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Debtors are given Christmas surprise ; Assets expanded for bankruptcy

Consumer advocates and bankruptcy attorneys are praising Gov. David A. Paterson for giving debtors in the state a big Christmas present Thursday, but lenders say he's been a Scrooge to them.

The outgoing governor signed legislation to expand how much of their homes, cars and other assets debtors can keep in bankruptcy or when legal judgments are made against them. The law takes effect in 30 days.

"Gov. Paterson has given a tremendous Christmas gift to tens of thousands of New Yorkers hard hit by the recession," said Russ Haven, legislative counsel for New York Public Interest Research Group. "He has provided a little breathing room and hope for New Yorkers who are desperate for help."

The new law raises the Western New York threshold for homes by 50 percent to $75,000 per person, or $150,000 for a couple, while increasing the maximum "exemption" for a car to $4,000 from $2,500. And it raises or creates other exemptions as well, including on jewelry, tools and tax refunds. The exemptions will also be indexed for inflation every three years.

Advocates and attorneys say the law will allow more people to protect those assets from being seized by bankruptcy trustees, or sold to repay creditors.

"It will really help many clients support their families. And I am not talking about supporting their family in an extravagant fashion," said Jeffrey Freedman, a local bankruptcy attorney. "The exemptions provide the bare necessities that allow a family to survive. Some clients have not been able to file bankruptcy out of fear they might lose an asset."

And it will mean more people will be able to file to write off their debts and start over rather than develop a repayment plan.

"It's more of a bright future for people having financial problems who need to file," Freedman said. "This bill allows those who file bankruptcy to have a little more dignity by being able to keep a few more assets."

Supporters say the legislation updates rules that in most cases haven't been changed in decades, giving consumers protections and options that other states already allow. In particular, it also restores the ability of New York consumers to choose between federal or state exemptions depending on their circumstances -- a right that was taken away in the early 1980s.

But lenders are crying foul, saying that it's not fair now to change the rules and conditions on which previous lending decisions were made. They say lenders would have assumed certain assets would be available to satisfy debts if necessary.

"There's this issue of businesses making decisions and making credit extensions based on what they understand the law to be," said Michael Smith, president of the New York Bankers Association, which opposed the legislation. "This would change those rules midstream."

And they say the larger exemptions will inevitably curtail the availability of credit, since lenders will now take these added protections into consideration when deciding whether to make a loan in the future, and how much interest to charge.

Bankruptcy is generally administered under particular chapters of the federal bankruptcy code, but certain aspects of it were delegated back to states, such as the size and type of "exemptions" or protections afforded to a debtor's home, car and other assets. As a result, the rules and exemptions vary widely from state to state.

Advocates had been trying to change the law to raise the protections since at least 1994, but the legislation never came up for a vote in the Senate until this year. It passed the Legislature in June, but was only sent to the governor on Dec. 15.

"During this time of economic crisis, it is our responsibility as public servants to protect those who are struggling the most," Paterson said. "Though this is not a perfect bill, the benefits far outweigh its concerns."

One local judge said the change will have immediate effects.

"This is going to have a significant impact on how bankruptcy is administered," said Carl L. Bucki, chief judge of the U.S. Bankruptcy Court for the Western District of New York. "It would mean the equity in a considerable number of homes would no longer be available for the benefit of creditors."

The law also raises the car exemption and extended it to money judgments outside of bankruptcy, where a car was not previously exempt. That hadn't changed since 1982.

And the law raises the exemption for the Earned Income Tax Credit from $2,500 to $5,000. The EITC can provide refundable credits of more than $6,000 for low-income working parents, particularly single parents, who often rely on the credit to catch up on bills and debts or make necessary purchases. But if they declared bankruptcy before filing for the refund in the past, they could have lost most of the credit to the trustee.

Additionally, the tool exemption went up to $3,000 from $600, for tools used in a person's trade. And the law adds a $1,000 jewelry exemption, on top of the exemption for a wedding ring. Previously, engagement rings weren't covered.

Other exemptions now cover books and religious texts up to $500, from $50; pets and food up to $1,000, from $450; and a watch for $1,000, up from $35.

"This is a very good day for unemployed people and low-income working parents in Western New York," said Peter Scribner, a Rochester bankruptcy attorney. "No longer will a working mom with three kids fear that she will lose the tax refund she needs to pay her rent and Niagara Mohawk bill. No longer will a creditor sue an unemployed worker and take away his car. No longer will a woman in bankruptcy be afraid of losing her engagement ring."


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