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New restraining Notice and Bank Account Property Execution Law in New York State (and unanticipated bankruptcy implications.)

New York State law changed significantly on January 1, 2009 regarding creditor's power to freeze, or restrain, bank accounts. In most cases, the first $1,716 or more of a judgment debtor's bank account can no longer be restrained.

Background: One of the first collection steps taken by a creditor after they have obtained a judgment against a debtor was to "sweep" bank accounts. It was cheap, easy, and often effective. It also was semi-illegal: the restraint process itself was legal enough, but the restraints often froze money that the creditor did not have a right to seize – exempt funds.

The restraint process: The process was simple enough. Pursuant to New York Law (CPLR §5222), the attorney for the judgment creditor simply would mail a restraining notice to all the local banks and credit unions in the area the debtor lived. There was no need to go through the sheriff's office, and the creditor's attorney didn't even know if the judgment debtor had an account at the banks where the restraint was mailed. So, for example, if the judgment debtor lived in Rochester, the creditor's attorney simply mailed a restraining notice to all the Rochester banks – M&T, HSBC, Citizens, ESL, Summit etc. The banks would then check their records to see if they had an account with the judgment debtor. If they did, the entire account would be frozen, or restrained, up to twice the amount of the judgment. As an extra bonus, the bank would first deduct a fee from its customer – usually around $100 – for processing the restraint.

Practical effects of restraints: All this was perfectly legal. And perfectly horrible for many judgment debtors. The rent check or mortgage payment would bounce, the last pay check would be frozen, the RG&E payment would be gone. There is no prior notice – that's the whole idea (if you knew your bank account was about to be frozen you would likely withdraw all your money, which rather defeats the whole point of the restraint, from the perspective of the creditor.) Even worse, any future deposit into the account would also be frozen. So if the account got restrained and the debtor couldn't the your automatic payroll deposit in time, the debtor would watch helplessly as the next paycheck gets swallowed up into the restrained account and, meanwhile, the debtor would have no money.

Semi-legal restraints: All this is perfectly legal – up to a point. The legal problem is that often – most often – some or all of the money in a bank account is "exempt" from creditors; that is, creditors do not have the right to take that money away in satisfaction of their judgment. Examples of exempt funds include social security checks, unemployment benefits and child support payments – judgment creditors are not entitled to any of those funds. But if they are deposited into a bank account, and the account is restrained, the debtor is – or was prior to January 1 – stuck. The debtor would have to prove that part of the funds were exempt from collection. I regret to report that some judgment creditor attorneys are unresponsive to even legally valid claims that they have restrained exempt funds. Some (not all) judgment attorneys basically said "too bad; if you think we have restrained exempt funds, take us to court." Of course, a judgment debtor whose funds have just been restrained has no money to go to court, and the cost would eat up all the potential savings of releasing the funds. Meanwhile the bills remain unpaid.

New Changes overview: New York law changed dramatically January 1 to remedy this problem. It is much harder for judgment creditors to freeze exempt funds and it should be impossible to restrain all the debtor's money, leaving him or her with nothing. It is almost impossible to restrain the first $1,716 to $2,500 of a bank account, and the new law provides expedited procedures to challenge unlawful restraints, even without an attorney. And some of these changes also have an impact on debtors who file bankruptcy.

Change #1: $2,500 exempted in automatic deposit accounts:

Debtors with direct deposits are treated much more favorably than non-direct deposit debtors. Under new provisions of CPLR 5205, if an account has received 'reasonably identifiable' automatic deposits of exempt funds within 45 days prior to the restraint, $2,500 in that account is exempt from restraint. If less than $2,500 is in the account when the restraint is received, no money is restrained and the restraining notice is "deemed void" (new CPLR §5222(h))

How this works: What does this mean? If $500 was deposited automatically into a account as a social security check on April 1, and the bank received a restraining notice prior to May 15, the first $2,500 in that account is not restrained. The funds can be used and checks can be drawn against it.

