About Me
Craig D. Robins, Esq. New York Bankruptcy Attorney, Longisland bankruptcy attorney

“ Craig D. Robins, Esq., has been a practicing Long Island bankruptcy attorney for over twenty-four years ”

Craig D. Robins, Esq.

Chapter 13 Bankruptcy

Valuing Houses in Bankruptcy Cram-Down Proceedings

Posted on Thursday (June 30, 2011) at 1:00 pm to Bankruptcy Practice
Chapter 13 Bankruptcy
Recent Bankruptcy Court Decisions
Suffolk Lawyer

Using appraisers in bankruptcy cram-down proceedingsWritten by Craig D. Robins, Esq.
 
Court Finds Mortgagee’s Appraiser Lacked Credibility in Chapter 13 Mortgage Cram-Down Proceeding
 
Over the past several years, the judges in the Central Islip Bankruptcy Court here in the Eastern District of New York have done an outstanding job issuing well-reasoned decisions covering a variety of issues.
 
These opinions are great practice tools and I truly look forward to reading new ones as soon as they come out.  These decisions often explain a judge’s thinking, which can give clues as to how the judge may decide other issues down the road.  They may explain a complex issue of law. 
 
They can also provide insight on some of the recent changes to the law and how counsel should interpret these new provisions.  Sometimes the decisions are merely entertaining and an interesting read.
 
The decisions are easily accessible on the court’s website for free.  I’ve found so many of the Court’s recent decisions important and interesting that I’ve devoted many of my columns to discussing them.  This month’s column is no exception.
 
Last month, Judge Robert E. Grossman issued a fascinating decision which basically pointed out many things a real estate appraiser should NOT do.  Joseph Lepage v. Bank of America, no. 8-10-08287-reg, (Bankr. E.D.N.Y. May 18, 2011).
 
Appraisals in Cram-Downs
 
Lepage was a Chapter 13 bankruptcy case which involved a routine adversary proceeding in which the debtor sought to cram down the second mortgage.
 
A Cram-down, also known as a “strip-off,” is when a debtor strips off and avoids the secured status of the second mortgage because there is insufficient value in the property to secure any part of it. 
 
Debtors have the ability to cram down second mortgages in Chapter 13 bankruptcy cases pursuant to Bankruptcy Code § 1322(b)(2).  One of our three Central Islip judges, Judge Dorothy T. Eisenberg, also permits Chapter 7 debtors to do this as well, something I’ve addressed in a prior column. 
 
A debtor must bring a cram-down application by adversary proceeding, which is essentially a federal lawsuit brought within the bankruptcy case.
 
In order to cram down a second mortgage, the house must be underwater to the extent that there is no equity whatsoever covering the second mortgage.  In other words, the value of the house must be less than the balance due on the first mortgage.
 
The debtor demonstrates this by supplying the Court with an appraisal.  As such, the only defense that the second mortgagee can generally assert is that the debtor’s appraisal is inaccurate, and that the house is actually worth at least a dollar more than the balance due on the first mortgage.
 
The appraisal is therefore very important and, as you will see, using a highly experienced appraiser, at least in the event there is a trial, can be critical.
 
The Recent Lepage Case – The Only Issue Was Valuing the Property for Purposes of the Cram-Down
 
When a mortgagee challenges the appraisal, which is relatively rare, then the Bankruptcy Court ultimately schedules an evidentiary hearing in which the Court decides what the value of the property is.  That was the sole issue in the Lepage case. 
 
In fact, the parties agreed that the only issue to be litigated was the value of the house.  It was agreed that if the Court determined that the house was worth less then the amount due on the first mortgage, then the debtor would prevail on the cram-down proceeding.
 
In Lepage, the debtor asserted that the house, a 900-square foot ranch located in Brentwood, was worth $175,000, which was less than the balance due on the first mortgage. 
 
The second mortgagee, however, argued the house was worth much more – $205,000.  The balance due on the first mortgage was $181,000. 
 
Thus, as long as the Court determined that the property was worth less than that amount, the debtor would be successful with the cram-down application.
 
The debtor used an appraiser who has been an active appraiser for 31 years, and has been licensed for the past 15 years.  There was evidence that he had testified extensively in Federal and state courts.  He even held a law degree.
 
The mortgagee’s appraiser, on the other hand, had only been appraising for eight years, and had only been licensed for four years.  He testified that he had never testified as an expert in any court.
 
Both appraisers testified that they employed the “direct sales comparison” method of valuation in determining the value of the property. 
 
As the debtor’s appraiser explained, this method involves inspecting the property and reviewing Multiple Listing Service reports for sales comparisons.  The appraiser then takes into consideration a number of factors and adjusts the comparable sales to the property. 
 
The court stated that this approach constitutes the best evidence of market value.
 
