – See 11 U.S.C. Section 522(d)(2) (but can be supplemented by the Wild Card 11 U.S.C. Section (d)(5)).
20. The exemption for personal bodily injury in New York is $7,500 – See NY Debt & Cred Section 282 (3). In contrast the Federal Exemption is $21,625 per individual debtor – See 11 U.S.C. Section 522 (11)(D). Again, depending upon the facts of the case it may be in the client’s interest to claim the State over the Federal exemptions or vice versa. However, use of the entire Wild Card under the Federal Exemptions could turn a $21,625 personal injury exemption into an exemption of up to $33,600.
21. See NY Debt & Cred Section 283(2)( c )
22. See NY Debt & Cred Section 283(2)(a)
23. See NY Debt & Cred Section 282(2)(e) and 11 U.S.C. Section 522(12)