New York Bankruptcy Laws

How to File Bankruptcy in New York

Laws for bankruptcy are no different in New York than they are in any other state. However, every state has been affected by the 2005 Bankruptcy Act that was presented to Congress by the President. Since this act’s creation all the previous laws and regulations have been added to.

Additions include increased monthly payments for Chapter Thirteen bankruptcy and additional regulations for granting Chapter Seven bankruptcy. Bankruptcy abuse prevention acts have also been passed to disallow the abuse of the United States’ bankruptcy system. These acts have been included in recent years because the system has seen much abuse from repeated offenders.

Filing for Bankruptcy

All bankruptcy petitions are to be filed towards the bankruptcy court of New York. An individual is eligible to petition by his or herself or a husband and a wife may petition together in a joint petitioning. Before petitioning every United States citizen is required to submit to a means test that will compare his or her income, household arrangements, and debt to that of all other citizens in the state of New York. A median will then be calculated.

Whether or not an individual falls above or below the median can designate which kind of bankruptcy he or she can file. The new stipulations from the 2005 Bankruptcy Act were partially place to limit the number of individuals who are eligible for Chapter Seven bankruptcy. This kind of bankruptcy eliminates debts in less than six months and halt foreclosure. Because of the speed of Chapter Seven bankruptcy, it is often abused.

Chapter Seven Bankruptcy

Chapter Seven bankruptcy is for the most severe of bankruptcy cases where individuals cannot pay one hundred dollars against their debts each month. A trustee is assigned to each Chapter Seven case and will liquidate the non-exempt property. He or she will also divide the exempt property from the non-exempt property.

The compensation received will be used to pay off creditors. Exempt property is broken into different categories in the state of New York. These categories include homestead, personal property, insurance, miscellaneous, pensions, pensions, public benefits, tools of the trade, and wages.

These categories are divided by items and item values. These can include real property up to ten thousand dollars, books up to fifty dollars, cookery, cash under twenty-five hundred dollars, motor vehicles under twenty-four thousand dollars, disability insurance, life insurance, annuity contract benefits, alimony, child support, IRAs, unemployment compensation, veteran’s benefits, farming equipment, uniforms, and ninety percent of earnings through milk dealers or unpaid wages from the previous sixty days.

Chapter Thirteen Bankruptcy

Chapter Thirteen bankruptcy does not require individuals to sell any property. Instead individuals are required to use their own income and funds to pay off their debts. The New York bankruptcy court will assigned a specific repayment plan according to the individual’s income, expenses, and how many people live in his or her household.

The payment plan will assign specific amounts to be paid each month for five years. No plan can exceed this five-year limit nor be under three years.

Can I Remove My Second or Junior Mortgage Lien in A Chapter 13 Bankruptcy?

First, you must Qualify for Chapter 13. Yes, you may be able to remove your junior mortgage in a chapter 13 bankruptcy. This is different from a chapter 7 bankruptcy which does not allow for the removal of a junior mortgage lien. In order to take advantage of this lien removal, you must qualify for chapter 13. This means you must have a regular income as chapter 13 involves a payment plan. Regular income can even mean social security or disability payments. If you have insufficient income for a chapter 13, you may be able to have a friend or family member make contributions under the plan. Further, your unsecured debt, such as credit card debt, cannot exceed $383,175 and your secured debt, such as a mortgage, cannot exceed $1,149,525. You also must have been up to date on the filing of your tax returns.

Second, your home must be worth less or equal to your first mortgage. In order to successfully remove your junior mortgage, you will have to show that your home is worth less or is equal to the amount due and owing on your first mortgage. You should ascertain from your first mortgagee how much is owed on your first mortgage. You can request a payoff amount from the lender. You should then obtain an appraisal by a licensed appraisal. You can also retain a licensed real estate broker to physically inspect the premises and value the home based upon the inspection and comparable sales in the area. Also visit www.zillow.com

Will I Lose or Be Able to Keep My Home in A Chapter 7 or Chapter 13 Bankruptcy?

