Bankruptcy Legislation

 

 

For New York consumers considering bankruptcy, the biggest bankruptcy news in five years dropped like a bombshell on December 23, 2010 when then-Governor Paterson unexpectedly signed legislation greatly increasing the state law exemptions.

 

Exemptions are those statutes that permit consumer debtors in bankruptcy to keep and protect assets.  The new law will become effective on January 22, 2011.

 

This will certainly cause an increase in the number of consumer bankruptcy cases we will see next year as more financially burdened consumers will be able to eliminate their debts while keeping and protecting all of their assets.
 
Homestead Exemption Increases to $150,000 per Person for Those on Long Island
 
The old homestead exemption statute, which went into effect in 2005, increased the amount of equity each debtor could protect in their home from $10,000 to $50,000. For Long Islanders and those in the five boroughs, the new homestead exemption for 2011 triples that amount to an incredible $150,000.  Since a husband and wife can pool their homestead exemption, that means that a married couple will be able to protect a whopping $300,000 worth of equity in their home.

 

This will enable almost any typical Long Island middle class family to file a Chapter 7 bankruptcy and eliminate their credit card debts while fully protecting their home.  Of course, consumers must still pass the means test; the new exemption law has no impact on that.

 

The new law also means that many individuals who previously filed for Chapter 13 relief because they had too much equity in their homes, and are currently part-way through their Chapter 13 plan, will likely be able to convert their cases to Chapter 7 and not have to make any further payments.  In order to do so, they would also need to demonstrate that their new budget has no disposable income, despite previously filing a budget that had enough funds left over to enable them to make their monthly Chapter 13 plan payment.

 

Incidentally, the amount of the new homestead exemption will be based on what county the debtor’s home is in.  For most downstate counties the homestead exemption will be $150,000 per person; for upstate counties, it will be $75,000 per person.

 

Previously, most states had more generous homestead exemptions than New York; now it will have one of the best.
 
Amounts for Almost All Other Exemptions Categories Are Being Increased and New Categories Are Being Added
 
The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.

 

The exemption for cars is being increased from $2,400 to $4,000.  Vehicles equipped for the handicapped will be exempt for up to $10,000. 

 

A new exemption enables homeowners who claim the homestead exemption to also exempt up to $1,000 in cash.  Previously, homeowners could not exempt cash if they claimed the homestead exemption.  This will enable homeowners to protect a larger amount of their tax refund which is considered cash for exemption purposes.

 

Another new category permits consumers to protect up to $1,000 worth of jewelry and art.  The tools of trade exemption, which permit debtors to protect the tools and implements of their profession, is being increased from $600 to a more respectable $3,000. 

 

There are also increased protections for cell phones, health aids, food, heating equipment, religious books, etc.  However, I have never seen a trustee previously raise an issue with any of these types of assets, nor do trustees seem to have any interest in a used home computer.  Nevertheless, it’s nice to see increased exemption amounts.

 

New Law Will Permit Debtors To Chose Between the New State Exemptions and the Federal Exemptions
 
Perhaps the biggest change to the law, other than the increase to the homestead exemption, is that debtors may now chose either the federal exemptions or the New York State law exemptions.

 

When the current version of the Bankruptcy Code was created several decades ago, it included certain federal exemptions as well as a provision that permitted each state to either adopt them or “opt out,” in which case the state can chose their own exemption scheme.  From day one, the New York legislature chose to opt out and use its own exemption statutes which have primarily been contained in the C.P.L.R. and Debtor and Creditor Law.

 

 

The federal exemptions should provide some tremendous protections for consumers who do not need the generous New York state homestead exemption.  This is because the federal exemptions contain a miscellaneous “wildcard” exemption that permits consumers to protect  $12,000 worth of miscellaneous assets including cash and tax refunds.  Since the wildcard exemption provides a great deal of flexibility, consumers will greatly benefit from now being able to use this provision.

 

In addition, the federal exemptions have a $20,200 personal injury exemption, compared to New York’s much-smaller $7,500 P.I. exemption.