It doesn't matter if the rest of the account is not exempt funds (say, a tax refund check.) It would also appear that it is irrelevant if all the social security money was withdrawn the day after it was deposited; if any automatic deposit of exempt funds is made within 45 days of the restraint, $2,500 in the account is exempt, period. If the balance in the account is under $2,500, the restraint is voided, and, I assume, a subsequent deposit (say an automatic payroll deposit a few days later) would not be restrained, even if that brought the balance up beyond $2,500.

How the bank treats change #1: If the automatic deposit is "reasonably identifiable" as coming from exempt funds, the bank that receives a restraining notice automatically exempts $2,500 in that account. The debtor does not have to do anything. The new statute presumes that automatic deposits from exempt funds will be pretty obvious on their face. When a bank receives an automatic payment from the social security administration, the bank should recognize that as clearly exempt funds and, therefore, not restrain the first $2,500 on the account. Apparently some banks already put a code on automatic deposits of certain funds like social security benefits; that practice will make it easy for the bank to identify such deposits.

What is 'reasonably identifiable'?

The $2,500 exemption kicks in if there are "direct deposit or electronic payments reasonably identifiable as statutorily exempt payments." CPLR §5205(l). What makes an automatic deposit "reasonable identifiable?" Very good question.

Reasonably identifiable to who? New CPLR §5222(h), dealing with restraining notices, and §5232(e), dealing with executions, states that automatic deposits reasonably identifiable to the bank as statutorily exempt trigger the $2,500 exemption. But the source statute for these provisions is CPLR 5205(l), which does not limit the entity doing the reasonable identification to banking institutions. The debtor, judgment creditors at the request of the debtor, state court, bankruptcy trustees, and bankruptcy court may all at one point or another be called upon to determine if an automatic deposit is reasonable identifiable as statutorily exempt.

For what it is worth, one online analysis by attorney Joseph D. Simon of the Long Island office of Cullen & Dykman states "the amendments do not provide any guidance on when funds are deemed "reasonably identifiable as statutorily exempt." A rule of reason should apply. If the source of the funds indicates that the funds are exempt (such as a social security code), a bank will likely be deemed on notice. However, if there is no such code or other indication that the funds are exempt, a bank should not have to do extensive research to determine if an exemption applies." (Processing Restraining Notices and Levies: an Update on the 2008 Amendment; December 2008.)

California has a similar scheme related to automatic exemptions of accounts with direct deposits of certain exempt funds. The California statute, California Code Of Civil Procedure §704.080, exempts a certain amount in accounts with direct deposits of either 'social security benefits' or 'public benefits' (welfare benefits.) The California statute automatic exemption is limited just to accounts with direct deposit of these two benefits, and does not require that the deposits be reasonably identified as such; presumably direct deposits of social security or welfare benefits are easy to code by the bank and, therefore, easily identifiable.

Bankruptcy implications #1 - new $2,500 bankruptcy exemption:

This $2,500 limit on restraints and executions for bank accounts with exempt automatic deposits is considered 'exempt property' under CPLR 5205. When a debtor files bankruptcy in New York State, New York law (Debtor & Creditor Law §282) allows that debtor to 'exempt', or keep free and clear of the bankruptcy trustee, all property listed as exempt in CPLR §5205. This is independent of the $2,500 'cash' exemption of D&C §283(2) for debtors without equity in their homes.

Until now, a debtor who owns his or her residence and has equity in it (that is, value above and beyond the mortgage), could exempt up to $50,000 in 'homestead' equity but then was unable to exempt any 'cash' or money in a bank account, under D&C §283(2). But now a debtor with automatically deposited exempt funds – which may (or may not) include automatically deposited paychecks – can claim an entirely separate exemption of up to $2,500 under CPLR §5205. And debtors who do qualify for the 'cash' exemption of D&C §283(2) are also eligible to claim as an entirely separate exemption of up to $2,500 in accounts with automatic deposits of exempt funds (See Coolbaugh note below).