The debtor’s appraiser also considered a downward “time adjustment” of two percent per month to account for the decline in sales prices as the Long Island residential real estate market has been in decline since 2007, which was important as  Brentwood has experienced a steeper than average decline in home prices. 
 
He estimated this decline to be 25% per year.  In addition, he stated that Brentwood contains many properties that have been foreclosed, and are now “REO”– real estate owned by the bank.  Since banks typically sell REO properties for less than market value, this has the effect of depressing all sales of homes in the area.
 
Appraiser Made Serious Mistakes in Bankruptcy Court Proceeding
 
During cross-examination, debtor’s counsel was able to demonstrate that the approach taken by the mortgagee’s appraiser contained three significant and ultimately fatal deficiencies.
 
First deficiency:  The mortgagee’s appraisal contained valuations based on the fact that the house did not have a garage.  However, during cross-examination, the mortgagee’s appraiser was caught admitting that he did not know whether the premises had a garage or not – a significant factor that affects valuation.  In fact, the house did have one.  That certainly shot down this appraiser’s credibility.
 
Second deficiency: The mortgagee’s appraiser used some comparable properties that were listings and not sales.  A listing is not an accurate indicator of a property’s value and usually has no place in an appraisal.
 
Third deficiency: The debtor’s appraiser took into consideration the effect of REOs in the neighborhood, whereas the mortgagee’s appraiser neglected to do so.  The Court pointed out that this constraint made his report less accurate.
 
Judge Grossman adopted the debtor’s appraiser’s valuation of the property in its entirety, commenting that his methodology was consistent with industry standards and his testimony was credible. 
 
In stark contrast, the Judge described the mortgagee’s appraiser’s methodology as flawed, and his testimony as less credible.  Indeed, the mortgagee’s appraiser even admitted that his omission of REO sales in his calculations rendered his valuation less accurate.
 
In citing caselaw, Judge Grossman pointed out that valuing assets is not an exact science and that the Court must look to the accuracy, credibility and methodology employed by the appraisers.  Courts are not bound by appraisals submitted by the parties and may form their own opinions as to the value.
 
The burden is on the debtor as the moving party to establish that “there is not even one dollar of value” in the property to support the lien which the debtor seeks to avoid.  Once the debtor has met this burden, it is up to the challenging party to submit evidence to overcome the debtor’s valuation.
 
Accordingly, the debtor prevailed and was successful in cramming down the second mortgage to his house.  Kudos go to bankruptcy attorney Alan C. Stein of Plainview, who represented the debtor, and his appraiser, John Breslin, of Huntington.
 
Practice Pointers for Bringing Mortgage Cram-Down Proceedings in Bankruptcy Cases
 
Most cram-down applications are unopposed.  However, if the mortgagee contests your valuation, hire a highly experienced appraiser who will testify in court. 
 
Also, keep in mind that if you have a hearing on valuation, you will either be totally successful or totally unsuccessful – all depending on how the court weighs the competing valuations.  Therefore, it may be wise to play it safe and negotiate a settlement with the mortgagee, for example, by agreeing to reduce the balance on the mortgage substantially.
 
————————-
 
About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the June 2011 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com
 
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Pressuring Lenders to Modify Mortgages in Bankruptcy Cases — New Legislation

Posted on Tuesday (February 1, 2011) at 8:30 pm to Bankruptcy Legislation
Chapter 13 Bankruptcy
Foreclosure Defense

modifying mortgages in bankruptcyWritten by Craig D. Robins, Esq.
 
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.
 
Mortgage Cram-Down in Bankruptcy is the Bill’s Objective, But In a Voluntary Manner
 
 
 
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.
 
The Proposed Bill Permitting Bankruptcy Modification Would Help Cut Through the Bureaucratic Red Tape
 
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?
 
Legislative Action is Needed to Curb the Number of Foreclosures
 
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 !
 
New York Bankruptcy Judge Drain Testifies at Hearing
 
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.
 
Seeking Mortgage Modification in Long Island Bankruptcy Cases
 
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.
 
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Captial One Bank May Be Sending You Money If You Filed Two Bankruptcy Cases

Posted on Thursday (January 20, 2011) at 12:00 pm to Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Creditors Engaging in Abusive Bankruptcy Practices

 Capital One enters into bankruptcy settlement with Office of U.S. TrusteeWritten by Craig D. Robins, Esq.

 The Executive Office of the United States Trustee issued a news release this week stating that the U.S. Trustee just entered into a settlement agreement with Capital One to resolve allegations that the bank attempted to collect on debts that had previously been discharged.

 
Apparently, a number of consumers across the country filed for bankruptcy years ago, and in the process, discharged their debts to Capital One.  When these consumers later filed a subsequent Chapter 13 bankruptcy, Capital One filed a proof of claim in the new bankruptcy case, but on the old debt, even though that debt had been discharged.
 
