Homestead Exemption and Married Spouses

It is not uncommon for one spouse to seek bankruptcy relief under Chapter 7 or Chapter 13 of the Bankruptcy Code in a situation where title to the real property is held in both parties’ names. Generally, under such circumstances, the debtor typically claims a half interest in the property. Thus, the homestead exemption, under either New York law or federal bankruptcy exemptions, would be used to protect that interest. This creates an interesting legal issue  since under New York’s Real Property Law both spouses hold an undivided interest in the entirety of the property. If so, does the homestead exemption have to protect all of the equity in the property? 

In In re Naples, W.D.N.Y. Bk #14-10264, the bankruptcy trustee made precisely that argument. The trustee argued that since only one of the spouses had filed bankruptcy, and since the property was held by the parties as tenants by the entirety, creating undivided interest in each spouse, the debtor did not have sufficient homestead exemption to protect his equity in the property. The bankruptcy court disagreed. It held that under those circumstances, for purposes of valuing the debtor’s interest in the property, only one half interest needs to be valued and homestead exemption would be applied only to that half interest. The court reasoned that since the way the title is held creates limitations on each spouses to transfer title without consent of the other spouse, for the bankruptcy court’s valuation, only one half interest needs to be valued.

I think that this is a well thought-out result. If both spouses were filing for bankruptcy, each spouse would be able to apply their own exemption to any equity in the property, so if only one spouse files, that spouse should only need to protect that spouse’s half interest.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Homestead Exemption and Multi-Family Residences in New York

Once in a while, I represent debtors who own a multi-family properties. In the past, the local Rochester rule has been to allocate the homestead exemption solely to the portion of the property that is used as the debtor’s residence.

However, in In re McCarthy; W.D.N.Y. Bk #11-31499, Syracuse Bankruptcy Court Judge Margaret Cangilos-Ruiz has ruled that a bankruptcy debtor can claim a homestead exemption in Chapter 7 bankruptcy on an entire parcel or residential property, even if the debtor only resides in part of the property. In McCarthy, the debtor owned property containing a two family house, both units of which were rented out, and a smaller building in the back where the debtor both worked and lived.  The creditor argued that the homestead exemption should only be allocated to that portion of the lot that is used as the debtor’s residence. The court ruled that the debtor could exempt the entire parcel.

McCarthy in part relied upon an earlier decision of Judge Cangilos-Ruiz, In re Ford, 415 B.R. 51 (Bankr. W.D.N.Y. 2009), aff’d. on appeal, Cmty. Bank, N.A., v. Ford, Civil Case No. 5:09-cv-633 (GLS) (N.D.N.Y Dec. 4, 2009). In Ford, the debtor lived on one parcel, an the septic and well water for the homestead parcel came from an adjoining vacant parcel. The parcel with the residence also included two sheds used by the debtor for both personal and commercial purposes. The court allowed the debtor to apply the homestead exemption to the vacant land parcel as well as the property with the residence.

The McCarthy decision also relied on a decision of Western District of New York Bankruptcy Judge Michael J. Kaplan, In re Rupp, 415 Br.R. 72 (Bankr. W.D.N.Y. 2008).  In Rupp, Judge Kaplan allowed the owner of a two family residence to exempt the entire parcel as a homestead.

McCarthy decision did not address an unpublished 1992 decision of the Hon. Michael A. Telesca, District Court Judge for the Western District of New York in Randall v. Mastowski, CIV-92-6049T. Mastowski was an appeal of a decision by former Rochester Bankruptcy Judge, Hon. Edward D. Hayes, In re Mastowski, 135 B.R. 1 (Bankr. W.D.N.Y. 1992). The debtor in that case owned two double houses, and only lived in one of the four units. Judge Telesca held that the debtor could only claim a homestead exemption “on that part of the property . . . that she occupies as her primary residence.”

In Rupp, Judge Kaplan  acknowledged the Mastowski district court decision, but held that “the binding effect of the decision of a district judge of this district upon all bankruptcy judges of this district depends on whether the district judge published the decision.”

Whether the McCarthy decision will be followed in Rochester by Judge Paul R. Warren is not quite clear at this time.  This issue has not been extensively litigated in the recent years perhaps because New York’s homestead exemption was so limited. Since the homestead exemption has been increased to $75,000 in Western New York, and up to $150,000 elsewhere in the state, I anticipate more litigation involving homestead exemption claims for multi-family properties in the foreseeable future.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Top Ten Bankruptcy Myths

There are lot of myths and misinformation regarding debtors’  rights to file bankruptcy.  In my practice, I see a lot of debtors who seek to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, who have heard a lot of rumors and incorrect information with respect to their rights and obligations when they file for bankruptcy relief.  The following is a compilation of the typical questions, and correct answers to the questions I frequently hear from the debtors.

1.  I will not be able to buy a house for ten years since I will not be able to obtain a mortgage.

Although Chapter 7 Bankruptcy will appear on your credit report for a period of ten years, you will be able to buy a house again much sooner than that, because the bankruptcy is likely to improve your credit rating.  Chapter 13 Bankruptcy is likely to improve your credit sooner and is likely to disappear from your credit report much sooner as well.

2.  I won’t be able to buy a car for ten years since I will not be able to obtain a car loan.

Although Chapter 7 Bankruptcy is likely to be on your credit report for a period of ten years, you will be able to borrow money to purchase a car again because because the bankruptcy is likely to improve your credit rating.