 

New York attorneys, trustees and bankruptcy judges, all of whom have little or no idea what the federal exemptions are about, as they have never had to use them (or haven’t used them since the early 1980’s when the federal exemptions were last available in New York), will have an interesting and very exciting time during the next several years as they race to come up to date learning about them and applying them. We will also begin to see some New York bankruptcy court decisions for the first time in many decades interpreting the use of the federal exemptions in this state.

 

 

For years, legislation was proposed each and every year in Albany that sought to increase exemption amounts.  This legislation never received any publicity because it was periodically struck down and nobody ever expected it to pass.

 

In years past, when I would discuss this with some of my colleagues, they were surprised to hear that there was pending legislation considering that it wasn’t publicized at all.   

 

Despite reaching various stages in Albany each year for the past decade, such legislation has never found its way into law except once, when the homestead exemption was increased in September 2005. 
 
The Governor’s Signing of the Bankruptcy Legislation Today Was Totally Unexpected
 
In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws. 

 

At that time, both houses of the New York State Legislature passed legislation to increase bankruptcy exemptions in New York State.  However, the banking industry, which has an extremely large presence in New York, vigorously lobbied Governor Paterson to veto the bill.

 

Very few people thought there was any chance that Governor Paterson would sign the legislation into law. For that reason, no one was holding their breath about its passage because nobody expected it to happen.

 

The Bankers carry a lot of power, even with Democrats.  They argued that many consumers owe taxes to New York State, and with the bill’s added protections for debtors, both in and outside of bankruptcy, New York State’s tax collections would suffer.

 

New York City officials also opposed the legislation, arguing that it would impair the City’s ability to tow and auction cars for outstanding parking violations.

 

For a period of time, the bankruptcy legislation, which was signed by both houses, just sat on the Governor’s desk, and we all assumed it would die there.

 

Yet, Gov. Paterson, who is leaving office in just one week, signed the bill during his last week in office — with no advance notice and no fanfare of any kind, catching me, as well as all other bankruptcy practitioners, by surprise. And a very nice surprise at that!  The only hint came a day before when his staff circulated a memo to asking for input on the pending bill.

 

Perhaps the Governor, who apparently does not see public service in his future, was upset at the damage wrought by the financial sector which drove the economy into a recession, and used this opportunity to give something back to his constituents.
 
Governor Paterson Issued Press Release Discussing Why He Signed New Exemption Law
 
The Governor announced his signing of the bill by sending out a press release the day he signed it.  He stated that the bill “would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s.

 

The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.”
 
The New and Increased Exemptions Will Help Future Bankruptcy Debtors in Many Ways
 
Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.

 

Also, many existing Chapter 13 debtors may be able to convert there cases to  one under Chapter 7 and eliminate all further monthly payments.

 

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Forcing lenders to work out settlements with homeowners in bankruptcy is the subject of a bill that Senator Sheldon Whitehouse (D., R.I.) introduced last week.  Today there were hearings on the bill before the Senate Judiciary Committee.

 

The ideas under the proposed law, which would permit homeowners to modify their mortgages through bankruptcy proceedings, have been tossed around before and at times have been quite controversial.

 

 

Previous bills would have given debtors the ability to cram-down first mortgages in bankruptcy cases.  However, these bills never made it into law.

 

Currently,  mortgage cram-down in a bankruptcy can only be done with second mortgages. 

 

Cramming down a mortgage in bankruptcy is not the essence of Senator Whitehouse’s bill; getting the lender to voluntarily agree to it, however, is.

 

The current bill would give bankruptcy judges the power to require foreclosure mediation between banks and homeowners.

 

The bill creates a mechanism for judges to supervise talks between homeowners and their lenders.  This could address the problem where a homeowner makes a reasonable settlement proposal to the mortgage lender, but the lender or its servicer rejects it — a rather common occurrence.

 

 

One of the biggest obstacles in seeking a mortgage modification is the difficulty in getting though to individuals at the lender who have the authority to negotiate terms.  Take it from me, this can be a fruitless exercise in frustration.