Once a debt is discharged, a creditor is forever barred from collecting it, even if the debtor later files another bankruptcy case involving a Chapter 13 payment plan.
 
The investigation revealed that Capital One filed 15,500 claims totaling approximately $24.7 million on debts that were previously discharged in bankruptcy, and that they received payment of approximately $2.35 million.
 
The reason for the erroneous claims simply boils down to some very sloppy business practices.  Here, Captial One neglected to identify which customers had previously filed for bankruptcy protection — something they should have and could have easily done. 
 
All creditors have an obligation to maintain adequate procedures to ensure that they do not violate the discharge protections that bankruptcy offers.  Here, one of the country’s largest banks failed in that regard.
  
Capital One will refund each consumer or bankruptcy estate with the amount that was improperly collected as a result of the erroneous claim.  Consumers and bankruptcy trustees need not take any further action.
 
In addition, Capital One will also be paying the attorney’s fees of those bankruptcy attorneys who objected to the erroneous claims.
 
The case that the U.S. Trustee raised this issue in was the  In re: Galley Case out of Massachusetts, going back to 2008 (United States Trustee v. Capital One Bank (USA) N.A., Adversary Proceeding No. 08-01272 (Bankr. D. Mass.).
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If You’re Considering Bankruptcy, Be Mindful About Tax Refunds

Posted on Tuesday (January 18, 2011) at 4:30 pm to Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Tax and Bankruptcy Issues

Tax refunds and bankruptcyWritten by Craig D. Robins, Esq.
 
Tax Refunds can be a big deal when factored into a bankruptcy filing — for two main reasons. 
  
Be Mindful of the Bankruptcy Exemptions for Tax Refunds
 
First, tax refunds can only be protected up to a certain amount.  When you file for bankruptcy, you can protect various assets, and tax refunds is one of them — but only up to a certain amount.
 
In what is very good news for New York residents, the exemption for tax refunds will increase after January 23, 2011.  See:  The New, New York Bankruptcy Exemption Statutes for 2011 .  I will post a detailed article in the next few weeks about protecting a tax refund while utilizing the new, New York state exemption.
 
Basically, each person who files who need to protect their home with a homestead exemption, can also protect up to $1,000 worth of cash, money in the bank, and tax refunds.
 
For those who do not need the homestead exemption, they may be able to use the federal exemptions, which up until now has not been a choice for New York bankruptcy filers.  The federal exemptions provide for a wildcard exemption that can enable you to protect other miscellaneous assets up to $11,975 per person  That is very generous!
 
Be Wary of the Effect of the Refund on the Bankruptcy Means Test
 
Second, the tax refund is considered income for purposes of calculating the means test, and adding the tax refund to the means test can make it harder for some people to become eligible for Chapter .  For those filing Chapter 13, a tax refund can result in having to pay a larger Chapter 13 monthly payment.  See:  How a Tax Refund Can Mess Up Your Bankruptcy Means Test
 
Tax Refunds and Bankruptcy is such an important topic that last year I devoted an entire week’s worth of posts to the subject:  Tax Refunds and Bankruptcy — Everything You Need to Know .  I will write a few additional posts this year.
 
Be Careful How You Spend Your Refund If You Are Planning to File for Bankruptcy
 
In the meantime, if you get your tax refund, be careful how you spend it.  You should not repay any loans to friends or family members because doing so could be considered making a “preferential payment.” 
 
A preferential payment is when you “prefer” a certain creditor, even unintentionally, and that creditor gets more than he or she would have gotten otherwise.  If you file bankruptcy within a year of paying back a family member, under certain circumstances, the bankruptcy trustee has the right to sue the family member to recover the money and bring it back into a “bankruptcy estate” so that it can be distributed in a fairer manner to all creditors.
 
Also, don’t spend the money frivolously by taking a vacation or buying luxury goods.  Doing so can be considered inconsistent with the good faith necessary to receive a bankruptcy discharge.
 
So what can you spend your refund on?  Bankruptcy attorney’s fees is one.  Many of my clients are able to file for bankruptcy relief in the Spring, because that is when they typically receive their tax refund.
 
Tax refunds can also be spent on household repairs, car repairs, food, clothing, mortgage or rent payments, car payments, property taxes, fuel oil, child support arrears and some other reasonable items.  However, seeking advice from an experienced bankruptcy attorney is your best bet.
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Bankruptcy Means Test Car Deduction Issue Decided by Supreme Court Today

Posted on Tuesday (January 11, 2011) at 7:15 pm to Bankruptcy Means Test
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Recent Bankruptcy Court Decisions

automobile / car deduction in bankruptcy means test

Written by Craig D. Robins, Esq.

