​          I am on the Chapter 11 Advisory Committee for the Bankruptcy Court for the Eastern District of New York, a committee comprised of Bankruptcy Judges in the District and experienced bankruptcy practitioners. At a recent meeting there was a discussion of bankruptcy filings in the Eastern District and National trends.  Despite the fact that many individuals and businesses are in financial distress, it has been somewhat counterintuitive to my non-bankruptcy lawyer colleagues, friends and acquaintances to comprehend that bankruptcy has been on the decline and that business for bankruptcy lawyers has been extremely slow.

​          In 2020, total chapter 7 and 11 cases nationally for the 12 months ended June 30, 2021 was the lowest since 1985. In 2020 total filings were 544,463 which is about 230,000 fewer than in 2018 or 2019. The reason for fewer bankruptcy cases is thought to be attributable to (i) the strength of capital markets; (ii) easy access to financing; (iii) under the radar layoffs and other cost cutting measures by employers that were not possible in earlier environments; (iv) collection agency restrictions on the type of debts that could be collected; (v) a generally more flexible approach by lenders with debtors; (vi) financial institutions scaled down vehicle repossessions; (vii) court closings (viii) moratoriums on foreclosures, litigation and evictions; and (ix) inability to obtain and execute on judgments. Enhanced unemployment benefits, access to PPP, CARES ACT Stimulus payments, and Economic Disaster Loans (EIDL) also contributed to the decline in cases filed.

​          Consumer Chapter 7 cases in the Eastern District of New York Central Islip Division, which covers Nassau and Suffolk Counties, are down significantly in 2021 as shown below. Total filings of all chapters in Central Islip are down to 1879 cases as of October 31, 2021 as compared to 3731 cases for the entire 2020 year. More Sub Chapter V reorganization cases, (a streamlined chapter 11 case which went into effect in early 2020 just before the pandemic) are being filed in the District. For those with student loans, the U.S Department of Education issued its final extension of the student loan pause until January 21, 2022. That pause includes suspension of loan payments, stopped collection on defaulted loans and implemented a 0% interest rate. As of this article the bankruptcy community is waiting for when overall bankruptcy filings will increase. Once the dynamics that gave rise the decline are no longer in place, increased filings are expected in all chapters.
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​          ​Below are figures that illustrate the decline in bankruptcy filings in the Central Islip Division. The information was obtained from statistics maintained by the bankruptcy court.

                             2021(to10/31)         2020            2019
Chapter7            1578                      2642            4330
Chapter13          280                        1028            4249
Chapter11          21                           61                110

​New York State’s Exemptions for property exempt from application to the satisfaction of money judgments is adjusted every 3 years. The exemptions recently changed, effective April 1, 2021.  Of note is that the personal Homestead Exemption (in the Metropolitan Area) increased over $9,000, from $170,825 to $179,975 in just three years. When I started practicing bankruptcy law in 1984, the homestead exemption was $10,000! Many thought that amount, which had not changed in many years, was too low.  New York Lawmakers ultimately enacted legislation to avoid this circumstance from happening again by having the exemptions automatically adjusted every three years based on the change to the consumer price index for All Urban Consumers, New York-Northern New Jersey-Long Island, NY-NJ-CT-PA region. 

​Some think that the current homestead exemption is too generous when one considers a husband and wife can exempt a combined $359,950 in equity over and above consensual mortgages and tax liens. Other notable New York exemption increases are motor vehicle ($4,825); personal bodily injury ($9,000); and cash if not taking homestead exemption (as much as $6,000). The next adjustment is scheduled for April 1, 2024.
 
In contrast to the New York State Homestead Exemption, the Federal Bankruptcy Homestead Exemption is currently $25,150.00 and there is a Wildcard Exemption, if no Homestead Exemption is taken, of $13,900. The Wildcard Exemption can be applied towards cash or any other asset whether or not there is an independent exemption amount for that asset.  For example, the Wildcard Exemption could be used to increase the car exemption if the value of the car exceeded the $4,000 federal motor vehicle exemption. The Wildcard Exemption can even be used, with limitation up to $12, 575, for any unused part of their homestead exemption. Federal Exemptions are also updated every three years.
 