BUT NOTE: this new exemption appears to be available only to bankruptcy debtors with automatic deposits. More on this in 'bankruptcy implications #2, below.

Bankruptcy implications #1(a) – Coolbaugh Note:

Even prior to the change in restraining notice law, a bankruptcy debtor in New York could claim a separate "Coolbaugh" exemption, but that was complicated. Coolbaugh is an unpublished written decision by Rochester Bankruptcy Judge John C. Ninfo July 6, 2000 (WDNY Bk #99-23706; available at the court web site or by Google search 'Ninfo Coolbaugh'.) That decision follows Maidman (141 BR 571; Bankr. SDNY 1992), and Buffalo Bankruptcy Judge Michael Kaplan followed Coolbaugh in Wrobel 268 BR 342 (Bankr. WDNY 2001).

Under Coolbaugh and the other cases, a bankruptcy debtor is entitled to an exemption for 90% of personal services income under CPLR 5205(d), by way of D&C §282, and that this exemption was completely independent of the so-called 'cash' exemption of D&C §283(2). Wrobel also stated that the exemption was available for income earned but not yet received on the petition date. The new restraining law changes appear to have a major impact on Coolbaugh analysis, but more on that under "Bankruptcy implications #3".)

Change #2: $1,716 exempted in accounts without automatic deposits:

What about judgment debtors who do not have their paychecks or other exempt funds deposited directly into their bank accounts? They are also protected under this new law, although not quite as protected as debtors with automatic deposits. A new subdivision, (i), has been added to CPLR §5222. Under this subdivision, the first $1,716 of a bank account cannot be restrained. Why the odd amount? The figure represents 240 times the minimum wage, and increases to $1,740 on July 24, 2009. The higher of the New York or Federal minimum wage is used. This exemption applies to seizures (executions) on a bank account as well as restraints (see new subdivision (e) in CPLR §5232.) Again, this applies to every bank account, whether or not there are any exempt funds in it or not. The idea is to be sure that a restrained judgment debtor is not left without any money to pay the bills.

Limits to the $1,716 exemption: There is a limitation: this exemption does not apply to any amount "a court determines to be unnecessary for the reasonable requirements of the judgment debtor and his or her dependents." However, the creditor would have to get a court order for this determination, and it would seem unlikely that the cost of obtaining the order would justify the return, unless the debtor had multiple bank accounts, which brings us to our next question.

Automatically deposited pay checks:

Social security benefits and child support payments may be clearly "identifiable" as exempt and, therefore, trigger the $2,500 exemption. But what if the automatic deposit is a paycheck? The $2,500 limit on restraints should apply there too, but the debtor may need to prove the exemption.

Why? Here is the important part: direct deposits of pay checks should count as a deposit of exempt funds. Under New York law, 90% of pay checks are exempt from creditors; that's why a judgment creditor can only garnish 10% of wages. So, if a paycheck is automatically deposited, 90% is "statutorily" exempt (that is, exempt by New York statute), and so any restraint served withing 45 days is limited to the balance over $2,500.

Is a bank obligated to recognize automatic payroll deposits as exempt deposits? This is an important question, because if a deposit is "reasonably identifiable" as statutorily exempt, then the bank will not restrain $2,500 in that account; the judgment debtor does not have to do a thing. But if the bank is not obligated to consider an automatic deposit of a pay check, the restraint applies to funds on deposit above $1,716 and the debtor must prove that part of the funds in the account are exempt pay to get the full $2,500 exemption.

Example #1: Grandma has $500 in social security funds automatically deposited April 1, and the bank receives a restraint April 2. $2,500 of that account is exempt automatically; Grandma does not have to do anything, even if the other $2,000 in the account is from unexempt funds.