 
Today the U.S. Supreme Court gave us another interpretation of the how the means test should be used in bankruptcy cases by deciding that only consumers who have car loans or car leases can claim a certain motor vehicle “ownership expense” deduction on the means test.
 
Justice Elena Kagen, in her very first decision since ascending to the Supreme Court, ruled in an eight-to-one opinion that the BAPCPA means test is designed to enable creditors to recover as much as possible while ensuring that consumers seeking bankruptcy relief have enough money to maintain a reasonable standard of living.
 
The case, Ransom v.F.I.A.Card Services, N.A., had been frequently discussed at national bankruptcy symposiums that I’ve attended during the past year.  Even though the case is not a victory for the consumer (it is basically a win for the credit card companies), it was not unexpected either.  The Supreme Court upheld the decision of the U.S. Court of Appeals for the Ninth Circuit.
 
Ransom Case Now Governs Who Can Take Ownership Expense Car Deduction on Means Test
 
What the case means is that only consumers who have a car loan or car lease can take an additional deduction on the means test that car owners whose vehicles are totally paid off cannot take. 
 
This additional means test deduction can sometimes be significant in enabling a consumer to either pass the means test in a Chapter 7 case or pay substantially less in a Chapter 13 case.
 
The Ransom decision does not change local practice here in New York at all, as consumer bankruptcy practitioners here have customarily only taken the vehicle ownership expense deduction when the consumer debtor had a car loan or lease.
 
In her ruling, Justice Kagan sought to interpret the language of the means test statute, which provides that a debtor may claim only “applicable” expense amounts.  While the law does not define applicable, the Justice cited dictionary definitions such as relevance and appropriate.
 
In her decision, Justice Kagan also relied on the “statutory context” that in chapter 13 bankruptcy cases, means testing deductions fill in “amounts reasonably necessary to be expended” by above-median-income debtors.
 
Finally, Justice Kagan noted that bankruptcy law has a “core purpose of ensuring that debtors devote their full disposable income to repaying creditors.”
 
What Can Consumer Debtors Do to Get Around the Ransom Decision?
 
Here is how some bankruptcy debtors who do not have financed vehicles, side-step the issue so that they can obtain the additional means test deduction.  Instead of keeping an older, non-financed vehicle, they trade it in for a newer car that is financed by a loan or lease.  They do this prior to filing for bankruptcy.
 
Assuming that they engage in this “pre-bankruptcy planning” in good faith, and that they truly need a newer, more-reliable vehicle, then no one should be able to argue that engaging in such a transaction is abusive bankruptcy conduct.
 
Even Keeping an Older, Non-Financed Car, Results in an Additional Means Test Deduction
 
In our jurisdiction, the U.S. Trustee permits debtors to utilize a certain additional IRS used car deduction if the debtor’s car is an older car, which is one which is at least six years old.  This is because a good part of the means test deductions are based on IRS cost of living deductions.
 
If a debtor has an older car, then the debtor can take an additional $200 deduction on the means test.  This applies even if the car is financed, in which case the debtor can get a double deduction.
 
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The New, New York Bankruptcy Exemption Statutes for 2011

Posted on Monday (December 27, 2010) at 4:00 am to Bankruptcy Exemptions
Bankruptcy Legislation
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy

New Bankruptcy Law Exemptions in New York 
Written by Craig D. Robins, Esq.
 
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.
 
The Federal Exemptions Come to New York
 
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.
 
 
Chart Containing the Most Important Changes to the New, 2011 Bankruptcy Exemption Statutes for New York
 

Existing New York State Bankruptcy Exemptions


NEW New York State Bankruptcy Exemptions
Homestead Exemption (note:  this can be doubled for married couples filing jointly, who own the real estate together)

  • $50,000
Homestead Exemption (note:  this can be doubled for married couples filing jointly, who own the real estate together)

  • $150,000 for property in the New York downstate area (Counties of Nassau, Suffolk, Kings, Queens, Bronz, RIchmond, Rockland, Westchester and Putnam)
  • $125,000 for property in the Counties of Dutchess, Albany, Columbia, Orange, Saratoga and Ulster
  • $75,000 for all other counties
Motor Vehicle

  • $2,400
Motor Vehicle

  • $4,000
 

 
Motor Vehicle equipped for use by a disabled person (new category)

  • $10,000
Cash Exemption if Homestead Exemption is taken

  • None
Cash Exemption if Homestead Exemption is taken

  • $1,000.   (Note:  New exemption.  Can also be used for personal property.   However, the Federal Exemption is more generous.)
Jewelry and Art 

  • a wedding ring
  • a watch worth up to $35
Jewelry and Art

  • a wedding ring
  • a watch, jewelry and art worth up to a total of $1,000 (Notes:  New exemption.  This will make it much harder for trustees to go after engagement rings)
Tools of Trade  (these are the working tools and implements that are necessary to carry on one’s business)

  • $600 
Tools of Trade  (these are the working tools and implements that are necessary to carry on one’s business)

  • $3,000
Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing

  • $5,000

Aggregate Individual Bankruptcy Exemption for Cash, Household Goods and Clothing

  • $10,000 

 

Link to the Actual Bankruptcy Exemption Bill

Here is a link to the actual bankruptcy exemption bill.

