About Me
“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”
Bankruptcy Exemptions
Written by Craig D. Robins, Esq.
This post is the fourth in a series of articles that I’ve writtten this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues. Links to all posts in this series are at the bottom of the page.
What Should You Do If You Expect a Large Tax Refund, But Haven’t Filed the Bankruptcy Petition Yet?
TIP: Here’s where pre-bankruptcy planning becomes very important. If you expect a large refund, you may want to delay the filing of your bankruptcy petition until you receive the refund and spend it down in an appropriate manner.
Using a large tax refund to pay your rent or mortgage, buy food, make a car payment, or even pay your bankruptcy attorney, are all types of payments that are consistent with filing for bankruptcy in good faith. Sometimes the refund can also be used to buy necessary clothing or furniture, fix your house, repair your car, or get necessary dental work done.
However, you cannot pay existing debts to friends or relatives, give the money away, gamble it away, or buy luxury goods. In general, using it to pay any reasonable and necessary expenses is O.K.
Since pre-bankruptcy planning can be tricky in order to do it in a way that complies with the bankruptcy law, it is always best to seek the advice of a competent bankruptcy attorney before doing so.
Exempting the Tax Refund in the Bankruptcy Petition
If you need to file your bankruptcy petition before you recieve the refund, you must list it in the petition.
To protect your tax refund, you must exempt it by including it as an asset in the Schedule B, which is the Schedule of Personal Property, by stating the anticipated amounts of both the Federal and State refunds, and by listing the exemption and the correct exemption statute (New York C.P.L.R. section 5206) in Schedule C to the petition, which is the Schedule of Exemptions.
If you have to file your bankruptcy petition before preparing your tax return, then you will not know the amount of your refund (which is fairly common because most people don’t do prepare their tax returns until April). In such situations, you should nevertheless list it as “possible income tax refund for the 2009 tax year. . . . Amount $ - unknown -”
You May Be Able to Keep a Non-Exempt Tax Refund If It Is Small
Generally, trustees will only administer non-exempt assets if it is reasonable to do so. If the tax return is relatively small, it will probably be administratively inconvenient for the trustee to be burdened with all of the work necessary to distribute a very small amount.
I previously wrote a post about the issues a Chapter 7 trustee considers in deciding whether to take a debtor’s money or assets to distribute to creditors: Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
Written by Craig D. Robins, Esq.If a trustee in a Chapter 7 case comes across a significant asset that is not exempt, the trustee will first solicit an offer from the debtor. If the debtor is interested in keeping the asset, then the debtor will negotiate to purchase the debtor’s interest.
What happens if the debtor is not interested or can’t afford to purchase the asset? Then the trustee will try to sell it.
In order to do so, the Chapter 7 trustee must give notice to all creditors and interested parties listed in the petition.
The trustee can then determine how the asset will be sold. It can be through a broker or an auctioneer. The trustee can also publish a notice indicating that the sale will be in his office, or that the item will be sold to the highest bid received by a certain date.
In order for the trustee to accept a bid, even if the only party making the offer is the debtor, the trustee must seek bankruptcy court approval. In some instances, the trustee will structure the sale so that it is subject to a higher or better offer.
Once the trustee sells the asset, then he has good amount of paperwork to do.
You may be interested in a related post I wrote: How Much Do Chapter 7 Bankruptcy Trustees Get Paid?
What are typical assets that a Chapter 7 trustee may sell? These can be cars, jewelry, collectibles, homes, and even baseball tickets.
However, a good experienced Chapter 7 bankruptcy attorney will properly guide the client to make sure that there are no unprotected assets. Also, Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
.
.
For those considering filing bankruptcy in New York, here is a list of the most common Bankruptcy Exemptions in New York .
Written by Craig D. Robins, Esq.Almost all pensions are protected in bankruptcy proceedings, whether the debtor files here in New York or in any other state
Here’s why: In a 1992 United States Supreme Court case, the court ruled that any pension plan that is “ERISA qualified” is excluded from the bankruptcy estate.
“ERISA” is the Federal Employee Retirement Income Security Act of 1974. Under this act, pension plans, 401-K plans, and other “ERISA-qualified plans” are specifically protected from creditors because of a prohibition from being assigned or alienated.
This means that the pension never even becomes part of the bankruptcy estate. (The bankruptcy estate consists of those assets owned by the debtor which the trustee can go after if the assets are not exempt). When an asset like a pension plan is excluded from the bankruptcy estate, it remains the property of the debtor and the trustee cannot touch it.
Also, since pension plans are not part of the bankruptcy estate, you don’t even have to ascertain whether there is an exemption statute to protect it. It is already protected.
So, simply put, an ERISA-qualified plan cannot be used to satisfy the claims of creditors in a bankruptcy proceeding and should therefore be totally protected.
How can you tell if a pension plan is ERISA-qualified?
Pension plans usually have a pamphlet of information about the plan which contains information about the plan’s tax status. Most employers give a copy of the pamphlet at some point, but if misplaced, additional copies can usually be obtained easily.