Example #2: Grandpa goes to the bank on April 1 and deposits a $2,200 social security check. Bank receives a restraint April 2. Only $1,716 in the bank is automatically exempted from restraint. Grandpa must use the exemption claim system of new CPLR §5222-a to prove that there are $2,200 exempt funds in the account, not just $1,716. Grandpa does not get to exempt the first $2,500 in that account, as his Social Security is not automatically deposited.

Example #3: Joe the Plummer has his $2,700 paycheck automatically deposited in his bank account April 1. Under New York law, 90%, or $2,475, is exempt. The bank receives a restraint April 2. Is his situation the same as Grandma, where, if he doesn't do anything, $2,500 is automatically exempted? Or, like Grandpa, does he only get $1,716 automatically exempted? If he is like Grandpa, Joe then must go through the exemption claim form process of CPLR §5222-a to exempt the full $2,475 of his paycheck, and not just $1,716.

CPLR §5205(l)(2) states that, "For purposes of this article, "statutorily exempt payments" means any personal property exempt from application to the satisfaction of a money judgment under any provision of state or federal law. Such term shall include, but not be limited to, payments from any of the following sources:. . ." This non-exclusive lists goes on to itemize several exempt payments. Wages (and support) are not included on this list.

CPLR §5222(3) sets out a notice form that is to be served on judgment debtors, which contains "a partial list of money which may be exempt" under state or federal law. Interestingly, the exemption for wages and support missing from the 5205(l)(2) list are included on this list. More interestingly, the Notice to Judgment Debtor list includes, as item #11 of 13, "Twenty-five hundred dollars of any bank account containing statutorily exempt payments that were deposited electronically or by direct deposit within the last forty-five days, including, but not limited to, your social security, supplemental security income, veterans benefits, public assistance, workers' compensation, unemployment insurance, public or private pensions, railroad retirement benefits, black lung benefits, or child support payments". Every item listed under #11 is also listed elsewhere on the judgment debtor notice; only wages and support are listed elsewhere on the notice but not within #11.

Finally, §5222-a(b)(4) includes yet another list of exempt items, on both the exemption notice and the exemption claim form. Wages (and support) are included on both lists, and there is no sub-list associated with the $2,500 exemption.

What if the debtor has multiple bank accounts?

The actual text of the statute regarding accounts with direct deposits of exempt funds refers to the "judgment debtor's account", singular. Case law may interpret this differently, but on the face of it, it would appear that these exemptions apply to each and every separate bank account that have automatic deposits of exempt funds.

BUT the language in CPLR §5222(i) regarding the $1,716 exemption refers to a "restraining notice issued pursuant to this §shall not apply to an amount equal to or less than . . ." $1,716. So if a debtor has no account with direct deposits of exempt funds, one interpretation of this text is that a maximum of $1,716 on deposit with that bank would be exempt from execution. But the title of CPLR §5222(i) is "Effect of restraint on judgment debtor's banking institution account." So another interpretation of this provision is that the title refers to 'account', singular, and so the $1,716 exemption applies to each account. But new CPLR §5232(e), which exempts $1,716 from execution, does not include the word 'account' in its provisions or title. Case law will undoubtedly clarify whether multiple accounts in one bank would each receive the $1,716 exemption.

Certainly if a judgment debtor has an account at, say, three different banks, each would exempt up to $1,716 or $2,500, depending on whether there are automatically deposited exempt funds. My guess is that if a judgment debtor had ten separate accounts in ten banks, with $1,700 in each, and the judgment creditor discovered this, the creditor could obtain a court order determining that the debtor does not need $17,000 for his or her "reasonable requirements." But the $2,500 exemption for direct deposit of exempt funds appears on its face to be absolute, no matter how many accounts are involved. So a debtor with social security deposited into one account and pay checks automatically deposited in another, would get the $2,500 exemption limit in each. (Except in bankruptcy, where a maximum of $5,000 may be claimed for all property exempted under CPLR §5205, including household goods and clothing.)