Generally, you should not lose your home in a chapter 7 bankruptcy assuming that you have been making payments on your mortgage or will be able to have your debt modified and your equity does not exceed $150,000 or $300,000 if the property is jointly held. In late December 2010, New York State enacted legislation increasing the New York State homestead from $50,000 to $150,000. The $150,000 exemption is for New York City, Long Island, Westchester, Rockland and Putnam. The exemption is $125,000 for Dutchess and Orange Counties (or $250,000 for joint owners); and $75,000 (or $150,000 for joint owners) for Sullivan County.

If you are married and your home is held by each spouse, then the exemption doubles. So, for instance, if you live in Manhattan, Queens, Long Island, Westchester, the Bronx, Staten Island or Brooklyn and own a home with your spouse, you can protect up to $300,000 of equity. If you and your spouse own a house, condominium or cooperative apartment worth approximately $500,000 and have 2 mortgages totaling $250,000, then you would be able to exempt the $250,000 in equity in your home. So, your home should not be affected by the bankruptcy.

This assumes that you have kept current on payments on your mortgage or will be able to successfully modify your mortgage loan while in bankruptcy. Lieber & Lieber, LLP is often retained by its clients to modify home mortgages. This can be done through the Bankruptcy Court system whereby the Bankruptcy oversees the process.

In the event that you have more than $150,000 in equity or $300,000 in equity if you are married, then you can still protect your home by filing for chapter 13, which is a payment plan. So, for instance, perhaps you own 100% if your home and have equity (above the mortgages) of $200,000, which is $50,000 above the $150,000 exemption. In order to protect your home, you may be able to pay the $50,000 over a time in a 5 year chapter 13 plan, comprised of 60 payments. With the Chapter 13 Trustee’s commission of 10%, the monthly payment plan may be as low as $916. Such repayment plan should serve to prevent the chapter the trustee from attempting to sell your property. There are other benefits to chapter 13 as well, such as the preservation of other assets, such as vehicles or investment or bank accounts that may be vulnerable in a chapter 7. Further, not only does chapter 13 serve to protect assets, but it is also allows individuals whose income exceed the thresholds of chapter 7 to be able to file for bankruptcy.

Will I Lose My Inherited IRA If I File For Chapter 7 Bankruptcy?

You may lose your inherited IRA if the amount of such inherited IRA is greater than any applicable exemptions in a chapter 7 Bankruptcy. However, a chapter 13 bankruptcy filing may afford you the protection you need.

Possibly; on June 12, 2014, the US Supreme Court ruled in the case of Clerk v. Rameker that IRAs inherited by someone other than a spouse cannot be considered retirement funds and protected from creditors as typical IRAs are. Unlike typical retirement funds, a person who inherits such “inherited IRA” can withdraw the funds at any time without having to first await his or her own retirement. Justice Sonia Sotomayor wrote for the majority of the Court and recognized that “nothing about the inherited ARA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.” Accordingly, the debtors in the Clerk case will not be able to shield their inherited IRA which is worth around $300,000 from their creditors who are owned approximately $700,000. The chapter 7 trustee will be able to distribute the funds to the creditors

What does this mean for You?

If you have an IRA that exceeds any applicable exemption to which you may be entitled and file a chapter 7 bankruptcy, you will have to turn over the IRA funds or a portion thereof to the chapter Trustee for distribution to creditors. So for instance, in New York, a chapter 7 debtor can elect to use the Federal Exemptions afforded under the Bankruptcy Code. If such debtor does not own a home, the debtor may be entitled to protect up to $12,725 in non-exempt assets, which is known as the “wild card exemption.” However, if such person is not entitled to such exemption or if the IRA exceeds the $12,725, then such individual will have to turn over the excess amount to the trustee as such amount is not protected.

Will a Chapter 13 Bankruptcy Filing Help Me Save My Inherited IRA?

Yes; it can provide more protection than in chapter 7 if you have the funds to pay the non-exempt portion over time or if someone is willing to assist you in paying those funds over time. A chapter 13 is a payment plan which is based upon your disposable income as well as your non-exempt assets. Monthly payments are made by debtors to the chapter 13 who then distributes them to creditors. For instance, if you have an inherited IRA worth $32,725 and no other non-exempt assets, and are able to avail yourself of the wild card exemption, then (depending on your income) you may be able to propose a chapter 13 plan that allows you to pay the $20,000 portion of the inherited IRA over a 5 year period, together with the Trustee’s commission of 10%.