The best assurance that a plan is ERISA-qualified is when the plan contains a copy of a favorable ruling letter from the IRS indicating that the IRS has determined that the pension plan is in compliance with the tax code and meets tax qualification requirements. Incidentally, a plan could conceivably be considered tax-qualified even if it has not received a favorable ruling letter from the IRS, and even if it is not in compliance with the tax code, as long as the debtor is not materially responsible for its noncompliance.
One important note: Although the pension plan may be protected, recent contributions, if very large, may not be.
Of course, making sure a pension or retirement account is ERISA-qualified and protected is extremely important. This is one of the many things an experienced bankruptcy attorney should do, and we do this regularly with our Long Island bankruptcy clients.
Written by Craig D. Robins, Esq.
The 2005 Bankruptcy Amendment Act changed how a debtor determines which state’s exemptions statutes to use. If you’ve lived in the same state for the two years prior to filing then you have nothing to worry about. You use the exemptions from that state.
However, if you moved from state to state during the prior two years, then some important rules apply.
The 730-day Rule
If you resided in the same state for at least 730 calendar days continuously (two years) prior to the filing of your bankruptcy petition, then you can use that state’s exemptions.
The 180-day Rule
If you did not live in your current state continuously for at least 730 days, then you must pick the state in which you lived most of the time during the 180 days prior to the 730 days. In other words, the state that must be selected is where you lived most of the time between 2 and 2 ½ years before filing.
The Default Rule
If no state qualifies using the above rules (i.e., you lived in abroad) or if the 180-day state requires current residency or domiciliary to use its exemptions (a tricky issue), then you must use the federal exemptions. The default rule will only apply if you did not live in any state during the 180 day period that began 730 days before filing, or if the state requires current residency or domiciliary.
If You Moved, Seek Advice From an Experienced Bankruptcy Attorney
The above rules can be somewhat confusing. If you moved between different states in the past two or three years, then you should consult with a knowledgeable bankruptcy attorney.
Written by Craig D. Robins, Esq.Exemption statutes are the laws that enable debtors to keep and protect certain assets. There are set values for most exemptions.
Some of the most important exemption categories can be doubled if a husband and wife file a joint bankruptcy petition in the state of New York.
For example, the homestead exemption in New York is $50,000. If a husband and wife file a joint bankruptcy petition, and they own the house together, they can pool their homestead exemptions for a total of $100,000 of bankruptcy protection.
With jointly-held bank accounts, married debtors filing a joint bankruptcy petition can exempt a total of $5,000, rather than the exemption amount of $2,500 per person.
The exemption for cars, however, cannot be doubled, as the exemption amount is per car, and not per person.
Written by Craig D. Robins, Esq.The bankruptcy laws and exemption statutes permit debtors to keep and protect various specified assets in Chapter 7 bankruptcy cases. See Bankruptcy Exemptions in New York .
When an asset is either non-exempt, or greater than the exemption amount, the bankruptcy trustee has the right to liquidate the asset to raise money for the benefit of creditors.
Fortunately for debtors, however, even if an asset is non-exempt or has a value greater than the exemption amount, the debtor may be able to keep it anyway.
Here’s why: If an asset has relatively low value or is hard to sell, the trustee will probably abandon it. In order for a trustee to want to liquidate an asset, there has to be enough net funds to make a reasonable distribution to creditors. If there isn’t, the trustee will walk away.
Also, trustees don’t work for free. Their compensation for liquidating assets comes out of the gross proceeds that they collect. Thus, if a sale will not produce enough to pay the trustee, an auctioneer, and then leave a sufficient net proceeds, the trustee will not bother.
There is no magic amount that trustees will walk away from, but most New York Chapter 7 bankruptcy trustees will not bother to administer any assets that will produce less than a thousand dollars, sometimes even more.
.
I recently wrote a post about the additional pressures trustees face in deciding whether to liquidate assets: The Back-Door Politics Behind Trustees Pursuing Non-Exempt Assets .
.
Experienced bankruptcy attorneys can do a pretty good job gauging the likelihood of whether a trustee will want to liquidate a non-exempt asset.
Written by Craig D. Robins, Esq.I recently attended a dinner for an attorneys organization that I am a member of and sat with a bankruptcy judge and two Chapter 7 trustees. During the dinner, we had an interesting discussion over whether trustees should liquidate vehicles that had some, but not too much, non-exempt equity.
This conversation began when the judge asked the trustees why they weren’t going after more cars that appeared to clearly have value over the exemption amount. The trustees explained that from time to time the Office of the U.S. Trustee puts pressure on the trustees to either go after, or not go after, certain non-exempt assets.
Apparently, for a period of time, some trustees were seeking to liquidate vehicles with very little non-exempt value, thereby resulting in a very small distribution for creditors in the bankruptcy estate. The primary beneficiaries of such sales were the trustees, who received commissions and legal fees, rather than the unsecured creditors, who barely received pennies on the dollar. Apparently, this was giving trustees a bad name. One of the trustees said that trustees were being called “money grubbing trustees” and other not-so-nice names for doing so.
