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.  

Credit counseling and debtor education in bankruptcy

Here at Shenwick & Associates, we’ve filed approximately 1,000 bankruptcies in our 23 years of practice.  And each case is a unique as the person who files it, involving a complex tapestry of assets, debts, real estate, marital status and other factors.  But there’s one thing that all individual bankruptcy filings have in common–individual debtors must complete required educational courses both before and after the bankruptcy filing.  Businesses filing for bankruptcy do not to take these courses.

These courses became mandated under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).  Section 109 of the Bankruptcy Code governs who can be a debtor under various chapters of the Code.  Section 109(h)(1) of the Code provides that:

 . . . an individual may not be a debtor under this title unless such individual has, during the 180-day period ending on the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency . . . an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.  

The only exceptions to the credit counseling requirement are for incapacity, disability, or active military duty in a military combat zone.  If a debtor has taken a credit counseling course with the 180 days prior to the bankruptcy filing, but not yet received the certificate of counseling, the certificate must be filed within 14 days after the bankruptcy filing.

In practice, as soon as we are retained by clients, we recommend that they take the credit counseling course right away, especially if it’s an emergency filing to stay litigation or foreclosure.  It’s rare that clients have to take the course a second time.  There are many approved credit counseling agencies, which charge $25 for counseling online and $35-$50 for counseling via phone.

Rule 1007(c) of the Federal Rules of Bankruptcy Procedure requires the debtor to file a certificate of completion of a personal financial management course within 60 days after the first date set for the debtor’s meeting of creditors pursuant to § 341 of the Code (the “341 meeting.”)  The requirement to take a personal financial management course is contained in § 727 of the Code, which governs discharge.  Section 727(a)(11) of the Code provides that the court shall grant the debtor a discharge [of debts], unless ”after filing the petition, the debtor failed to complete an instructional course concerning personal financial management . . .”  The same exceptions for the credit counseling course (for incapacity, disability, or active military duty in a military combat zone) apply to the personal financial management course.

Although the certificate must be filed within 60 days after the first date set for the debtor’s 341 meeting, it can be filed any time after the debtor’s bankruptcy filing.  In practice, we recommend that debtors take it as soon as possible after filing, since it often falls through the cracks.  And we always remind debtors of the requirement when we attend their 341 meeting. Credit counseling agencies charge $15-$22 to take the course online and $25-$35 to take the course via phone.

For more information about credit counseling, debtor education and the bankruptcy process, please contact Jim Shenwick. 

The automatic stay in bankruptcy

Here at Shenwick & Associates, we play for both sides–both debtors and creditors.  One issue that both debtors and creditors are intensely concerned about is the “automatic stay” imposed by § 362 of the Bankruptcy Code.  The automatic stay is an injunction that tolls legal actions by creditors (with a few limited exceptions) against debtors.  The automatic stay takes effect when a bankruptcy petition is filed. In many cases, debtors contact us prior to a court hearing or a foreclosure sale to invoke the protection of the automatic stay to stop these proceedings.  In the case of a debtor who’s a party to a collection action, once the bankruptcy petition is filed, the collection is stayed and barring a successful objection to the discharge of the debt, the debt will be discharged in bankruptcy (the exceptions to discharge are complex, vary from chapter to chapter and are beyond the scope of this article).  Although the automatic stay stops enforcement mechanisms in actions (such as debt collection and foreclosure sales) and the commencement or continuation of legal proceedings, it does not bar the ministerial act of entry of judgment against a debtor. From the creditor’s perspective, the automatic stay serves to bar the creditor from exercising their rights and remedies under applicable non–bankruptcy law.  Fortunately, there are some strategies that creditors can use to obtain relief from the automatic stay.  If a debtor has a pending bankruptcy case and files a new case, a new filing will be presumptively considered to be in bad faith; the automatic stay in the new case will only last for 30 days, unless a request to continue the automatic stay is made by a party in interest and the debtor can demonstrate that the new case was filed in good faith.  And if a debtor has had two pending cases in the past year, the third filing will not trigger the automatic stay without an order from the bankruptcy court. However, the primary method for creditors to circumvent the automatic stay is by filing a motion for relief from the automatic stay pursuant to § 362(d) of the Bankruptcy Code, which provides that: On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—for cause, including the lack of adequate protection of an interest in property of such party in interest; with respect to a stay of an act against property under subsection (a) of this section, if—the debtor does not have an equity in such property; and such property is not necessary to an effective reorganization;  “Adequate protection” is discussed in § 361 of the Bankruptcy Code, and is required to protect secured creditors from a decrease in the value of their collateral between a bankruptcy filing and confirmation of a plan.  Section 361 lists several examples of adequate protection, including single or periodic cash payments.  Although § 362(d)(1) specifically references adequate protection, that’s only one example of “cause,” which can also include the filing of a Chapter 13 plan in bad faith or the Debtor’s failure to make post–petition payments on the secured claim. With respect to § 362(d)(2), the Supreme Court has held that once a party moving for relief from the automatic stay establishes that a debtor has no equity in a property, it’s the burden of the debtor to establish that the collateral at issue is necessary to an effective reorganization.  Section 362(g) places the burden of proof regarding the Debtor’s equity in property on the party moving for relief from the automatic stay, but the burden of proof on all other issues is on the party opposing relief. Whether you’re a debtor or a creditor, please contact Shenwick & Associates to discuss how the automatic stay in bankruptcy will affect your rights.