Window for Homeowners Considering Bankruptcy
By FORD FESSENDEN
Published: September 14, 2005
Two new bankruptcy laws - a much-debated federal law that goes into effect next month and a state law passed in Albany without fanfare this summer - are dovetailing in a way that may tempt some New York homeowners who are deep in debt to file for bankruptcy in the next few weeks.
Under the new state law, passed so quietly that many bankruptcy officials did not hear about it until last week, a husband and wife may now be able to protect $100,000 of equity in their homes from creditors, up from $20,000. It increases the incentive for those with large credit card payments to file for bankruptcy and get those debts discharged.
"It will be a tremendous benefit to families that are struggling financially, because they will be able to declare bankruptcy to get a fresh start and still be able to retain their home," said Assemblywoman Helene E. Weinstein of Brooklyn, who has been trying to get the law changed for the last 13 years.
In the past, New York provided almost no protection for homes in a personal bankruptcy, and even those with overwhelming debts were often better off borrowing against their homes to stay out of bankruptcy court.
The change in the state law, which was effective Aug. 31, came just weeks before a toughened federal bankruptcy law is to take effect, on Oct. 17. That law will make it more difficult and expensive for people to claim bankruptcy and discharge their debts. A means test will determine the homeowner's ability to repay debts; lawyers' fees will probably rise with a corresponding level of paperwork; and filers will have to take a credit counseling course before bankruptcy is granted.
The timing of the two laws creates a brief window for homeowners with large debts. Michael Macco of Huntington, N.Y., who represents creditors' interests as a bankruptcy trustee, said, "This is the best time ever to file a Chapter 7 bankruptcy." "For the first time ever," he added "a substantial amount of equity in your house is protected from creditors."
Elizabeth Warren, a Harvard bankruptcy researcher, said the change in homestead protection would ultimately have greater impact in New York than the federal bankruptcy overhaul, and could even help discourage the widespread practice of taking out home equity loans to pay off credit card debt.
"Albany's changes to the homestead protection are far more important in the long run than Washington's changes to the bankruptcy laws," Ms. Warren said. "An increase in the state homestead exemption tells families: Keep your home safe; don't keep borrowing against it."
The change is particularly significant in suburban areas, where bankruptcy rates have been low. Bankruptcy in Nassau, Suffolk and Westchester Counties has declined steadily since 1998. Lawyers in those counties say that in the past they advised clients with homes to borrow on the expanding equity in them to avoid bankruptcy, because the low exemption in New York meant that if they filed for bankruptcy they could lose their homes to pay off creditors.
"I've always told people it's better not to file bankruptcy; it's better to tap into your equity," Mr. Macco said. But the new law allows a $50,000 exemption for homes and might, depending on how courts interpret it, allow couples to double the amount. Therefore, Mr. Macco said, "You're better off wiping out your debt in a bankruptcy."
Bankruptcy cases in the eastern district of New York, which includes Brooklyn, Queens, Nassau and Suffolk, were up 9 percent in August over the same period last year.
The homestead provision, introduced in every legislative session since 1992, never got past the Republican Senate. This year, however, Senator Vincent L. Leibell, a Putnam County Republican, decided to push the provision, and it passed.
Some states, like Texas, allow homes to be withheld from creditors no matter what their value, said Robert Farley, chief counsel to the Senate Corporations Committee. "We don't want to be driving people out of their homes," he said.
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