 

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New York Bankruptcy Exemptions Suddenly Increased – This Is the Biggest Bankruptcy News in Years!

Posted on Friday (December 24, 2010) at 1:00 am to Bankruptcy Exemptions
Bankruptcy Legislation
Bankruptcy Tips Consumers Should Know
Benefits of Bankruptcy
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Current Events

New York Bankruptcy Exemptions have increasedWritten by Craig D. Robins, Esq.
 
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.
 
New York Residents Seeking Bankruptcy Relief in 2011 Will Be Able to Protect More Assets than Ever Before
 
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.
 
 
Homestead Exemption Increasing to $150,000 per Person for those on Long Island
 
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.
 
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.
 
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.
 
Proposed Legislation to Expand New York’s Exemptions Has Been Periodically Submitted in Albany for Years
 
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 .
 
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 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.
 
Governor Patterson Issues Press Release Discussing Why He Signed New Exemption Law
 
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.
 
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.
 
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.
 
 
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Non-Filing Spouse Keeps Tax Refund in Chapter 13 Bankruptcy Case

Posted on Tuesday (December 21, 2010) at 8:00 pm to Chapter 13 Bankruptcy
Suffolk Lawyer
Tax and Bankruptcy Issues

Tax Refunds in Bankruptcy CasesWritten by Craig D. Robins, Esq.

 
Pro-Se Litigant Scores Victory Against Chapter 13 Trustee Over Tax Refund Issue
 
When it comes to post-petition tax refunds in Chapter 13 bankruptcy cases, the long-standing practice in this jurisdiction for debtors who propose to pay unsecured creditors less than 100%, is to surrender to the trustee all tax refunds the debtor receives during the pendency of the bankruptcy case. 
 
Every experienced consumer bankruptcy practitioner who practices on Long Island is keenly aware of this “requirement.”
 
However, what happens when only one spouse files for Chapter 13 relief?  Does the non-filing spouse also have to surrender his or her tax refund to the trustee? 
 
Recently, Chapter 13 trustee Michael Macco of Melville said “yes” to this question and threatened to dismiss a confirmed Chapter 13 plan filed only by the wife, unless the non-filing husband cooperated and turned over the entire joint tax refund.
 
The trustee argued that inherent in the debtor’s obligation to turn over all post-petition tax refunds, was an obligation by the non-debtor spouse to do the same, so that the debtor’s creditors would then receive a distribution from these funds.
 
The husband refused to do so, went to a law library, and then brought a pro se motion seeking a determination that his share of the tax refund should be protected.  He did this two months after writing a letter to the judge expressing frustration over what he perceived to be an extremely unreasonable request from the trustee.
 
In an affidavit in opposition that was barely longer than one page, the Chapter 13 trustee argued that:  a)  the debtor chose to file a joint tax return; b)  there is no mention in the Chapter 13 plan that there can be an exclusion for the non-debtor spouse’s tax refund if the debtor files a joint return; and c)  the Bankruptcy Code requires the debtor to pledge all household income to pay unsecured creditors.
 
The husband and trustee had oral argument before Central Islip (Eastern District of New York) Bankruptcy Judge Robert E. Grossman in August, who reserved decision.  The Judge delivered an oral decision at a subsequent hearing in September. 
 
Judge Grossman then issued a detailed written decision last month, on November 4, 2010.  It held that the trustee had no basis, either at law or under the terms of the plan, to compel the husband, as a non-filing spouse, to turn over his property to the trustee, or to hold the debtor in default for the husband’s failure to do so.  In the Matter of Susan Malewicz, no. 09-74807-reg, (Bankr. E.D. New York 2010). 
 
Why Do Debtors Have to Turn Over Tax Refunds?
 
Judge Grossman first addressed the concept of why Chapter 13 trustees require debtors to turn over their tax refunds.  Apparently, Chapter 13 trustees claim that if a confirmed plan does not require a debtor to turn over tax refunds, debtors may manipulate deductions on their W-2 forms which would have the effect of reducing monthly income payable to creditors through the plan.
 
Mindful of the potential for abuse, bankruptcy courts have found that turnover of a debtor’s post-confirmation tax refunds is appropriate under the following situations:  when they are property of the estate; when they are included in “projected disposable income” which means they must be committed to the Chapter 13 plan; and/or when the terms of the plan provide for such turnover.
 
