Exemptions in bankruptcy

Here at Shenwick & Associates, our goal for our consumer bankruptcy clients is to get as many of their debts as possible discharged, while enabling them to maximize the property they can keep in bankruptcy, which is exempted from the debtor’s bankruptcy estate that comes into being when a bankruptcy case is filed.

Bankruptcy law is a federal system, but there’s a complex interplay between state and federal law in practice.  And this relationship between state and federal law also holds true for exemptions from bankruptcy.

Section 522 of the Bankruptcy Code governs exemptions.  Section 522(b)(1) of the Code provides that “an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.”  Section 522(b)(2) provides that “property listed in this paragraph is property that is specified under subsection (d) . . .” (which includes the federal exemption scheme, addressed below).  Section 522(b)(3) provides that “ . . . any property that is exempt under Federal law, other than subsection (d) of this section, or State or local law that is applicable on the date of the filing of the petition to the place [where the Debtor was domiciled for the greater part of the 180-day period prior to filing than in any other place].”  Up until 2011, New York State debtors were required to use New York State’s exemptions.  However, now debtors are free to choose either the state or the federal exemptions (but only one or the other-you can’t mix and match exemptions from both systems).

The New York State exemptions are contained in Civil Practice Law and Rules (CPLR) §§ 5205 ( personal property exempt from application to the satisfaction of money judgments  and 5206 ( real property exempt from application to the satisfaction of money judgments), as well as in Article 10-A (§§ 282-285) of the Debtor and Creditor Law.  Some commonly used New York State exemptions are for a homestead ($165,550 per debtor in the NYC metropolitan area-amounts differ upstate); a car ($4,425); and the cash surrender value of life insurance (fully exempted).  New York exemption amounts were last adjusted on April 1, 2015 and will be readjusted on April 1, 2018.

The federal exemptions in § 522(d) of the Code include exemptions for a homestead ($23,675 per debtor); a car ($3,775); the cash surrender value of life insurance ($12,625) and a “catch all” exemption (interest in any property (including cash) up to $1,250 plus up to $11,850 of any unused homestead exemption).  Federal exemption amounts were last adjusted on April 1, 2016 and will be readjusted on April 1, 2019.

In practice, we usually use New York exemptions, but in cases where the debtor doesn’t own a house or has no equity in their house but has other valuable personal property, we may use the federal exemptions. 

Deciding which exemption system to use is a fact intensive process that requires a carefully analysis of the debtor’s property and its valuation.  For more information about exempting your valuable property from the reach of your creditors, please contact Jim Shenwick.