One of the primary objectives of the United States Bankruptcy Code is to enable Debtors to obtain a fresh start and return to good financial health. Towards that end Congress recognized the needs of Debtors in maintaining certain basic assets enabling them to function comfortably. Exemptions were established under the United States Bankruptcy Code permitting Debtors to retain basics, housing, household furnishings, personal effects, tools of the trade, etc.
U.S. Code §522(f) empowers debtors to strip judgments and certain liens from the title of the Debtor’s real property and personal property thereby further protecting certain basic assets deemed necessary towards Debtor’s return to good financial health.
To the extent Debtors have equity in their homes, that equity is protected from the creditor claims up to certain limitations. This is known as the Homestead Exemption.
The Federal Homestead exemption is limited to $23,676.00. Debtors, however, can opt for using home state exemptions instead of the federal exemptions. This decision must be carefully evaluated because sometimes it is more advantageous for Debtors to choose Federal Exemptions over State Exemptions to protect other important assets of the debtor. This requires careful analysis by your bankruptcy attorney.
The New York State Homestead Exemptions are set forth under Debtor and Creditor Law §282. Under the New York statutory scheme the Homestead Exemptions are as follows: $165,550 if the property is in the counties of Kings, Queens, New York, Bronx, Richmond, Nassau, Suffolk, Rockland, Westchester, or Putnam; $137,950 if the property is in the counties of Dutchess, Albany, Columbia, Orange, Saratoga or Ulster; $82,775 if the property is in any other county in the state. The Homestead Exemption also covers condominiums, co-op apartments and mobile homes.
The New York State Exemptions also permits married couples to double their homestead exemption, allowing each spouse to claim the full exemption amount for each on the property. Therefore, a married couple can exempt up to $331,100, $275,900, or $165,550, depending on which region of the State the debtor resides in.
HOW TO STRIP JUDGMENT LIENS FROM DEBTOR’S HOMESTEAD EXEMPTION
Debtors may avoid judicial liens i.e. judgments, to the extent such liens impair the Debtor’s homestead exemption. Debtors must file a §522(f) motion to take advantage of this opportunity. The procedure requires Debtor establish that there is no unprotected equity in their home on which the judgment creditor can secure its lien. A valuation of the debtor’s home must be presented to the Court and the Debtor must provide the Court proof of any mortgages on the homestead. Therefore, Debtor must provide a recent appraisal of their homestead and copies of filed mortgages establishing valid mortgage liens on the property.
The Court will ascertain whether there is any equity securing the judgment liens on the homestead. If there is no equity securing the liens, the Bankruptcy Court will order the judgment liens stripped from the title of the homestead and those judgment creditors will be treated as general unsecured creditors.
Note: this procedure is not available to IRS Tax liens or State Tax liens. Only liens of judgment creditors can be stripped from the title of Debtor’s homestead.
STRIPPING LIENS FROM PERSONAL PROPERTY
The Bankruptcy Code also permits Debtors to strip nonpossessory, nonpurchase-money security interests in any household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor; implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; professionally prescribed health aids for the debtor or a dependent of the debtor. (See 11 U.S. Code §522(f)(B).
This enables Debtors to strip all encompassing security interests in protected or exempt personal property assets. Often these types of liens arise when the Debtor obtains a loan from a finance company and the lender places a lien on all of the debtor’s assets. The loan in this instance is a nonpurchase-money security interest. Debtor cannot strip ‘purchase-money liens’ where Debtor acquired furniture or appliances or tools of the trade and the seller financed the sale.
The Bankruptcy Code provides Debtor’s unique ability to protect assets needed to successfully reorganize its affairs. The Bankruptcy Code protects the Debtor’s basic necessities including equity in its homestead and personal property needed by Debtor to gain a fresh start. Towards that end, the Debtor is permitted to strip liens which encumber Debtor’s protected equity in its homestead and exempted personal property assets. In successfully helping Debtor reorganize its financial affairs the Debtor’s assets must be carefully evaluated and the Debtor’s bankruptcy attorney must assist the debtor in stripping liens and encumbrances which impair the Debtor’s exempted assets.
The author of this article is an expert in all bankruptcy matters. Mr. Stern practices law in Rochester, New York where he is a senior partner at law firm of Elliott Stern Calabrese, LLP. For further insights on bankruptcy issues feel free to visit Mr. Stern’s Bankruptcy Website located at http://www.rochesternybankruptcylawyer.com/index.html
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