3.  I won’t get a credit card or a good credit score for ten years.

Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are  likely to improve your credit rating.  In my experience, although I do not recommend it, the debtors are able to obtain credit cards again within 1 to 2 years.

4.  I won’t be able to get a student loan for myself or my children.

Since guaranteed student loans must be repaid, and cannot be discharged in bankruptcy, therefore, there is little concern that student loans will not be paid back.  Any private lender may deny a student loan based on the debtor’s credit score, however most student loans are government backed.

5.  My employer will fire me because I filed for bankruptcy.

While bankruptcy information is available as a public record, employer, or prospective employer, is not allowed to discriminate against you based on debtor’s decision to file Chapter 7 Bankruptcy or Chapter 13 Bankruptcy.  If a prospective employer asks you for a copy of your credit report, questions you about bankruptcy, most employers are prefer to know that the debtor no longer has any financial issues which may affect work performance.  Discharging the debt is preferable to an employer as opposed to a situation where the debtor is receiving phone calls at work from collectors or a credit report that shows a pattern of irresponsibility. Further, in Chapter 7 Bankruptcy, employers are not notified of the filing.  In Chapter 13 Bankruptcy, the employer is likely to be aware of the filing since here in Rochester, New York, the Bankruptcy Court requires a wage deduction order that is sent to the debtor’s employer and requires a portion of the wages to be remitted directly to the Chapter 13 Trustee.

6.  I don’t qualify for chapter 7 bankruptcy because I own a house.

You can file for a Chapter 7 Bankruptcy even if you own a home.  Most states, including New York, allow a homeowner a certain amount of equity in their residence.  In New York, pursuant to its homestead bankruptcy exemption, a single filer can have $50,000 worth of equity in their residential property, and joint filers (husband and wife) can have $100,000 worth of equity in their property.

7.  I will lose my car if I file for bankruptcy.

If the debtor has a financed car, and can afford the payments, the bankruptcy court will not take away the car, unless the amount of equity in the vehicle is considerably greater than New York’s vehicle exemption.  Further, the lender is likely to ask the debtor to reaffirm the car loan.  Most Chapter 7 Bankruptcy filers who have car loans, tend to reaffirm them.

8.  I am not a citizen, and therefore I can’t file for bankruptcy protection.

You can qualify to file bankruptcy even if you are not a United States citizen.  If you have the right to reside in the United States, have a social security number, and have filed income tax returns, you can file for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy protection.

9.  Bankruptcy can’t help because I have unpaid federal and state taxes.

Under appropriate circumstances, even taxes can be discharged in Chapter 7 Bankruptcy.  Chapter 13 Bankruptcy can reduce debtor’s monthly payment to the IRS or New York Department of Taxation and Finance and allow for payments over the life of the plan, as long as five years, without interest.

10.  My creditors tell me they will still sue to recover the money owed to them.

Once the bankruptcy is filed, the automatic stay, imposed by the bankruptcy law, protects you from any further attempts to collect a debt or any pending or future lawsuits.  While secured creditors may ask for their property back if you do not continue to make payments, they must seek consent of the bankruptcy court before attempting to recover the property.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

Past Judgments, Real Estate and New York’s Exemptions

Whenever there are judgments against real property, owned by the debtor who files Chapter 7 Bankruptcy, those judgments, under appropriate circumstances, can be removed by filing 522(f) motion.  The judgment can be removed provided that the debtor’s equity in the property does not exceed $50,000.00 per single filer, or $100,000 per married couple.  The $50,000.00, otherwise known as a homestead exemption, comes from the present version of New York’s Debtor and Creditor Law.  Prior to August 30, 2005, New York’s homestead exemption was $10,000.00 per single filer, or $20,000.00 per married couple.

One issue that was not conclusively resolved in Western New York bankruptcy court was what happened in a situation where the creditor’s judgment was perfected prior to August 30, 2005.  If the judgment was perfected prior to the effective date of the increase in the homestead exemption, would the new homestead exemption or old homestead exemption would apply if the debtor filed Chapter 7 Bankruptcy?

According to the United States Bankruptcy Court Judge Bucki in Buffalo, the applicable homestead exemption amount is the new $50,000.00.  In Re Calloway, Judge Bucki held that once the New York statute was amended, the homestead exemption amount became $50,000.00, and it would apply regardless of the date it was perfected.  Judge Bucki wrote that to hold otherwise, would disregard the meaning of the statute and its interpretation under New York law.  Specifically, he wrote that “C.P.L.R. § 5206 was immediately changed to provide that a homestead “not exceeding fifty thousand dollars in value above liens and encumbrances, owned and occupied as a principal residence, is exempt from application to the satisfaction of a money judgment, unless the judgment was recovered wholly for the purchase price thereof.””

Pursuant to the Debtor and Creditor Law § 282, the debtor has exercised her right to exempt her property from the bankruptcy estate.  Therefore, pursuant to 11 U.S.C. §522(f), the debtor may now avoid judgment liens that impair a homestead not exceeding $50,000 in value.

Therefore, debtor’s bankruptcy attorney does not need to be concerned with the date when the judgment was perfected.  As with most §522(f) motions, the biggest concern that a lawyer would have is the value of the property and whether debtor’s equity in it does not exceed the homestead exemption.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.