 

The proposed bankruptcy modification bill would require that an individual with full settlement authority for the bank must show up for the mediation proceeding.  In addition, the bill requires the lender to be open to good-faith negotiations.

 

Senator Whitehouse believes that court-ordered talks could pressure mortgage servicers to modify mortgages that they wouldn’t otherwise agree to modify.

 

During the hearings, Senator Whitehouse also criticized the HAMP program which has not succeeded as intended — Something I’ve written about extensively.  See Problems with HAMP — Too Many to Count?

 

 

This is now more important than ever as foreclosures are expected to climb to 12 million by the end of 2012 and Long Island will certainly have its fair share of that number..

 

I’ve also written extensively before about the frustrations in persuading lenders to modify a mortgage.  See Why I Won’t Negotiate Loan Modifications and Loan Modification Industry is a “Sham” Says Attorney General Cuomo !

 

 

The New York Bankruptcy Courts in the Southern District have a pilot loss-mitigation program that enables debtors to confer with their mortgagees.

 

Judge Robert Drain, sitting in the Southern District of New York, testified that half of the mediations that take place in his court end in an agreement which is often a modification.  He said that the other half at least give the homeowner a clear understanding for why they are losing their home.

 

Judge Drain said that such programs are vital to sorting out the foreclosure issue.

 

 

There is currently an underutilized loss-mitigation pilot program here in the Eastern District of New York that has been in existence for just over a year.

 

I will discuss this program in a future blog post.

 

 

I just posted breaking news about the Governor Paterson’s unexpected signing of the bill to change the New York Bankruptcy Exemption Statutes.  See:  New York Bankruptcy Exemptions Suddenly Increased – This Is the Biggest Bankruptcy News in Years!

 

This Christmas and holiday gift from the outgoing governor is great news for consumers and it will certainly by the major topic of bankruptcy conversation this coming year.  The new law, which will help consumers protect more assets than ever before, will certainly lead to many more consumer bankruptcy filings for years to come.

 

Over Christmas break I prepared a chart outlining the most important changes to the New York exemption statutes that we commonly use for our bankruptcy clients. 

 

There are other changes as well that I didn’t outline, as they never come up.  For example, there are also increased protections for cell phones, health aids, food, heating equipment, religious books, etc.  However, I have never seen a trustee raise any issue of any kind with such assets.

 

 

Perhaps the other major aspect of the new exemption law is that it permits New York residents to choose between the New York exemption statutes and the Federal Exemption statutes which are set forth in Section 522(d) of the Bankruptcy Code.

 

The federal exemptions have never been available in this state before.

 

The federal exemptions have some liberal provisions not otherwise available in New York statutes.  They provide many additional protections that would be most useful to those consumers who do not need to take advantage of their homestead exemption.

 

The federal exemptions contain a “wild card” exemption that enables consumers to protect a generous amount of cash.

 

I will discuss the federal exemptions in future article that I will post later this week.

 

 

 

 

For New Yorkers considering bankruptcy, the biggest bankruptcy news in five years dropped like a bombshell this afternoon when Governor Patterson unexpectedly signed legislation greatly increasing exemptions for consumers.

 

Exemptions are those statutes that permit consumer debtors in bankruptcy to keep and protect assets.

 

 

This will certainly cause an explosion in the number of consumer bankruptcy cases we will see next year as more financially burdened consumers will be able to eliminate their debts while keeping and protecting all of their assets.

 

 

 

Right now each homeowner can protect only $50,000 worth of equity in a house.  However, for those on Long Island who live in Nassau and Suffolk Counties, that amount will triple to $150,000.   

  

Since a husband and wife can pool their exemption, that means that a couple will be able to protect a whopping $300,000 worth of equity in their home. 

 

This will enable almost any typical Long Island middle class family to file bankruptcy to eliminate their credit card debts while protecting their home.