This would be equal to $367 per month over 60 months. At the end of the five (5) year period, you would be afforded a discharge of all dischargeable debts. So, for instance, even if you had $100,000 in debts and only paid $22,000 under the plan, you would receive a DISCHARGE of ALL OF YOUR DEBTS upon completion of your plan payments. Further, during the five year (5) period, no creditor could take actions to collect from you (including garnish your wages and levy on your bank accounts) as there is an automatic stay. Not only does chapter 13 serve to protect assets from being liquidated by a chapter 7 trustee, but it is also allows individuals whose income exceed the thresholds of chapter 7 to be able to file for bankruptcy.

Beware of Debt Settlement Companies

With uncontrollable interest rates of 25% or more, credit card balances can double in amount before you know it. Debt Consolidation and Debt Settlement Companies prey on people who have fallen into a fiscal and emotional crisis and are desperate. There are things you should know before signing up with one of Debt Settlement Companies or Debt Consolidation Companies:

Debt settlement and debt consolidation companies cannot guarantee that all of your creditors will sign onto their plan. That means that you can end up paying a monthly amount and also be sued by creditors who decided not to be bound by a debt settlement or consolidation plan. (Once these creditors sue and obtain a judgment, they can garnish your wages and restrain, freeze and levy on your bank accounts.) Further, the costs and fees to these companies are huge and it is often the case that the companies pay themselves first before even paying your creditors. Debt settlement and consolidation companies (and even law firms that offer debt settlements) often sign up people into plans that contemplate a monthly payment that people cannot afford. The result is that many who enter into these arrangements default and end up wasting thousands of dollars and filing for bankruptcy.

Additional things you should know;

• Most people who enter into debt settlement or consolidation plans would have qualified for bankruptcy had they filed. I know this first hand because many of my bankruptcy clients first tried unsuccessfully to settle their debts through these companies. They would have saved a lot of money and aggravation had they sought bankruptcy first. If you qualify for chapter 7 bankruptcy, then with the exception of certain debts such as recent income taxes or domestic support obligations, and absent fraud, all of your debt may be able to be discharged for ZERO (0) PAYMENT to creditors. This is unlike a debt settlement or debt consolidation plan which contemplates monthly payments that you often cannot afford.
• Upon filing for bankruptcy, there is an “Automatic Stay” that BARS creditors from suing you. A debt consolidation or debt settlement company cannot prevent all creditors from suing you, garnishing your wages and freezing your bank accounts as there is no Automatic Stay. The Automatic Stay is imposed by the Bankruptcy Code.
• If you have significant income or assets that need to be protected beyond ordinary exemptions afforded to you, you can file a chapter 13 bankruptcy. Upon filing for chapter 13, all interest on all credit cards and loans stops. This is critical as interest is what causes your debt to double. Chapter 13 contemplates a plan which provides for monthly payments. As the plan is based upon what you can afford, it is often the case that the monthly payments made under the chapter 13 plan are substantially less than what you were paying under a debt settlement or debt consolidation arrangement. All chapter 13 debtors benefit from the Automatic Stay so they cannot be sued, their wages cannot be garnished and their bank accounts cannot be restrained and levied upon. Further, even if the creditors are paid a SMALL fraction of the amount owed them under the plan, at the end of the plan, all debt, with limited exception (such as for recent taxes and domestic support obligations) is discharged. So you may have a plan that provides creditors with only a 15% recovery. When you complete the plan, those creditors’ claims will be discharged even though they were not paid the 85% plus interest.
• There are no tax consequences in a chapter 13 or chapter 7 bankruptcy, unlike a settlement outside of Bankruptcy Court. If you settle outside of Bankruptcy, the IRS will treat the savings as income to you and tax you, unless you prove you were insolvent. This is not true in a bankruptcy as you will not be treated as earning income if you discharge your debt. So, for instance, if you discharge $50,000 of debt in a chapter 7 or chapter 13, you will not be taxed as having $50,000 as additional income.