Spouse’s Tax Refund Not Property of the Bankruptcy Estate
 
The Judge determined that Bankruptcy Code Section 541(a)(2) and 1306(a) are the relevant statutes that determine what is property of the estate in a Chapter 13 case.  He then found that there is no provision in the Code that includes a non-debtor spouse’s property as being included in the debtor’s “property of the estate.”
 
Projected Disposable Income in Chapter 13 Bankruptcy Cases Does Not Include Non-Filing Spouse’s Income
 
Judge Grossman noted that other courts have permitted Chapter 13 trustees to require turnover of post-confirmation tax refunds under the theory that the refunds must be included in the calculation of the debtor’s “disposable income.”
 
Bankruptcy Code Section 1325(b) requires debtors to pledge all of “the debtor’s” projected disposable income in order for the plan to be confirmed.   Here, the judge emphasized the wording which focused on “debtor” and ultimately found that a non-filing spouse’s entire income is not included in this analysis.  “Nothing in the Code obligates anyone other than the Debtor to fulfill the requirements of the confirmed Plan.”
 
The Chapter 13 Plan Is Binding
 
Although the plan had the typical language that “the debtor shall pay tax refunds to the trustee,” the Judge found that this wording could not be interpreted to include the non-debtor spouse’s tax refunds.
 
The Judge also remarked that even though the husband signed an affidavit of contribution, indicating that he was contributing his income to the plan, it was not binding because it was not mentioned in the Chapter 13 plan.
 
Practical Tips – Don’t Be Steamrolled by a Trustee’s Argument
 
I actually called the debtor’s husband to get his take on what happened, as scoring a pro se victory over a Chapter 13 trustee is an impressive feat.  He said that he felt very firmly that his position was correct and even went to a law library to do his homework.
 
As for bringing the motion, he said, “I was not afraid to go in and stand up for what was right.  If I lose; I lose.  I’m in no worse position than when I started.”  No one can argue with that reasoning.
 
As I’ve indicated in some past articles, just because a trustee strongly and loudly enunciates a particular position does not mean the trustee is correct.  Always consider presenting your issue to the Court if you believe you have a solid basis for doing so.  As the debtor’s spouse said, you have nothing to lose.  Congratulations to him!
 
Perhaps Debtors Do Not Have to Turn Over Tax Refunds — A Big Issue for Another Day
 
I was greatly intrigued by one particular statement that Judge Grossman inserted in the decision:  “The parties have not raised, and this Memorandum Decision does not address, whether it is appropriate for the Trustee to require the turnover of the Debtor’s post-confirmation tax refunds.
 
This leads me to ponder if the Judge questions whether Chapter 13 debtors should uniformly commit their tax refunds to the plan.  Perhaps there are some exceptions to our local practice.  This would certainly be a major issue, but that is a subject for another day.

  
About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the DECEMBER 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com
 
 ____________________
  
Quick Links to Tax Week Blog Posts About Tax Refunds and Bankruptcy
 
This past January, for an entire week, I posted a series of articles every day about tax refunds and bankruptcy.  Here are some quick links to these articles:
 
 
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Bankruptcy Judge Suggests Direction of Means Test Decisions in EDNY Cases

Posted on Tuesday (November 16, 2010) at 3:30 pm to Bankruptcy Means Test
Bankruptcy Practice
Chapter 13 Bankruptcy

Central Islip Bankruptcy Judges Alan S. Trust, Robert E. Grossman and Dorothy T. Eisenberg at Bankruptcy Roundtable 2010

Central Islip Bankruptcy Judges Alan S. Trust, Robert E. Grossman and Dorothy T. Eisenberg at Bankruptcy Roundtable 2010

Written by Craig D. Robins, Esq.

 
Comment by Bankruptcy Judge Grossman at Annual Update Seminar Hints at How the Central Islip Bankruptcy Court Will Address Future Decisions Involving Means Test Issues
 
All three Bankruptcy Court judges from the Central Islip Courthouse in the Eastern District of New York attended the Annual Bankruptcy Roundtable panel discussion last night, which was held at the Nassau County Bar Association.
 
Over one hundred bankruptcy practitioners from Nassau and Suffolk Counties attended the event.
 
Of course, the presentation included the annual wrap-up of notable Supreme Court bankruptcy decisions and noteworthy local decisions, as well as some nice presentations by some of our local bankruptcy attorneys about substantive law issues.
 
What I found most significant, however, was not the typical presentation material, but instead, the substance of a two-minute comment that Judge Robert E. Grossman contributed during a review of the Lanning Supreme Court case.
 
The Comment from Judge Grossman. . .
 
