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New York state, bankruptcy law 101--what you need to know in a time of indecision & market turmoil

New York's state exemptions for personal bankruptcy increased significantly in late 2010--a boon for hard-pressed debtors


Misconceptions about bankruptcy

If you are considering filing for bankruptcy, you probably have many questions--and deservedly so. For many people, the image of someone who "goes bankrupt" invokes spectres of deadbeats and ne'er do wells.

In other words? LOSERS. (Remember Jim Carey's spot-on stage-business? "Luh-hoo-zer!")

For other people, the image of someone who files for bankruptcy protection is at the opposite end of the spectrum, namely winners, that is, those who keep their mansions, fancy cars, etc.--but winners who nonetheless game the system in order to protect vast personal wealth at the expense of others, which in some cases could be taxpayers, although usually it's any number of investors, bond-holders, hedge funds and so forth who wind up directly on the short side of a real player's stick (obviously, that ripples through the economy--don't get me wrong).

In that category, Donald Trump comes to mind.

Truth is, bankruptcy code designed for honest, second-chance

But the reality is this: the U.S. Bankruptcy Code is designed neither for losers nor for schemers. The code is designed for stand-up, honest citizens who need a break, who deserve a way to hit the "reset button." We in the United States of America have long ago resolved to spurn the "Old World" model of debtors' prisons, in favor of a much more sympathetic and business-minded model that keeps people in their homes and with their jobs--those hard-working, civic-minded people who venture out everyday and work and pay sales tax and payroll tax and local and community taxes.

Not to mention buyers of  local goods and services. However, sometimes circumstances dictate that you can no longer afford services, and maybe not even local goods.

The four districts

In New York state, what all this means, if you need the considerable power of the protection of the bankruptcy code, you will be dealing with  one of four federal bankruptcy courts:

Effects of BAPCPA

Under intense pressure from credit-card companies (and the banks that own them) and their lobbyists for about five years, Congress in 2005 passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), designed to make it more difficult for consumers to file for bankruptcy protection. The idea was to make it tougher for individuals to file Chapter 7 (so-called "liquidation bankruptcy"), steering them toward Chapter 13 (so-called "reorganization bankruptcy").

Trustees and the "means test"

According to the Justice Department's BAPCPA page, the act gave "the U.S. Trustee Program new responsibilities in a number of areas, including:

  • implementing the new “means test” to determine whether a debtor is eligible for chapter 7 (liquidation) or must file under chapter 13 (wage-earner repayment plan);

  • supervising random audits and targeted audits to determine whether a chapter 7 debtor’s bankruptcy documents are accurate;

  • certifying entities to provide the credit counseling that an individual must receive before filing bankruptcy;

  • certifying entities to provide the financial education that an individual must receive before discharging debts; and

  • conducting enhanced oversight in small business chapter 11 reorganization cases."

Median income vs. finding of abuse

The trustee is now charged with more areas of ensuring the accuracy of filings and the determinations made under the means test and the disposable income test.

Before BAPCPA, income had no bearing on eligibility for Chapter 7. What comes into play now is the state's median income, as determined by the Census Bureau (see New York's Census Bureau stats). Basically, if your household income is higher than the New York median income, you must satisfy the criteria of the means test in order to file under Chapter 7. This also puts you in the category of being subject to provisions against "abuse" of the bankruptcy code, whereas pre-BAPCPA law was framed in terms of "substantial abuse." If abuse is found--subject to an appeal hearing--the Chapter 7 case can be dismissed (thereby exposing you once again to creditors) or converted to a Chapter 13 (or Chapter 11) filing.

Safe-harbor provisions, IRS criteria

If your household income (also relative to number of dependents) is below the median for New York, you have what is known as "safe harbor" from the abuse provisions and allows you to file under either Chapter 7 or Chapter 13. A sidenote: although Chapter 11 is commonly perceived as restricted to business reorganization, individuals with unsecured debt more than $336,900 are not eligible for Chapter 13 but can file under the more expensive--and more flexible--Chapter 11.) The means test uses the IRS national and local collection standards for determining household and living expenses.

Federal vs. state exemptions

Exemptions also come into play, and you can choose (best to do so in conjunction with advice from an experienced, trained attorney) whether to use federal exemptions or New York state's exemptions. What this means is homes can be protected, up to certain amounts--which vary by county for homestead exemptions--and so can certain household items (jewelry, a computer, a TV), as well as a modest vehicle and tools of the trade. So can certain financial instruments necessary for retirement, and rarely considered financial settlement awards, such as crime-victim awards.

State exemptions increased for homesteads, other items

The New York State exemptions increased by legislation passed late in 2010, which is listed as an "announcement" by the New York Southern District Bankruptcy Court: scroll down to "Public Law 111-327 - H.R. 6198, known as The Bankruptcy Technical Corrections Act of 2010"; that link retrieves a summary of the changes, including the differences among county rules for homesteads, plus a full-text rendering of the law.

Court can provide limited help

The bankruptcy court can provide limited help filing bankruptcy for yourself, such as which forms you need and so on. But no personnel in the court can provide legal advice or opinions, other than to recommend that you retain an attorney.

Consider free case evaluation

If you're interested in learning more about the power of bankruptcy protection, please, browse our site for more information; if you need help filing for bankruptcy protection for yourself, consider signing up for a free case evaluation.


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