One online analysis by attorney Joseph D. Simon of the Long Island office of Cullen & Dykman states unequivocally that the $1,716 exemption is only available for all deposits in a bank, not for each account (Processing Restraining Notices and Levies: an Update on the 2008 Amendment; December 2008.)

Bankruptcy implication #2: $1,716 exemption not available in bankruptcy:

The $1,716 exemption for non-direct deposit bank accounts is provided under New York CPLR §5222 and 5232, NOT CPLR §5205. But D&C §282(1), the bankruptcy exemption, only exempts property listed in CPLR §5205, and so CPLR exemptions that are only listed in Sections 5222 or 5232 do not appear to be available to bankruptcy debtors. Case law may eventually prove otherwise, but this would be a properly conservative interpretation. Therefore, if a bankruptcy debtor wants to take advantage of these changes, he or she would be well advised to have his or her paycheck (or social security check, child support check etc.) directly deposited into a bank account. Without a direct deposit, the bankruptcy debtor does not appear to get the presumption of an exemption. However, a provision in the new law in the way exempt funds are traced in a bank account should assist a bankruptcy debtor as well (See Bankruptcy Implications 3, below).

Tracing exempt funds in a bank account:

The $2,500 exemption for bank accounts with direct deposit of exempt funds applies only if there are still exempt funds in the account when the restraint is served. This is clear when the only money in the account is exempt money; for example, an account which is only used to receive direct deposits of social security benefits. But what if an account receives direct deposits from exempt money and also deposits of unexempt funds or money whose exempt status is unknown? Do exempt funds lose their exemption status when commingled with unexempt funds?

And what about exempt funds that are deposited into a bank account by the debtor, not automatically? Do they lose their exempt status?

Example 4: Grandma has $500 automatically deposited into her bank account April 1. The balance in the account after this deposit is $600. By April 15, the balance has been drawn down to $50, when Grandma deposits her unexempt $3,000 tax refund. There is a $2,000 balance on April 30 when a restraining notice is served on the bank. How much of the $2,000 is exempt from restraint and execution? Answer: all of it.

Buried in the new law, at new §5222-a(a)(4)(c)(4), is a provision that uses the "lowest intermediate balance principle of accounting" to trace exempt funds in an account. The full text of this provision is as follows: "Where the [restrained] account contains some funds from exempt sources, and other funds from unknown sources, the judgment creditor or support collection unit shall apply the lowest intermediate balance principle of accounting and, within seven days of the postmark on the envelope containing the exemption claim form and accompanying information, shall instruct the banking institution to release the exempt money in the account."

The Lowest Intermediate Balance Rule of accounting, also known as LIBR, was developed in English Common law (Hallett's Estate) to trace trust funds commingled with other funds. California has specifically incorporated the principal in tracing exempt funds (California Code of Civil Procedure §703.080 set forth below).

Using example #4 above, the balance went down to $50 on April 15, and then up to $3,050 after the tax refund was deposited, only $50 of the $2,000 balance on April 30 would be considered social security funds. $50 was the lowest 'intermediate' balance between the original deposit of the social security money and the restraining notice date four weeks later. LIBR assumes that the money being traced – here the social security funds – are the last funds to be withdrawn.

In Example #4, there was $100 in funds from an unknown source when the $500 social security deposit was made April 1. As money was withdrawn over the next two weeks, the $100 unexempt funds are considered to have been withdrawn first, and only then were social security funds considered withdrawn. Similarly the whole $1,050 withdrawn between April 15 and 30 are considered to have been from non-exempt sources, so the $50 from the April 1 social security automatic deposit are considered still to be in the bank April 30. As $50 of the $2,000 in the account on April 30 was from automatically deposited exempt funds, the whole $2,000 is exempt under new CPLR 5205(h). This new rule may have a big impact in bankruptcy situations.