A bankruptcy debtor has the option of choosing between the Federal and New York State Exemptions but it is all one scheme or the other, no mixing is allowed. It is important to select the proper exemption scheme to maximize property that can be retained.  The difference between the New York and Federal Homestead Exemptions is $154,825. Similarly there is a $7,900 difference between the New York State cash exemption and the Federal Wildcard Exemption. Both the state and federal exemption statutes outline exemption amounts for basically all property. However, due to the large differences in amounts that can be protected, the Homestead Exemption and the Cash/Wildcard exemptions generally require the most attention. 

​For years I have advocated that everyone, particularly business owners, should make a concerted effort to learn what would happen if a financial disaster befell them or their business. As a bankruptcy attorney I have seen once wealthy individuals and thriving businesses fall on bad times, often due to health reasons, business reversals, and divorce. However, who would have thought that the entire world would be struck with the devastating consequences of the COVID-19 Virus? There is no better example than COVID-19 that a catastrophe can hit any one of us at any time. Sadly, we have only seen the beginning of business failures due to COVID-19. Many closely held small businesses have shut their doors never to re-open. Where does that leave the owners of those businesses? The answer may rest with whether they planned for a financial catastrophe or were just lucky. 

Financially successful individuals and business owners do want to think about what might happen if an unfortunate life altering event were to happen to them. It’s like not wanting to spend time and thought making one’s own funeral arrangements. Who wants to focus on negative events, even those that are inevitable like death? But, not planning for what might happen in the future is like not having car, fire or health insurance. One event can financially ruin a once successful person or business. That is why everyone should have at least a modicum of knowledge that could protect assets should a catastrophic event occur.
 
Simply incorporating a business shields the owners from most personal liability exposure. However most small business owners often sign papers they do not understand. Moreover many do not even keep copies of what they signed for future reference. While it may be difficult, co-signing or personally guaranteeing a corporate obligation should be avoided if possible. All paperwork should be maintained for future reference. Very often clients do not even know that they are personally liable for business debts until they are sued in their individual name.
 
If married and starting or engaged in a business, consideration should be given whether it is advisable to transfer the marital residence to the other spouse if that person is less likely to be at potential personal financial risk in the future. This assumes a solid marriage and that the conveyance is not a fraud on creditors (which is a whole other article in itself).
 
If a home is jointly owned by a husband and wife, in New York a judgment creditor of only one spouse is prohibited from selling the marital home to satisfy the debt. However judgments obtained against one spouse and filed with the County Clerk will remain a lien against that spouse’s interest for ten years. The lien can be renewed prior to the expiration of the tenth year. The judgment will also incur statutory interest of 9% a year, a tremendous interest rate in today’s market. When owners seek to refinance or sell their home the judgment will have to be satisfied. In a bankruptcy scenario, (if appropriate) a judgment debtor that owns a house will be able to shield and keep up to $170,825 (in the New York Metropolitan area) from a judgment creditor. The same exemption applies in a forced judgment foreclosure sale. Interestingly some judgment creditors with liens on real property that have a lot of equity and are capable of being foreclosed upon (i.e. not owned with a spouse) are quite comfortable sitting with their judgment knowing that they cannot generate a 9% rate of return on their money elsewhere.
 
Business owners in distress often sign Confessions of Judgment (usually associated with merchant cash advances) take out home equity loans or grant collateral mortgages on their home to lenders to secure business obligations. This places their most precious asset at risk when other options may have been available to discharge that debt and preserve exempt equity in their residence. Worse is where a spouse, who is not obligated for the debt or involved in the business, agrees to guarantee the debt or consents to placement of a mortgage against their interest in the home.
 
