In New York bankruptcy, debtor homeowners can benefit from a fairly generous homestead exemption. Real property located in the counties in New York City, Long Island, as well as Rockland, Westchester, and Putnam counties, get a $150,000 exemption. The exemption in Dutchess, Albany, Columbia, Orange, Saratoga, and Ulster counties is $125,000. Finally, homeowners elsewhere in the state can receive up to $75,000 in a homestead exemption.
Enterprising out-state individuals (okay, maybe unscrupulous individuals) might think of ways of exploiting this large exemption. For example, let’s say someone owes a large amount of unsecured, easily dischargeable debts (so not student loans), but also owns sizeable assets. What if this person were to sell the assets, purchase a home in New York, and then file chapter 7 bankruptcy to clear the rest of the debts? Wouldn’t he or she be able to hide all that wealth in the homestead exemption?
The answer is not anymore—if anyone was clever enough to do that to begin with. The term for this before the 2005 changes to the bankruptcy was “the mansion loophole,” a hint at the kinds of homes debtors would need to buy to pull this scheme off. The Bankruptcy Abuse Prevention and Consumer Protection Act, however, has made this not impossible but much more difficult to accomplish. In 11 U.S.C. § 522(p), the Bankruptcy Code now prevents debtors (or their dependents) from claiming up to $155,675 in real property classified as a residence, coop, burial plot, or a homestead if the parcel was acquired by the debtor within 1,215 of the bankruptcy filing. It’s an irregular amount of time, three years, four months.
As a result, debtors hoping to use “the mansion loophole” will be stymied by the relatively new bankruptcy law. The law does not prevent such debtors from filing bankruptcy, nor does it consider such filings abusive, but it does disrupt their goals. Using the federal homestead exemption, which is much smaller than New York’s, is still possible, and they may confer some advantages to debtors depending on their circumstances.
“The mansion problem” is not a problem most debtors need to worry about, but if you’ve moved to New York you shouldn’t let concerns of your new home purchase deter you from seeking advice from an experienced bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.