For purposes of information only, below is a provision of California's exemption statute concerning tracing exempt funds. I report it only due to the similarity to New York's new provision on tracing:

California Code of Civil Procedure §703.080:

(a) Subject to any limitation provided in the particular exemption, a fund that is exempt remains exempt to the extent that it can be traced into deposit accounts or in the form of cash or its equivalent.
(b) The exemption claimant has the burden of tracing an exempt fund. (c) The tracing of exempt funds in a deposit account shall be by application of the lowest intermediate balance principle unless the exemption claimant or the judgment creditor shows that some other method of tracing would better serve the interests of justice and equity under the circumstances of the case.

Bankruptcy consideration #3: LIBR and bankruptcy bank accounts:

Before the LIBR provision of new §5222-a(a)(4)(c)(4), there was no statutory guidance available to courts to determine how to identify exempt money when commingled with other funds. Rochester Bankruptcy Judge John C. Ninfo faced this problem in the Coolbaugh decision of July 6, 2000 (WDNY Bk #99-23706.) In Coolbaugh, the debtor claimed a homestead exemption under D&C §283, and, therefore, was not entitled to an alternative cash exemption. The debtor's attorney argued that as 90% of the debtor's pay check income was exempt property under CPLR 5205(d)(2), a separate exemption from D&C 283.

As stated in the Coolbaugh note above, Judge Ninfo agreed, but then was faced with determining how much of the debtor's bank account should be considered exempt wages and how much should not. There was no apparent New York statutory or case law guidance as to how to deal with exempt funds commingled with unexempt funds (the earlier Maidman decision, 141 BR 571, Bankr. SDNY 1992, did not address the commingling issue.) Absent any statuary guidance, Judge Ninfo decided on a "first in – first out" (FIFO) analysis. He concluded that the exempt money would be treated as the first to be withdrawn, not the last. Buffalo Bankruptcy Judge Michael Kaplan followed this Coolbaugh analysis in Wrobel, 268 BR 342, as an "administrative rule of convenience dealing with the commingling of wages with other monies in a bank account" adopted "for the sake of uniformity within the District." Wrobel 268 BR at 344.

But with the new §5222-a(a)(4)(c)(4) adopting LIBR for tracing exempt portions of commingled bank accounts, a very good argument can be made that LIBR should be used whenever exempt funds are commingled in a general bank account. This happens all the time, and not just with paychecks. Social security benefits, unemployment checks, child support, etc. are regularly deposited into general bank accounts. If LIBR is adopted, rather than the FIFO rule of Coolbaugh, lots of funds will be considered exempt that are not exempt now.

Of course this is just my analysis; I wouldn't depend on it if I had an alternative way of treating exempt funds. But I am sure that a situation will arise in the near future where the Coolbaugh FIFO rule can be revisited.

This can be big in bankruptcy. As mentioned above, the $1,716 exemption for bank accounts without direct deposits of exempt funds does not appear to be available to bankruptcy debtors, as it does not arise out of CPLR 5205. But most money found in a typical bankruptcy debtor's bank account – wages, social security, retirement benefits, and child support – are exempt. So, a debtor who has paycheck, social security or support income can now, in my opinion, use LIBR to claim an exemption of those funds independent of the 'cash' exemption, even after they are deposited into a general bank account.

No-Fee Zone:

New CPLR §5222(j) prohibits the bank from charging the customer (the judgment debtor) any fee if the bank "cannot lawfully restrain a judgment debtor's banking institution account, or a restraint is placed on the judgment debtor's account in violation of any §of this chapter." This in an important benefit to judgment debtors who maintain vary small balances compared to outstanding checks. If the debtor has a balance under $1,716, for example, and has $1,700 in outstanding checks written against it, the bank cannot restrain the account and the bank cannot charge a service fee, which might otherwise cause checks to bounce (which would incur bounced check fees, which would cause more checks to bounce etc.)