Judge Grossman, clearly expressing his frustration and dissatisfaction over the poorly-formulated wording in the BAPCPA means test statute, remarked vehemently, “we can’t figure out what this miserably written statute means!” 
 
He then suggested that we seem to be entering a new judicial period in which Bankruptcy Court judges will have more discretion in reviewing means test issues, especially those concerning a debtor’s expenses.
 
He remarked that we will likely see “less absolutes,” as he predicted that the appellate courts will focus their holdings by utilizing a “plain language” approach.
 
I found this comment most important as it clearly shows that Judge Grossman, and likely his fellow colleagues on the bench in Central Islip, will be focusing their analysis of means test issues by using a common sense approach as opposed to a strict constructionist approach that can produce a technically-correct, but absurd and unintended result.
 
Judge’s Comment Underscores Position Judge Will Take with Analyzing Means Test Issues
 
I have previously written how BAPCPA was designed to essentially remove judicial discretion from interpreting means test results, and I even commented on the “plain meaning” approach that Judge Grossman took in some of his decisions (see my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts).
  
Judge Grossman also referred to his year-old Rabener decision, which I also commented on in my post, Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts .  In that decision the Judge made clear that he does not believe that the Court should blindly use a rigid application to reduce judicial discretion when reviewing means test issues.  He stated that a sound conclusion consistent with reason is paramount.
  
Now, with comments such as those from Judge Grossman yesterday, it is becoming more and more clear that our Bankruptcy Court will be emphasizing a logical, forward-looking, common sense, plain language approach to analyzing and resolving means test issues.
 
As an active consumer bankruptcy practitioner who needs to know where his clients stand with the means test, and when to butt heads with a Chapter 13 trustee who takes a nonsensical, yet strict constructionist view of the means test law, today’s comment cements what we are already know — that the Court will most certainly be guided by a common sense approach.
 
What’s even more important is that in utilizing a common sense approach, the bankrutpcy judges will likely use increased amounts of discretion to reach a reasonable and sound result.   So when the Chapter 13 trustee insists that you amend a plan because BAPCPA says so even though it produces a ridiculous result, consider getting an opinion from the judge instead — if the result is reasonable, you now know how the judge will likely rule.
 
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Avoiding Judicial Liens in Chapter 13 Cases

Posted on Monday (November 15, 2010) at 12:00 pm to Chapter 13 Bankruptcy
Suffolk Lawyer

Avoiding judicial liens in Chapter 13 bankruptcy casesWritten by Craig D. Robins, there Esq.
 
New Decision Says Avoiding the Lien is Not Dependant on Receiving the Chapter 13 Discharge  
 
One of the extraordinary powers a consumer debtor has is the ability to avoid (eliminate) judicial liens in a bankruptcy case provided certain conditions are met. 
 
In a typical bankruptcy filing the debtor can discharge the personal liability on most debts – both secured and unsecured.  However, in rem liens on real estate, including mortgages and judicial liens obtained from judgments, remain protected.
 
The discharge prevents lien holders from pursuing the debtor personally to collect on the underlying obligation; however, the lien holder maintains the value of its security interest as a lien against the real estate.
 
Consumer debtors have the ability to avoid judicial liens to the extent that the lien impairs the debtor’s homestead exemption.
 
In this month’s Suffolk Lawyer column I will provide a brief background on judicial liens and the process to avoid them.  I will then discuss an interesting recent decision by Judge Robert E. Grossman which holds that avoiding a judicial lien in a Chapter 13 case should be effective immediately, rather than years later when the debtor receives his discharge.
 
How do Creditors Obtain Judicial Liens?
 
When a creditor sues a consumer and obtains a judgment, the judgment can become a lien on real estate that the consumer owns.  If the creditor obtains the judgment in Supreme Court, then it automatically becomes a lien on any real estate owned by the debtor in the county where the court is located.
 
If the creditor obtains the judgment in District Court, then the creditor must file a transcript of judgment with the County Clerk in order to obtain a lien on realty in that county.  Judicial liens are always subordinate to any other liens of record such as existing mortgages.
 
The Debtor’s Right to Avoid Liens in Bankruptcy
 
When a consumer debtor files for bankruptcy relief – which is usually done under Chapter 7 or 13 – the debtor can avoid judicial liens which impair the debtor’s homestead exemption as long as the formula set forth in Bankruptcy Code Section 522(f) is satisfied. 
 
If the lien only partially impairs the homestead exemption, the debtor can avoid that part of the lien, essentially reducing it.
 
Procedure for Avoiding Judicial Liens in Bankruptcy Cases
 
A debtor bringing an application to avoid a judicial lien must do so by motion, as opposed to adversary proceeding.  This is usually done prior to discharge.
 
