Bankruptcy filers this year have been taking advantage of a federal “wild-card” exemption to hold on to more of their property, according to Long Island bankruptcy attorneys.
A state law that took effect on Jan. 21 increased the exemptions available to filers and appears to be one reason that Chapter 7 “liquidation” filings have risen while other types of bankruptcies have fallen in Long Island.
“It really has revolutionized the consumer bankruptcy practice particularly in this environment where most of the consumers who are filing for bankruptcy protection have little or no equity in their homes,” said Richard Feinsilver, a Carle Place-based bankruptcy attorney.
Under the new law, people filing a Chapter 7 bankruptcy to discharge all their debts can choose between federal exemptions or state exemptions whereas before they could only use state exemptions that are more stingy.
While the new law made state exemptions more generous, especially for homeowners, the federal wild-card allows people to hold onto property such as stocks, cash, cars, heirlooms, with a total value of as much as $11,975 in many situations.
Feinsilver said that more than 90 percent of the more than 100 Chapter 7 bankruptcy cases he’s filed on behalf of clients since the law changed have opted for the federal exemptions rather than the state.
The number of people, corporations and partnerships seeking protection at the federal bankruptcy court in Central Islip from their creditors fell to 862 in May, 13 fewer than the same month in 2010, according to the United States Bankruptcy Court Eastern District of New York.
During the first five months of 2011, 88.5 percent of bankruptcy filings in the Islip court were in Chapter 7 as opposed to Chapter 11 and 13. That’s up from 79.1 percent during the same period a year earlier. In a Chapter 13 proceeding, the other common consumer bankruptcy, the debtor repays creditors over up to five years.
Bankruptcy trustee Richard Stern, an attorney at Macco & Stern, in Riverhead and Melville, said that the majority of the cases he’s seen lately have opted for the federal exemptions. As a trustee, Stern acts on behalf of creditors but his firm also represents filers.
“It’s been very beneficial to our clients because they’re able to avail themselves of exemptions that protect more of their property,” Stern said. “From the standpoint of a Chapter 7 bankruptcy trustee whose duty it is to collect assets on behalf of the creditors, the statute is hurtful because it limits the amount that I can recover for the creditors.”
Nationwide, consumer bankruptcies fell in May by 16 percent compared to a year earlier, according to the American Bankruptcy Institute which cited National Bankruptcy Research Center data. Consumer filings were down to 114,803 last month, a 21,339 drop.