Is Bankruptcy the same everywhere?

19 May Is Bankruptcy the same everywhere?

No. You would think that since Bankruptcy is a Federal law, that it would be pretty much the same everywhere. But that is not the case.

The clearest example of why it is not the same everywhere is that the bankruptcy law allows each state to decide whether to use the Federal exemptions or to make their own exemptions. In Florida, Texas and a few other states, a debtor’s homestead is fully exempt, so even if they have a million dollars of equity in their home, it is protected. In New York, until recently the homestead exemption was only $10,000 for each debtor. (It is now $50,000). The difference is enormous. In New York, a retired person who owns nothing but her home could not file a chapter 7 because she would lose her home. But because she lives on a tight fixed income, she cannot afford to file a chapter 13 either. So here in New York, she is between a rock and a hard place, and cannot find debt relief.

There are many other, less clear differences from place to place. There are even significant differences found not only within the same state, but in the same district and sometimes even in the same court.

Many people believe that a law is a law, and the law itself clearly tells you what you can and can’t do. This is true for some laws, like the speed limit laws. If it is illegal to drive over 55 MPH, and you are going 65 MPH, you have broken the law. Nothing unclear about that. But then you find laws that are less clear. The “new” bankruptcy law, which went into effect in October 2005, is a great example of a law that is very not clear.

For example: The new bankruptcy law says that in a chapter 13, you cannot “cram down” (pay the value, not the amount owed) a vehicle if it was purchased within the 910 days (2 years) prior to filing the bankruptcy if the loan to buy it was purchase money security. Sounds clear, but you must dig a bit deeper. What is “purchase money security”? Some judges in some bankruptcy courts say that if you borrow the money to purchase the car, that it is “purchase money security” and cannot be crammed down. But other judges say that if you traded in a vehicle as part of the purchase of your present car, and you owed more on that car loan than the trade in was worth, that the new car loan is NOT “purchase money security” and therefore CAN be crammed down.

It takes many years for laws to be interpreted by courts, and until the Supreme Court makes a ruling, different courts and different districts use very different procedures and interpret the law very differently.

In my district, the Northern District of New York, we now have a new Court, with a new judge. I find I am often telling new clients that will have their case in front of the new judge that I cannot be sure about the ultimate result of a potential issues in their case until she has ruled on the issue.

Is it fair that a debtor in one place gets a better deal in their bankruptcy than a debtor in another place? No. Does it happen? Every day.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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