The United States Bankruptcy Code is a single title within the vast federal statutory library, being title 11 of the United States Code (a/k/a the “Bankruptcy Code”). The Bankruptcy Code is divided into chapters, and the first of those that provides protection from creditors is chapter 7. Since later 2005, eligibility for chapter 7 is determined by a financial formula (known as the means test) supposed to measure the ability of a debtor to afford repayment of some of his or her debts. (The means test is discussed further in the section on chapter 13 below.)
Chapter 7 is entitled “Liquidation.” In the overwhelming majority of chapter 7 cases filed in the United States Bankruptcy Court for the Southern District of New York, Poughkeepsie Division for New York’s mid-Hudson Valley, consisting of Dutchess County, Ulster County, Orange County, as well as Greene, Putnam and Sullivan counties, the only thing that is ‘liquidated’ is debt. That is so because the exemption rights that are available to chapter 7 debtors (the title given to those who file for protection under chapter 7 of the Bankruptcy Code) are sufficiently generous to protect all of the debtor’s assets.
Your Property is Probably Protected in Bankruptcy by Exemption Rights.
An exemption is technically the right to receive first moneys (i) from the judicial sale of an asset by creditors outside of bankruptcy, or (ii) by a trustee for the benefit of creditors in bankruptcy. For example, New York State law currently provides for a judgment defendant’s right to exempt 90% of earnings for services rendered within 90 days. Assume that a creditor obtains a money judgment for $5,000 against a defendant and then restrains and garnishes the defendant’s bank account. The bank account contains $5,000. That $5,000 in the account consists entirely of earnings for services rendered within 90 days. (Please further assume that the funds in the bank account are not protected by any other exemptions.) In executing the garnishment, the creditor must pay $4,500 (90%) of the account proceeds to the defendant in satisfaction of his or her exemption, and may only keep the remaining $500.
In a chapter 7 bankruptcy case, properly claimed exemptions usually (overwhelmingly) function to prevent chapter 7 trustees from liquidating assets. In the above example, as a practical matter, the chapter 7 trustee would abandon the $500 that was not exempt.
Chapter 7 debtors residing in New York’s Dutchess County, Ulster County, Orange County, as well as Greene, Putnam and Sullivan counties, may choose between two different statutory exemption schemes: the New York state bankruptcy exemptions authorized by Bankruptcy Code § 522(b)(3), incorporating the state exemptions in New York Debtor and Creditor Law §§ 282 and 283; and the federal bankruptcy exemptions set out in Bankruptcy Code § 522(d).
The single most significant difference between the state and federal bankruptcy exemptions has to do with the homestead exemption. The maximum federal homestead exemption is $25,150. The New York State homestead exemption for residents of Dutchess County, Orange County and Ulster County is $142,350. For Putnam County, the maximum is $170,825, whereas in Greene County and Sullivan County the maximum homestead exemption is $85,400. If you have a significant amount of equity in your primary residence above liens (like the lien of a mortgage), you’ll need to elect the New York state exemptions.
One consequence of electing the New York state bankruptcy exemptions to protect significant equity in your home is the loss of the maximum $13,100 ‘wildcard’ exemption available under the federal exemption scheme. The federal wildcard can be used to protect otherwise non-exempt property, such as the right to receive proceeds of a personal injury settlement or judgment (in addition to the specific exemption for personal injury claims).
Practice note: Chapter 7 trustees appointed in cases filed in the United States Bankruptcy Court for the Southern District in the Poughkeepsie Division appear reluctant to ‘open’ a case to administer estate assets if the non-exempt asset total subject to liquidation and distribution to creditors is less than five thousand dollars ($5,000.00). Note that the $5,000 figure as a baseline for inducing a chapter 7 trustee to start asserting control over your non-exempt assets is not a sure thing, but it is a working rule of thumb. It is often possible to elect exemptions so that the chapter 7 trustee concludes that it is not worthwhile to administer the case, other than to review the debtor’s petition, hold the required first meeting of creditors, and file a ‘no asset’ report stating in essence that there is nothing to distribute to creditors, and that the debtor is entitled to a discharge in bankruptcy. More information is available about exemptions elsewhere on this website.
The ultimate goal of filing for personal bankruptcy relief is the discharge. The chapter 7 discharge renders claims against a chapter 7 debtor uncollectible forever, as a matter of personal liability. By ‘personal liability’ is meant exposure to the enforcement of a money judgment. When a creditor sues you for money owed and the court renders a judgment in the creditor’s favor, that piece of paper signed by the judge is filed by the clerk of court and entered on the county judgment roll (now an electronic judgment docket). That docketed judgment allows the judgment creditor to restrain and garnish your bank accounts. It also lets the creditor garnish your wages (10% of your pay before deductions per pay period), or in some cases to have the sheriff sell your non-exempt property.
The discharge does not affect liens that have attached to property before the case was filed, and which are not otherwise unavoidable (see Bankruptcy Litigation elsewhere on this web site). A typical example of this is the judgment entered before the bankruptcy case was filed. As a matter of state law, once docketed by the county clerk the lien of a judgment attaches to real property in the county. If a judgment validly attached before bankruptcy to your home, the bankruptcy discharge does not wipe out the judgment lien. Instead, it renders the judgment incapable of being used for other forms of collection after entry of the discharge. (See Bankruptcy Litigation elsewhere on this web site for a discussion of how to avoid a judicial lien in a bankruptcy case.)
The discharge is nearly automatic in an individual or joint case under chapter 7 of the Bankruptcy Code. Generally speaking, if the debtor has not recently obtained a discharge in a prior case, hasn’t taken steps to hide assets or destroy financial records before filing, and follows the rules (discloses all relevant personal financial information in the bankruptcy petition to the best of his or her knowledge, takes the required bankruptcy counseling courses, testifies truthfully before the chapter 7 trustee and cooperates with the trustee), the chapter 7 discharge will issue in due course. There are exceptions to this rule of thumb. (See Bankruptcy Litigation.)
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.