Similarly, pensions and retirement accounts that are outside the reach of most creditors (some exceptions: IRS debt and domestic support obligations) are often lost by being sunk into businesses destined to fail. An entire lifetime of savings meant for retirement can be lost very quickly if proper planning is not done.
 
Fiduciary taxes, (sales and withholding) carry personal liability to not only the officers of a company but to those with check writing privileges. These taxes cannot be discharged in bankruptcy.
 
Sometimes it makes sense to invest one’s personal funds or those of willing family members into a business. Too often those transactions are not supported by proper paperwork and the people the business owner wants to protect the most, including themselves and family members, are not protected at all. Transactions with family members should be documented the same way an arms-length creditor would require. The transaction will then more likely pass muster as a legitimate debtor/creditor relationship, not a gift or a capital contribution. The devil is always in the details. If the transaction is well thought out it can accomplish the intent of the parties and less likely be exposed to outside legal attack when things do not go as planned.
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The bottom line is that everyone needs to think about what might happen if a catastrophe arises for them. Consulting with the proper professional can likely lessen the financial damage of an unexpected event.

​Chapter 11 reorganization allows the debtor to reject undesirable leases. If the debtor opts to reject the lease, the landlord is left with a breach of contract claim. In most instances rejection claims against the bankruptcy estate will be for less than the remaining rents under the lease as the claim is capped pursuant to the bankruptcy code.
 
Alternatively, the debtor can elect to assume the lease. Assumption requires the debtor to cure all prepetition defaults, including payment of all past due rents, on assumption.  The debtor has 120 days, which can in certain circumstances be extended another 90 days, to assume or reject the lease. During the time debtor decides to assume or reject the lease, all post-petition obligations, including payment of rent must be paid.  The court may “for cause” extend the time for performance of any post-petition rent, for up to an additional 60 days. 

​The COVID-19 pandemic has decimated the retail industry. Household names like J. Crew, Pier 1 and J.C. Penney have filed for bankruptcy relief.  Because these companies were forced to close their stores under shut-down, orders many have successfully argued that any obligation to pay current rents should also be postponed unless and until they are allowed to fully reopen their store locations.
 
The majority of the courts faced with this issue have been sympathetic to the exigent circumstances created by the pandemic and granted motions which postpone the debtor’s obligation to pay rent. This is a significant divergence from previous strict enforcement of landlord’s rights under the bankruptcy code. Courts that have granted this relief have justified it based upon catch all provisions of the bankruptcy code that gives courts latitude to issue orders necessary or appropriate to carry out the provisions of the bankruptcy code.
 
But when a catch-all is in direct contravention of the provisions of another section of the bankruptcy code, there is going to be push back and justifiable cause for concern about what other provisions of the bankruptcy code will be disregarded or watered down. Courts that have issued deferral orders have justified their decision on the fact that the rents will be given “administration” claim status. That means that it will be paid ahead of pre-petition claims in the pecking order of who gets paid from the debtor’s assets. However if the store goes dark and completely out of business or the company is administratively insolvent, the landlord will not get paid in full.
 
Landlords have been prevented from taking action in state court to evict debtors. Worse, landlords have become involuntary lenders to the debtor by virtue of debtors being allowed to remain in their stores without paying rent. The non-payment of rent it would seem indirectly and unfairly serves to benefit debtor’s secured creditors whose recovery will be enhanced by the rent holiday afforded by the court.
 
Most of the decisions have come out of the large retailer bankruptcy cases. In the Pier 1 case the court justified deferral of payment of rents because no one could have predicted that the world would effectively grind to a halt,  the nation is in a public health crisis and the landlord’ s administration claim will get paid at the end of the case.
 
As restrictions on store owners lift or ease it remains to be seen if courts will continue to defer payment of rents to landlords. If landlords are not paid their rents, are landlord bankruptcies on the horizon? 