 

In my Long Island bankruptcy practice, I am regularly meeting with homeowners who are forced to file for Chapter 13 bankruptcy instead of Chapter 7 because they have too much equity in their homes.  Now, almost everyone will be able to seek Chapter 7 bankruptcy relief and keep and protect their homes.

 

Incidentally, the amount of the new homestead exemption will be based on what county the debtor’s home is in.  For most upstate counties, the homestead exemption will only be $75,000 per person.

 

More than half of the states previously had more generous homestead exemptions than New York; now it will have one of the best.

 

 

The new bill also increases the exemptions for a great deal of other assets like cars, and adds some new categories like home computers and vehicles for the handicapped.

 

Many of the exemption amounts that are being increased had not changed in decades.

 

I am in the process of reviewing each of the various changes to the exemption laws, and I will discuss and outline them in a post tomorrow.

 

 

For years, legislation was proposed each and every year in Albany that sought to increase exemption amounts.  This legislation never received any publicity because it was periodically struck down and nobody ever expected it to pass.

 

In years past, when I would discuss this with some of my colleagues, they were surprised to hear that there was pending legislation considering that it wasn’t publicized at all.

 

Despite reaching various stages in Albany each year for the past decade, such legislation has never found its way into law except once, when the homestead exemption was increased in September 2005.  That year it was increased five-fold from $10,000 per person to $50,000 per person.  Here’s the article that I wrote about that:  Surprise Law Enactment – Homestead Exemption Increased .

 

 

In July of this year we seemed to get closer than ever before to seeing a change in New York’s woefully inadequate exemption laws.  

 

At that time, both houses of the New York State Legislature passed legislation to increase bankruptcy exemptions in New York State.  However, the banking industry, which has an extremely large presence in New York, vigorously lobbied Governor Patterson to veto the bill.

 

Very few people thought there was any chance that Governor Patterson would sign the legislation into law. For that reason, no one was holding their breath about its passage because nobody expected it to happen.

 

The Bankers carry a lot of power, even with Democrats.  They argued that many consumers owe taxes to New York State, and with the bill’s added protections for debtors, both in and outside of bankruptcy, New York State’s tax collections would suffer.

 

New York City officials also opposed the legislation, arguing that it would impair the City’s ability to tow and auction cars for outstanding parking violations.

 

For months, the bankruptcy legislation, which was signed by both houses, just sat on the Governor’s desk, and we all assumed it would die there.

 

Yet, Gov. Patterson, who is leaving office in just one week, signed the bill today – his very last — with no advance notice and no fanfare of any kind, catching me, as well as all other bankruptcy practitioners, by surprise. And a very nice surprise at that! 

 

Perhaps the Governor, who apparently does not see public service in his future, was upset at the damage wrought by the financial sector which drove the economy into a recession, and used this opportunity to give something back to his constituents.

 

 

Along with the new law came a press release.  In it the Governor said:

 

“During this time of economic crisis, it is our responsibility as public servants to protect those who are struggling the most.

 

“A reconsideration of the current exemptions, which in some cases have not been changed in decades, is particularly warranted when an increasing number of individuals find themselves in dire financial condition. Though this is not a perfect bill, the benefits far outweigh its concerns.”

 

The press release also stated:  This bill would provide a much-needed update to the exemptions law in New York as many provisions of State’s exemptions law are antiquated or have not been amended since the 1980’s. The purpose of such exemptions is to permit debtors in bankruptcy to retain a modest amount of personal property and equity in their homes so that they can continue to maintain their lives, and to protect them from becoming homeless, unemployed, or otherwise dependent on the State.

 

 

Not only will more consumers be able to file for Chapter 7 bankruptcy, but many of those who seek Chapter 13 protection instead will end up paying substantially less through their monthly Chapter 13 plan.

 

Also, many existing Chapter 13 debtors may be able to convert there cases to one under Chapter 7 and eliminate all further monthly payments.

 

The bankruptcy attorneys in my office and I will be quite busy reviewing all of our cases over the next few weeks to ascertain how to best take advantage of the new exemptions amounts.

 

To see a number of post that I’ve written about bankruptcy exemptions, see the articles under this category:  Bankruptcy Exemptions.

