A way out of debt that fits the actual facts

Debt problems rarely arrive as one event. A medical episode, a divorce, a business that stopped covering its own costs, a period of unemployment that lasted longer than the savings did — and then a series of consequences that arrive on their own schedule: charge-offs, collection calls, a summons, a default judgment, a frozen bank account, a garnished paycheck.

There is more than one way out, and the right one depends on facts rather than on preference. Chapter 7 and Chapter 13 do different things. Subchapter V exists for small businesses. Settlement is a real option in narrow circumstances and a poor one in most. Sometimes the correct first move is none of those — it is vacating a default judgment that should never have been entered, or raising a defense the creditor cannot overcome.

The firm represents individuals, families and small business owners across Suffolk and Nassau County. Bankruptcy cases for Long Island residents are filed in the U.S. Bankruptcy Court for the Eastern District of New York, whose Central Islip division serves this area. Consultations are free and confidential, and the first conversation is about what is actually happening and how fast, not about selling a chapter.

If a foreclosure is under way, see foreclosure defense. If the debt is tied to a house that is being sold or refinanced, see real estate law. If a business entity is involved, see business planning and succession.

The Law Offices of Christine Thea Rubinstein & Associates P.C. is a debt relief agency. The firm helps people file for bankruptcy relief under the Bankruptcy Code.

Chapter 7 bankruptcy

Chapter 7 is the liquidation chapter. A trustee is appointed, takes control of the property of the estate, sells anything that is not exempt, distributes the proceeds to creditors under a fixed order of priority, and the filer receives a discharge of most remaining unsecured debt. In the great majority of consumer cases nothing is actually sold, because everything the filer owns is protected by exemptions — but that outcome is the product of planning, not luck.

Eligibility and the means test

Access to Chapter 7 for an individual with primarily consumer debts runs through a means test. The first step compares household income, measured over a defined look-back period, against a median figure for a household of that size in New York. Filers below the median generally qualify. Filers above it go on to a second calculation that subtracts allowed expense standards and certain actual expenses to determine whether meaningful funds remain for creditors. The income figures and expense standards are revised periodically and have to be confirmed for the filing date.

The test is mechanical, which cuts both ways. Overtime that has ended, a recent job loss, a one-time bonus or a change in household size can all change the result, and the timing of a filing is frequently the difference between qualifying and not.

Exempt and non-exempt property

New York permits a filer to choose between the New York exemption scheme and the federal scheme. The choice applies as a whole — you take one set or the other, not the favorable parts of each — and it is made once. For Long Island filers the homestead exemption is usually the deciding factor, because New York’s homestead protection is tied to the county and is generally larger than the federal figure, while the federal scheme offers a more flexible wildcard that can be useful where there is little or no home equity. Married couples filing together have their own arithmetic.

Common exemption categories include a residence, a motor vehicle, household goods, tools of a trade, retirement accounts, and certain benefits and insurance. Amounts are adjusted for inflation on a recurring schedule and must be confirmed for the year of filing rather than taken from any article, including this one.

What the process looks like

• Credit counseling. An approved briefing is generally required before filing, and a financial management course is generally required before a discharge is entered.
• The petition and schedules. A complete disclosure of assets, debts, income, expenses, recent transfers and prior filings. Accuracy is not optional; the schedules are signed under penalty of perjury.
• The meeting of creditors. A hearing before the trustee, held for Suffolk and Nassau filers through the U.S. Bankruptcy Court for the Eastern District of New York, whose Central Islip division serves Long Island. Most last a matter of minutes.
• Trustee review. Tax returns, pay records and questions about transfers, transfers to relatives, and payments made to particular creditors before filing.
• Discharge. Entered after the applicable period runs, assuming no objection.

Reaffirmation of a car loan, the treatment of a mortgage a filer intends to keep paying, and any transfer made in the years before filing all deserve attention before the petition is signed rather than after.

Chapter 13 bankruptcy

Chapter 13 is a repayment chapter. Instead of liquidation, the filer proposes a plan that pays a defined amount to a trustee each month over a period of years, and creditors are paid from that fund according to rules about priority and minimum treatment. At the end, remaining eligible unsecured balances may be discharged. The plan length is set by the Code and depends in part on income relative to the state median; the current periods should be confirmed rather than assumed.