The filing of bankruptcy operates as an automatic stay of the enforcement of a judgment against the debtor or property of the estate, the commencement or continuation of litigation against the debtor, the taking of possession or control of property of the estate, and more.  Creditors are often placed in a position of not knowing what to do when they learn that a debtor has filed bankruptcy. Some common scenarios are where, prior to bankruptcy, (i) a creditor seized the debtor’s vehicle, (ii) the Sheriff garnished and is holding debtor’s wages, or (iii) creditor’s counsel engaged in litigation have pending outstanding interrogatories, subpoenas, motions or other court hearings.

​A “willful” violation of the automatic stay will result in damages, costs and attorneys’ fees. It is important to remember that the willfulness requirement does not require a specific intent by the creditor to violate the stay. Instead it is sufficient to show that the creditor knew that the automatic stay was in effect and then intentionally acted (or failed to act) in a manner that violated the stay. Good faith is insufficient to excuse a creditor from liability for debtor’s actual damages, but it may prevent imposition of punitive damages.
 
The Bankruptcy Code requires that any entity in possession of property of the estate deliver it to the trustee/debtor without condition or any further action—the provision is self-executing. A majority of courts, including the Second Circuit, have held that a creditor must immediately turn over property in which the estate has an interest and that passive retention is an act to exercise control over property of the estate.  A minority of courts hold that passive retention only maintains the status quo, is not an affirmative action, and therefore not a violation of the stay.
 
For instance, the Second Circuit has specifically held that a seized vehicle must be immediately returned to the debtor.  Further, if a creditor is garnishing wages, the Sheriff must be notified of the bankruptcy, the wage garnishment must cease and the previously garnished wages still held by the Sheriff turned over to the debtor.  Counsel for the creditor must withdraw all discovery and a formal request must be made to the state court to cancel any scheduled hearings in the matter. These actions or inaction as described above constitute a continuation of actions against the debtor in violation of the stay.
 
Taking the above into consideration, a creditor should not be lulled into a false sense of security that because a vehicle was lawfully seized or proper legal action to collect on a debt was taken that the creditor can sit by and do nothing once a bankruptcy is filed.  It is dangerous to force the Debtor to make an application to the bankruptcy court to compel return of a vehicle, the withdrawal of wage garnishments etc.  Creditors that violate the stay do so at their peril. If the debtor is forced to act, the creditor can anticipate being responsible for actual damages, attorneys’ fees, costs and punitive damages for its willful behavior.
 
As one judge has put it, creditor or the creditor’s legal representative has an affirmative duty, post-petition, to discontinue any proceeding it has initiated or continued, or to take appropriate steps to halt that proceeding if the proceeding: (i) jeopardizes or threatens in any way the integrity of the bankruptcy estate, or (ii) exposes the debtor to harassment or coercion or otherwise inhibits the debtor’s breathing spell from her creditors. 
 
It is mandatory that creditors and their representative timely discontinue or take affirmative action, as appropriate, when confronted with a bankruptcy filing. Demands for payment, even if automatically generated by a computer will not be an excuse. Post-petition setoffs to satisfy pre-petitions debts are not permitted. Recoupment however, perhaps the topic of another article, is not subject to the automatic stay because it is a special mechanism for adjusting obligations arising from the same transaction.
 
There is an exception for ministerial acts, but the exception is a narrow one.  For example, the Second Circuit has held that entry of judgment by the court clerk one day after the debtor filed a bankruptcy petition was a ministerial act that did not constitute a continuation of a judicial proceeding because the court was persuaded that the judge had endorsed the judgment the day before the bankruptcy, and at that point a hearing on the merits was concluded.  Accordingly, the clerk’s post-petition entry of the judgment, after the stay became effective, did not violate the stay.
 
It should be noted that the United States Supreme Court recently granted certiorari to settle a conflict amongst circuit courts on whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition. That case arose out of Chicago’s vast vehicle impoundment program, which is part of a national trend, where cities are seizing cars for unpaid tickets and refusing to return them to bankruptcy filers unless steep fees for towing, impounding and storing are paid.