Personal Bankruptcy in The Year 2010

The following is a talk on this topic given by James H. Shenwick, Esq. at the Douglaston Club on November 10, 2010.

I. Three types of personal bankruptcy

a. Chapter 11-This is the same kind of bankruptcy used by major corporations to reorganize. The primary reason that individuals file for Chapter 11 is that they have too much income and assets or they have debts that fall outside the statutory limits for filing a Chapter 13 bankruptcy.

b. Chapter 13-This is usually the type of bankruptcy individuals file when they want to reorganize their debts, if (for example), they have too much equity in their house. However, this means that the debtor will have to repay a portion of their debts, and their are limits on the amount of debt you can have to qualify for this type of bankruptcy (more on that later).

c. Chapter 7-the most common type of personal bankruptcy, this allows debtors to liquidate or discharge most (but not all) of their debts (again, more on what debts are dischargeable in Chapter 7 bankruptcy later).

II. Today’s market

a. The nominal unemployment rate is close to 10% [9.6% in September], while the real unemployment rate is closer to 18-19%.

b. The unemployment rate for recent college graduate is 20-21%.

c. We are seeing a record number of foreclosures–most of our personal bankruptcy clients who have purchased a home in the last three to four years are “underwater” (the owner owes more on the mortgages(s) then the home is worth).

d. 41.8 million Americans are on food stamps, and the White House estimates that number will soon rise to 43 million.

e. Are we in a “W” shaped economic pattern? If so, are we on a upward leg or a downward leg of the “W?”

III. How can personal bankruptcy be of use?

a. 98% to 99% of our personal bankruptcy clients wind up filing for Chapter 7 bankruptcy for the “fresh start” of liquidating most of their debts.

b. In 2005, the New York State legislature increased the homestead exemption from the bankruptcy estate (the assets available to pay their creditors) to $50,000 per spouse. Most of our Chapter 7 clients can reaffirm their mortgages and keep their houses. And the homestead exemption may be increasing soon (more on that later in my talk).

c. Debtors can also reject unfavorable leases and guarantees through a Chapter 7 filing.

d. Congress radically revised and amended Chapter 7 personal bankruptcy laws by enacting the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). These changes include median income and means testing, where if an individual (single, married or with children) has income that exceeds a certain dollar amount, then the bankruptcy filing is considered an abuse of the system and facially they are not permitted to file Chapter 7 bankruptcy.

e. The first test under the revised code is whether a debtor exceeds the median income for their family size based on their state of residence. Pursuant to the 2005 amendments, a case where the debtor makes less than the median is presumed to be a non-abusive filing, and a below-median debtor may file for Chapter 7 bankruptcy. Effective March 15, 2010, the median income of a single person in New York State is $46,320. For a family of two, the income threshold for the Median Income Test is $57,902, for a family of three it is $69,174 and for a family of four it is $82,164. Add $7,500 for each individual in excess of four. Median income figures are periodically revised by the Census Bureau.

f. However, all is not lost for a debtor who exceeds his or her state median income threshold. If an individual’s income exceeds the median income for their respective state and family size, they may still be allowed to file for Chapter 7 bankruptcy if they pass the so-called “Means Test,” i.e. the results show that the bankruptcy filing is not a presumption of abuse under § 707(b)(7) of the Bankruptcy Code. The Means Test (officially known as Form 22A, “Chapter 7 Statement of Current Monthly Income and Means-Test Calculation”) is one of the most complicated calculations in the law. It consists of eight pages, and is similar to doing a 1040 tax return for an individual. The Means Test incorporates the debts that an individual has (both unsecured and secured (i.e. mortgages and car loans), taxes that they owe, and expenses specified by the IRS in its financial analysis standards–food, clothing, household supplies, personal care, out-of-pocket health care and miscellaneous (National Standards); housing and utilities (non-mortgage expenses), housing and utilities (mortgage/rental expense), with adjustments, transportation (vehicle operation/public transportation/transportation ownership or lease expenses)(you are entitled to an expense allowance in this category regardless of whether you pay the expenses of operating a vehicle and regardless of whether you use public transportation)–as well as many other factors.

g. Another requirement to file for Chapter 7 bankruptcy is that the Debtor’s monthly net income (their average monthly income less their average monthly expenses) must be zero or a negative amount.

h. Chapter 13 bankruptcy can useful for debtors who have unincorporated businesses that they want to keep. Like Chapter 7 debtors, Chapter 13 debtors can also exempt up to $2,400 in equity in a motor vehicle and $50,000 in equity in a principal residence from their bankruptcy estate.

i. However, § 109(e) of the Bankruptcy Code places limits who can qualify to be a debtor under Chapter 13. To qualify, a debtor must have regular income and noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent, liquidated, secured debts of less than $1,081,400.

IV. New developments.

a. New York bankruptcy exemptions may be about to undergo their biggest transformation in years. New York State Senate bill S.7034A and Assembly bill A. 8735A have been passed by the Legislature and are expected to be signed into law by Governor Paterson in the very near future.

The scope of the bill is very broad, but a few of the major changes are:

• The homestead exemption would increase from $50,000 to: $150,000 for the counties of Kings, New York, Queens, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, and Putnam; $125,000 for the counties of Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster; $75,000 for the remaining counties in the state.
• The motor vehicle exemption would increase from $2,400 to $4,000. If the vehicle was equipped for a disabled person, the limit would be $10,000.
• The aggregate individual bankruptcy exemption for cash, household goods and clothing would increase from $5,000 to $10,000.
• The New York Banking Department will publish cost of living adjustments to exemption amounts every three years commencing April 1, 2012.
• Debtors will now be able to choose whether to use the New York exemptions or the federal exemptions. This will be especially useful for Debtors who do not own a home, since the “wildcard” exemption in § 522(d)(5) of the Bankruptcy Code allows Debtors to exempt a significant amount of cash.

A married couple filing jointly for bankruptcy can double the amount of the exemptions listed above.

b. Student loans are not usually dischargeable in bankruptcy, but the House of Representatives is currently considering H.R. 5043, the “Private Student Loan Bankruptcy Fairness Act of 2010,” which would allow debt from private loans issued by for-profit lenders to be dischargeable in bankruptcy. H.R. 5043 is currently in the House Judiciary Committee. A similar bill, S. 3219, the “Fairness for Struggling Students Act of 2010,” is currently under consideration in the Senate’s Judiciary Committee.