Provisions for resolving exemption disputes in restraining notices:

As mentioned above, if a judgment debtor prior to 1/1/09 wished to dispute whether a creditor had the right to restrain arguably exempt funds, the debtor would have to rely on the conscious of the fair minded creditor attorney to do the legally correct thing and release a restraint against exempt funds. Now the judgment debtor has much more powerful tools at hand.

New CPLR §52222-a sets out a complex procedure of determining the exemption status of bank accounts being restrained.

First: The judgment creditor must mail to the bank, along with two copies of the restraining notice, an 'exemption notice' and two copies of an 'exemption claim' form. The form of exemption notice is described in new CPLR §522-a(b)(4)(a), although it is similar to an existing form found in §5222(e). The exemption claim form is described in new CPLR §5222-a(b)(4)(b).

Second: The bank then is to mail the exemption notice and the exemption claim form to the judgment debtor (the bank's customer.) I assume the bank is required to do this even if the bank account is fully exempt under new CPLR §5205(h) or 5222(l). The statute says there is no liability if the bank 'inadvertently' fails to serve these document. The bank is to mail them within 2 days of receipt of the restraining notice or property execution.

Third: The judgment debtor then has 20 days to fill out the exemption claim form and mail them back to the bank and the judgement creditor's attorney. In the claim form, the judgment debtor states under penalty of perjury that exempt funds exist in his or her bank account. The judgment debtor is encouraged to submit supporting documents, such as proof that the deposits in question were from exempt sources (pay stubs, social security stubs, child support order etc.)

Fourth: The bank informs the creditor that the bank has received this exemption claim.

Fifth: The creditor's attorney is obligated to review the exemption claim and supporting documents.

If the form asserts a valid exemption claim to all the bank account funds, the creditor attorney is obligated to release the exemption within seven days.

If the exemption claim appears to assert a valid claim that some of the funds are exempt, the creditor attorney is obligated to use LIBR to calculate that portion of the funds which are not exempt and inform the bank within seven days.

However, if the bank receives an exemption claim form, it is obligated to release all the funds in the account within eight days. It appears that the bank is to release these funds even if the creditor's attorney instructs the bank within seven days that part of the funds are unexempt under LIBR.

If the creditor fails to properly analyze an exemption claim that is accompanied with supporting documents, the creditor could be penalized severely for acting in 'bad faith' (see below.)

Sixth: If the creditor wishes to assert that some or all the bank account funds are exempt, after receiving an exemption claim from the debtor, the creditor must file a court motion within eight days of the exemption claim, and the motion must be heard by court within seven days and a decision rendered within five days after that. And the burden of proof is on the creditor.

Bad Faith Creditors

Sorry to say, some creditors, prior to this change in law, would ignore valid claims of exemptions, and judgment debtors would have no alternative but to go to court. But judgment debtors with restrained bank accounts, almost by definition, have no money to afford a court action, and the legal costs could eat up the amount saved.

New §CPLR 5222-a(g) requires a judgment creditor to act in good faith in analyzing exemption claims. If a court finds "that the judgment creditor disputed the claim of exemption in bad faith . . . the judgment debtor shall be awarded costs, reasonable attorney fees, actual damages and an amount not to exceed one thousand dollars."

This duty to act in good faith is required in two separate stages of the exemption dispute resolution process. First, if the debtor mails the creditor (and bank) an exemption claim form with supporting documents, the creditor is obligated to analyze the claim according to the procedure of CPLR Sectrion 5222-a. failure to do so is considered 'bad faith' (see the last sentence in 5222-a(b)(4)(c)(4)). Presumably the debtor would have to take the initiative to take the creditor to court.

Secondly, if the creditor makes a court motion to dispute a debtor's exemption claim, and the court finds the creditor failed to analyze the exemption claim under CPLR §5222-a(c), the creditor would be liable for bad faith damages, under CPLR 5222-a(g).

In both cases, the bad faith results from failure to analyze an exemption claim supported with documents. It would seem likely that the degree of bad faith would be proportionate to the quality of the documents submitted by the debtor to the creditor in support of the exemption claim.