The debtor actually has the burden of filing the motion.  If the debtor fails to do so, the lien remains on the property and survives bankruptcy, although the creditor is prevented by virtue of the automatic stay and order of discharge from pursuing the debtor personally.
 
Creditors can object to a motion to avoid a judicial lien.  The most common ground is a dispute over the valuation of the real estate, thus creating an issue as to whether the debtor’s homestead exemption is actually impaired.
 
If the debtor is successful, the court will grant the motion and enter an order declaring the judgment to be void as a lien of record.  The debtor must then file a certified copy of the order with the County Clerk to remove the judgment lien from the judgment roll.
 
Issue of the Day:  When Should the Order Granting Lien Avoidance Become Effective in a Chapter 13 Case?
 
In Chapter 7 cases, the order is effective immediately.  However, a unique issue exists in Chapter 13 cases.   This is because a great number of Chapter 13 cases eventually fail, resulting in dismissal of the case and no discharge for the debtor.  An argument can be made that a debtor should not be permitted to finalize the avoidance of a judicial lien by expunging it from the public records of the County Clerk if the Chapter 13 case can be dismissed for non-payment of Chapter 13 obligations a few months later.
 
So here’s the big question: Should a Chapter 13 debtor be able to avoid a judicial lien shortly after filing the case?  Or should the effectiveness of the lien avoidance be dependant upon the debtor demonstrating 100% success with the bankruptcy, which means fulfilling all obligations under the Chapter 13 plan over a period that is three to five years?
 
Recent Decison:  Lien Avoidance Not Subject to Entry of Discharge
 
In a case where there is no binding caselaw in the Second Circuit, Judge Robert E. Grossman, sitting in the Central Islip Bankruptcy Court in the Eastern District of New York, just issued a decision on October 26, 2010 in which he determined that a Chapter 13 debtor who avoids a judgment lien pursuant to Section 522(f) should not have to wait until discharge for the order to become effective.  In re:  Kathleen Mulder, no. 10-74217, (Bankr. E.D. New York 2010).  In doing so, he reversed the Court’s policy of many years.
 
In the Mulder case, the debtor owned a home worth $255,000 at the time of filing.  There were mortgages on the property totaling $220,000.  Thus there was about $35,000 worth of equity.  The debtor was entitled to exempt up to $50,000 worth of equity under her New York homestead exemption.
 
At the time of filing, there was a judgment lien in the sum of $160,000.  The debtor, who was represented by my colleague, Donna M. Fiorelli of Garden City, filed a routine motion to avoid the judgment lien.  The creditor filed a limited objection arguing that its rights would be severely prejudiced if the Court permitted the debtor to expunge the lien prior to discharge. 
 
The sole issue before the Court was whether Section 522(f) lien avoidance is effective immediately or whether it must be conditioned upon the entry of a discharge in the case.  (There was no dispute that the lien should be avoided).
 
The Court overruled the judgment creditor’s objection and permitted the debtor to immediately expunge the lien, finding nothing in the Code to prohibits this.  In reaching this conclusion, the Court adopted the minority view in this country and essentially changed the policy of the Court in Central Islip (or at least those cases before Judge Grossman).
 
The Court pointed out that other provisions of the Code protect the creditor, in particular, Section 349 which provides that when a case is dismissed, all property rights are restored to the position in which they were found at the commencement of the case.  Thus, Section 349 automatically reinstates liens avoided by Section 522(f).
 
However, as a practical matter, this is not automatic, and if the debtor expunges the lien and the case it later dismissed, it places a burden on the judgment creditor to immediately take steps to protect itself.
 
Judge Grossman pointed out that the minority view seeks to preserve the function of Section 349 if the case is dismissed.  “Courts which condition lien avoidance on the entry of a discharge perceive a weakness in the Code that could adversely affect judgment lienholders. . .”  However, he found good cause to part from this view because the Code does not explicitly provide for this.
 
It appears that Judge Grossman’s approach here greatly differs from his approach in other cases.  Here he has taken a strict constructionist approach, stating, “the Court finds that the words of Section 522(f) are clear, and when reading a statute, if the meaning is clear, the analysis ends there.” 
   
He also quoted another decision stating, “Congress ‘says in a statute what it means and means in a statute what is says there.’” He concluded, “While this Court shares a similar frustration with what appears to be drafting deficiencies of the Code, this Court is bound by the plain meaning of the statute.”
 
Yet, most of Judge Grossman’s previous decisions have been more geared towards reaching a logical outcome, as opposed to citing strict constructionist grounds, something I addressed in my March 2010 column —Deciphering the Plethora of Means Test Cases Across Many Bankruptcy Courts  .  In any event, this decision is a win for the consumer.
  

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the NOVEMBER 2010 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Mastic, Patchogue, Commack, West Babylon, Coram, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com
 
 
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