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Prebankruptcy Exemption Planning

The purpose of a personal bankruptcy is to get a “fresh start” by obtaining a discharge (wiping out) of debt. To assist debtors in obtaining their fresh start the law allows them to keep a modest amount of property. The property that an individual is allowed to keep in bankruptcy is known as “exempt” property.

New York has opted out of the federal exemption scheme contained in the Bankruptcy Code which means that an individual in New York is only allowed to claim exemptions available under New York law, plus certain federal exemptions other than those contained in the Bankruptcy Code.

Except for the homestead exemption, the exemption scheme in New York has not been updated in a long time and the exemptions are not pegged to inflation or the consumer price index (CPI).

1. Homestead Exemption

For a single person he or she is allowed to exempt up to $50,000 in equity in his or her primary residence. A married couple can exempt up to $100,000. The current fair market value of a house, condominium or co-op is determined base on a current appraisal. In chapter 7 case if a debtor has significant equity in excess of his or her homestead exemption the chapter 7 trustee will seek to sell the property – pay off all mortgages and liens on the property — and pay the debtor the amount of his or her homestead exemption. The balance of funds will be distributed to the debtor’s creditors.

2. Car & Truck Exemption

For a single person he or she is allowed to exempt up to $2,400 in equity in his or her car or truck. A married couple can exempt up to $4,800 – either $2,400 in each of two cars or $4,800 in one vehicle. The current fair market value of vehicles is determined the reference to the Blue Book Value (see www.bluebook.com) and the National Dealers Association (NADA) (www.nada.com).

If a vehicle is utilized by the debtor in earning a livelihood, such as a pickup truck owned by someone who makes his living hauling junk to the dump, a “tool of the trade” exemption may also be claimed.

In a chapter 7 case if a debtor has significant equity in excess of his or her permitted exemption in a car or truck the chapter 7 trustee will seek to sell the property – pay the debtor his or her exemption and pay off all liens – and use the remaining money to distribute to the debtor’s creditors.

3. Retirement Assets

Retirement assets contained in qualified retirement accounts, such as pension funds, individual retirement accounts (IRAs), 401k retirement accounts, and retirement annuities are exempt. Unfortunately, many debtor who file for bankruptcy have cashed out their retirement accounts to attempt to deal with their debt problems. This also results in tax consequences for the debtors since an early withdrawal from a retirement account (subject to certain exemptions) is subject to an early withdrawal tax penalty.

4. Cash

A single debtor not claiming a homestead exemption is allowed to exempt up to $2,500 in cash (whether as cash on hand or funds on deposit with a bank). In addition, her or she is allowed to exempt up to 90% of his or wages earned within the 60 days prior to bankruptcy.

5. Social Security

Social security funds, whether for disability or retirement, are exempt. However, it is important that the debtor be able to prove that an account contains social security proceeds. This is usually easier to do if social security funds are not commingled with other funds. For this reason it is a good idea to keep social security funds separate from other funds.

6. Prebankruptcy Exemption Planning

Prebankruptcy exemption planning refers to the process of converting a non-exempt Bankruptcy courts and appellate courts have consistently found that some measure of pre-bankruptcy exemption planning is permissible. While there is no hard and fast rule regarding how much pre-bankruptcy exemption planning is permissible – the longer the time from the date of the pre-bankruptcy exemption planning to the date of the actual bankruptcy filing the less vulnerable the planning will be. If sufficient time passes applicable statutes of limitations (deadlines for starting lawsuits) will have passed. A general rule regarding exemption planning is that if it is viewed as an attempt to shield too much of a debtor’s property it is more likely to be subject to attack.

At Starr & Starr, PLLC, we are knowledgeable and experienced in exemption planning. We have written on this topic for attorneys in the New York State Bar Journal (Life Insurance and Annuities May Insulate Some Assets From Loss In Unexpected Bankruptcy Filings) and presented Continuing Education Programs to attorneys on this topic.

Please feel free to contact Starr & Starr, PLLC if you have any questions or to schedule a consultation. We can be reached at 8888678165 or by e-mail at info@starrandstarr.com or by computer through the link on this website.

IMPORTANT NOTICE: The discussion of exemptions in this blog post does not cover all available exemptions in New York. Reading a blog post such as this is not a substitute for legal advice from an knowledgeable attorney. You should consult with an attorney if you face legal issues relevant to this blog post. This blog post is subject to the terms of the
Disclaimers contained on our website.

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