Why The CPLR 5205(l) Exemption Still Matters In Chapter 7 Cases

     Although there has been a lot of focus on the new federal bankruptcy exemptions adopted in New York recently, it is premature to declare that the trustees are out of business. There will still be plenty of cases in which a debtor needs the New York exemptions because of homestead equity. This means that chapter 7 trustees can still pursue cash assets and tax refunds.

     For the past two years, we have have been utilizing the newly added CPLR 5202(l) to protect some cash assets even for clients who need the homestead exemption. This law creates an exemption of up to $2,500 for funds that are direct deposited into a bank account. The exemption is not automatic. You will have to demonstrate that at least some of the funds in the account are “statutorily exempt,” but this should not be hard to do because most potential bankruptcy clients have at least some type of exempt money going into their account. Obvious examples of exempt funds include social security, workers’ compensation, and disability.

     A less obvious (but very important) source of exempt funds for most people is payroll deposits. Virtually all employees now have at least a part of their earnings direct deposited into a bank account, and under CPLR §5205(d), ninety percent of wages earned during the prior 60 days are exempt from creditors. Therefore, if your client files bankruptcy and had even one dollar of earnings direct deposited into an account during the preceding 60 days, then he or she should be able to exempt the full $2,500 in that account. This is because the new law does not require that the debtor prove that all the money in the account came from an exempt source – just that some portion of it did. 

     While many trustees dispute that the new law will be interpreted as suggested in this article, I suspect that most courts will back debtors who claim the exemption.

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