 

 

 

Many of this country’s bankruptcy courts are severely overloaded and in dire need of additional judgships.

 

A pending bankruptcy bill entitled, “Bankruptcy Judgeship Act of 2010″ seeks to create 13 new permanent bankruptcy judgeships and convert 22 temporary bankruptcy judgeships to permanent ones.

 

However, the legislature needs to find money to fund the new judgeships.  Enter a new, but welcome filing fee increase.  For a number of years, the filing fees for Chapter 7 bankruptcy cases have been $299 and the filing fees for Chapter 13 cases have been $274.

 

That has meant that many a client has either brought in messy-to-count single bills, or expected change — when change was usually not available.   It has also made the addition of legal fees and court filing fees a little bit more troublesome.

 

Now, according to the proposed H.R. 4506 Bill, these filing fees will increase by one buck, to the even sum of $275 and $300.  Chapter 11 fees will rise by $42.

 

This Bankruptcy Bill passed the house on March 12, 2010.  Last week, the Senate Judiciary Committee reported favorably on it.

 

I have been opposed to every filing fee increase to date.  But this one I actually welcome.

 

 

We are all familiar with bankruptcy Chapters 7, 11 and 13.  Then there’s Chapter 9 for municipalities, Chapter 12 for farmers, and rather recently, Chapter 15 Bankruptcy  for international insolvency matters.

 

In an American Bankruptcy Institute Legislative Symposium held today, the panelists discussed whether Congress should add a new chapter to the Bankruptcy Code to handle filings by this country’s largest troubled companies that have recently been in the news as being “too big to fail.”

 

After the failure of Lehman Brothers and the possible failure of AIG and the big three automakers earlier this year, there has been significant concern about how to handle such large companies.

 

Daniel Flores, chief Republican counsel for the House Judiciary Committee, suggested that these companies need to be treated specially and that the United States needs to modify its bankruptcy laws so that the largest companies can fail without causing turmoil in this country’s financial system.

 

Flores advocated for congressional passage of H.R. 3310, which would create a “Chapter 14” to institute a new legal process designed to help restructure troubled non-bank financial holding companies whose collapse would pose a systemic risk to U.S. economic stability. The new chapter would create an oversight board that would bring together the failing company, its creditors and regulators to address complicated financial issues before a bankruptcy filing.

 

It appears that not all conference presenters were convinced that this new Chapter 14 filing category is  really necessary.

 

“I don’t know if it’s necessary to have a separate chapter,” said Harvey Miller of Weil Gotshal & Manges, who is the lead bankruptcy attorney for Lehman Brothers. “The Bankruptcy Code now is not perfect, but with some amendments, it could clearly deal with issues of non-bank financial holding companies.”

 

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About the image:  the political cartoon is courtesy of  David Donar, a Clemson University professor who maintains the blog, Political Graffiti .  Although he teaches digital film projection, David has a sharp wit for political satire and uses his political cartoon site to showcase his opinions on all sorts of topics…middle east, US politics, environment, sport, anything news or opinion worthy.  Check it out.

 

 

At various times this year, Congressional committees have pondered the idea of making it easier for consumers who are overwhelmed with medical debt to file for bankruptcy. 

I previously discussed this in:  Special Bankruptcy Protection on the Way for Consumers with High Medical Debts  and Congress Considers Amending Bankruptcy Code to Make it Easier for Consumers to Discharge Medical Debt .

 

Yesterday, the Senate Judiciary Subcommittee on Administrative Oversight and the Courts held a hearing on proposed legislation to make it easier to file for bankruptcy relief for those consumers whose medical debts are the primary cause of their financial difficulty.  The legislation is being sponsored by subcommittee chair Senator Sheldon Whitehouse (D-R.I.).

 

The hearing questioned whether the new bankruptcy laws adopted in 2005 make it unreasonably difficult for consumers burdened with medical debt to get a fresh new financial start.

 

One of the key issues is determining what consumers would be eligible for relief.