This trustee explained that at other times, the U.S. Trustee’s Office actually issued totally opposite directives, calling on trustees to be more vigilant and aggressive.
In the meantime, the judge questioned the fairness to creditors if trustees let such assets go. My trustee colleagues countered with these comments: it is simply not administratively convenient to go after an asset that produces such a small recovery for the estate. Also, some debtors do not have the financial ability to offer any settlement to the trustee. The trustee commented that he never saw so many debtors in a destitute situation.
I pointed out the inequity of the New York State exemption statute for vehicles, which, not having been changed in over 25 years, hardly gives consumers any protection at all.
So when a trustee is considering going after a non-exempt asset, the trustee will be guided by comments and directives from the U.S. Trustee that are not made public, comments they receive from the bankruptcy judges, and their own assessment and determination as to whether doing so is feasible and economically worthwhile for the bankruptcy estate.
Bankruptcy Exemptions in New York
Posted on
Written by Craig D. Robins, Esq.Consumer debtors who file for Chapter 7 or Chapter 13 bankruptcy in New York, are allowed to keep certain possessions that are “exempt.” Exemptions are statutes which indicate what assets you can keep and protect while eliminating debts in a bankruptcy proceeding.
.
Bankruptcy cases filed in New York must use exemptions set forth in New York law. Although there are federal exemptions, they do not apply to cases filed in New York. This is because New York has opted out of the federal exemption scheme. See my post last week: Can Federal Exemptions be Used in New York Bankruptcy Filings?
Some of the more common assets that New York debtors can protect are:
• Bank accounts with a total value of up to $2,500
• Automobiles with total equity of up to $2,400
• Household furniture and personal possessions with a value of up to $5,000
• Retirement and pension accounts
• Homes with a total equity of up to $50,000
A husband and wife who file a joint bankruptcy petition can usually pool their exemptions to double the above amounts.
While there are limitations to these exemptions, most of our Long Island bankruptcy clients are able to keep all of their belongings while reducing or eliminating their debt.
Written by Craig D. Robins, Esq.Of course not. Clothing is protected. When you file for bankruptcyin the State of New York, a consumer can keep and protect a certain amount of clothing.
Although there is a specific dollar amount for personal effects which include clothing, for all practical purposes, all usual and ordinary clothing is exempt and protected. The fact is that a trustee has no interest in trying to liquidate someone’s used duds.
There are only two possible exceptions. One would be an expensive fur coat which actually has to be separately itemized on the schedule of assets in the bankruptcy petition. The other exception might be a collection of expensive designer dresses.
.
However, in over twenty years of representing consumer debtors, I have yet to file a bankruptcy case with either.
A debtor will probably be able to keep even once-expensive designer clothes
I did have one client several years ago whose husband, while he was working, earned several hundred thousand dollars a year. The wife had spent over $500,000 on designer clothes in the five-year period before they retained me. In fact, their largest creditor was Barneys, the famous New York clothing store, which was owed about $200,000.
We never had to address how a trustee would handle the designer clothes because the matter was resolved without a bankruptcy filing.
Looking at what happened to former vice-presidential candidate Sarah Palin’s designer clothes, which were very much in the news last fall, the Republican National Committee eventually determined that they only had nominal value and turned them all over to Goodwill, even though they had cost many tens of thousands of dollars. So chances are that even if a consumer who was previously affluent files for bankruptcy owning some designer clothes, the trustee will not care less about them.
The bottom line: used designer clothes, even if they have potential value, are not easy to liquidate. Therefore, even if they may be technically non-exempt, a debtor will probably end up being able to keep them.
Written by Craig D. Robins, Esq.When a consumer files for bankruptcy relief, the bankruptcy laws permit him or her to keep and protect certain assets. These laws are called exemption statutes.
There is a set of exemption provisions set forth in the Bankruptcy Code and they are called the Federal Exemptions. However, in 1978, Congress gave the legislature of each state, such as the state of New York, the ability to “opt out” of the federal exemptions.
This is because for almost 200 years, there has been an issue over whether state rights should include the authority to regulate exemptions. Accordingly, each state can determine whether to use the Federal exemptions or their own state exemptions.
New York has opted out of the Federal Exemptions
I often meet with clients who have read up on bankruptcy law before coming to meet with us and many of them have expressed confusion over whether the federal exemptions apply in New York.
Here in the state of New York, federal exemptions are not used or recognized. There are a number of different New York state statutes which contain exemption provisions. Some of these statutes include the New York Debtor and Creditor Law, the New York Insurance Law, and the New York Civil Practice Law and Rules (CPLR).
Only 16 of the 50 states permit debtors to use the federal exemptions. The remaining states each have their own exemption statutes.
For those readers who live outside of New York, here is a list of states that permit the federal exemptions:
.
- Arkansas
- Connecticut
- Hawaii
- Kentucky
- Massachusetts
- Michigan
- Minnesota
- New Hampshire
- New Jersey
- New Mexico
- Pennsylvania
- Rhode Island
- Texas
- Vermont
- Washington
- Wisconsin