 

The other key issue concerns what the relief would be.  Here’s what was being discussed:

    A)    the means test would be waived

    B)    the credit counseling requirements would be waived

    C)    there would be a national homestead exemption of $250,000 for these debtors

    D)    these debtors would be permitted to pay some of their attorney’s fees after filing

 

 

An editorial in today’s Newsday commented that foreclosures on Long Island are still rising, pointing out that voluntary programs are not doing the job, and Congress needs to get more involved with stubborn lenders.

 

“Underwhelming” was the word Newsday used to describe federal efforts to help homeowners avoid foreclosure.

 

The problem is that the two major initiatives — “Making Home Affordable” and “Hope for Homeowners” — both rely on lenders to voluntarily modify or refinance loans.  However this has not worked, especially on Long Island.

 

Congress needs to revisit proposed legislation to authorize bankruptcy judges to modify or “cram down” mortgages.  See my post,  Chapter 13 Mortgage Cram-down Still a Possibility .  Newsday believes that if mortgage lenders knew that homeowners had this ability, they would have greater incentive to work with the homeowners, rather than let the homeowners cram down the mortgage in bankruptcy court. 

 

There have been 6,274 foreclosure filings so far this year on Long Island.

 

Several months ago I reported on the legislative efforts in Congress to pass a bill permitting consumer debtors in Chapter 13 cases to be able to cram-down mortgages.  See Will the Senate Approve Cram-Down Legislation to Enable Mortgage Modification in Chapter 13 Bankruptcy Cases?

 

Unfortunately this bankruptcy legislation never made it as I wrote in Bankruptcy Cram-Down Measure Appears to be Doomed .

 

However, last week a Senate Judiciary subcommittee held a hearing to discuss whether the federal voluntary home loan modification programs were working.  The committee determined that the programs were not working and that they were providing very little success in stemming foreclosures.

 

As a result, some senators announced their intention to revive the cram-down legislation which will permit Long Island Chapter 13 debtors to be able to cram-down and modify their mortgages in Chapter 13 bankruptcy cases. 

 

Although any cram-down legislation will have a uphill battle, it is nice to know that some legislators continue to battle the banking and finance industries in an effort to help consumers.

 

As I had written about at length previously, (Will the Senate Approve Cram-Down Legislation to Enable Mortgage Modification in Chapter 13 Bankruptcy Cases?), the proposed law would have made it easier for bankruptcy judges to alter the terms of an individual consumer’s mortgage in a bankruptcy proceeding.  It would have been a great help to the many struggling homeowners here on Long Island.
 
One of the legislature’s objectives was that if bankruptcy judges were given greater authority, mortgage companies would be more willing to work with troubled homeowners to alter the terms of their loans before they were forced into bankruptcy.  Many Long Island bankruptcy attorneys such as myself had hoped to utilize this measure to help our clients whose homes were underwater.

 

This proposed legislation had been a key plank of President Barack Obama and congressional Democrats’ attempts to help stabilize the housing market and provide assistance to individual homeowners struggling to make their repayments.

 

“It’s clear that the votes are not there in the Senate,” Pelosi said. “It’s really a major disappointment that homeowners will not have the ability to declare bankruptcy on their primary residence while wealthier people can declare bankruptcy on their second, third and fourth homes.”

 

The provision, commonly referred to as a cram-down or strip-down, was defeated in a vote in the Senate last week.

 

The House had previously passed a bill that included the cram-down provision. (See House Approves Cram-Down Bankruptcy Bill ).

 

Given Pelosi’s comments, the House would either have to take up the Senate version of the bill with the cramdown provision stripped out, or House negotiators would have to abandon any attempts to add the measure back in when House and Senate lawmakers meet to iron out differences between the two versions of the bill.

 

Apparently the financial services industry, which had strongly lobbied against the measure, successfully scored a victory for banks, arguing that it would raise the costs of borrowing for all homeowners.

 

Durbin was unable to reach a deal with the financial industry, despite having managed to get Citigroup Inc., one of the nation’s largest lenders, on board.