What Chapter 13 can do that Chapter 7 cannot

• Cure mortgage arrears. A homeowner behind on payments can spread the arrears across the life of the plan while making the ongoing monthly payment, which is the principal reason Chapter 13 is filed on Long Island. This is a structural cure available over a creditor’s objection, unlike a modification, which the servicer must agree to.
• Protect non-exempt property. Equity that could not be exempted in a Chapter 7 does not have to be surrendered; the plan instead pays unsecured creditors at least what they would have received in a liquidation.
• Strip a wholly unsecured junior lien. Where a second mortgage or home equity line is entirely under water — the first mortgage balance equals or exceeds the value of the property, so no equity supports the junior lien at all — the junior lien may in some circumstances be treated as unsecured and removed on completion of the plan. This depends on a valuation, on the lien being wholly rather than partly unsecured, and on the procedure being followed correctly.
• Handle debts that Chapter 7 leaves behind. Recent taxes and support arrears can be paid through a plan under the protection of the stay rather than pursued by levy.
• Provide a path where Chapter 7 is unavailable. Filers who do not pass the means test, or who have received a discharge too recently, may still be eligible.

What the plan has to satisfy

A plan must be proposed in good faith, must commit projected disposable income for the applicable period, must pay certain claims in full — administrative claims, most taxes and domestic support arrears — and must give unsecured creditors at least the value they would have received in a Chapter 7. Debt limits apply to eligibility and are adjusted periodically.

Confirmation is a court process. The trustee and any creditor may object, and objections typically go to income, expenses, valuation of collateral or good faith. Once confirmed, the plan binds creditors.

Conversion and dismissal

A Chapter 13 case can generally be converted to Chapter 7 if circumstances change, and can be dismissed voluntarily in most cases. Neither is free of consequence — a dismissal lifts the stay and creditors resume — but the flexibility is real and is part of why a filer facing an uncertain income picture may still be advised toward Chapter 13.

Chapter 11 and Subchapter V business reorganization

Chapter 11 is the reorganization chapter used by businesses and, occasionally, by individuals whose debts exceed the Chapter 13 limits. The business continues operating as a debtor in possession, under court supervision and with reporting obligations, while it negotiates a plan that restructures its obligations.

Traditional Chapter 11 is expensive. Reporting requirements, professional fees, creditors’ committees and disclosure statement practice make it impractical for many small companies whose problem is a manageable amount of debt and a temporary loss of cash flow.

Subchapter V

Subchapter V is a streamlined path within Chapter 11 for smaller business debtors. Its features are designed to remove the parts of ordinary Chapter 11 that make it uneconomic at small scale:

• A trustee is appointed with a facilitating role rather than displacing management
• Only the debtor may propose a plan, and the plan is expected on a compressed schedule
• The disclosure statement requirement is generally eliminated
• No creditors’ committee is appointed in the ordinary case
• A plan may be confirmed without an accepting impaired class if it meets fairness standards, which changes the leverage a single objecting creditor holds
• The rule that owners must contribute new value to retain equity is relaxed

Eligibility depends on a debt ceiling and on the debtor being engaged in commercial activity. The ceiling has been changed by Congress more than once and has been subject to sunset provisions, so the amount in effect on the intended filing date must be confirmed.

When a business owner should be thinking about this

• A landlord is moving to evict and the lease is worth more than the arrears
• Equipment financing or a merchant cash advance is consuming daily receipts
• A judgment has been entered and receivables are being restrained
• Payroll taxes have fallen behind, which carries personal exposure for responsible persons
• The business is fundamentally viable but carries debt from a period that is over

The firm evaluates whether a business reorganization is the right tool at all. For many closely held companies the better answer is an orderly wind-down, a negotiated resolution with the principal secured creditor, or an individual filing by the owner who carries the guaranties. Where the business itself is the client, coordination with business planning and succession matters, because the operating agreement and the ownership structure shape what is possible.

Debt negotiation and settlement

Debt settlement means negotiating with a creditor to accept less than the full balance, usually in exchange for a lump sum or a short series of payments. It is a private contract, not a court proceeding, and understanding that distinction is most of what a consumer needs to know.

What settlement does not do

• It does not stop a lawsuit. There is no stay. A creditor that has sued can continue to judgment while negotiations are ongoing unless it agrees otherwise in writing.
• It does not bind creditors who do not agree. Each account is negotiated separately. One holdout can undo the plan.
• It does not erase a judgment or a lien unless the settlement expressly provides for a satisfaction to be filed — and the satisfaction actually has to be filed.
• It does not avoid tax consequences. Forgiven debt may be reported as cancellation-of-debt income. Exclusions exist, including for insolvency, but they require documentation and a conversation with an accountant.

The commercial settlement industry

The typical program instructs a consumer to stop paying creditors and instead deposit money into an account each month until enough accumulates to make offers. During that accumulation period, accounts charge off, balances grow, collection intensifies, lawsuits are filed and judgments are entered. Fees are collected. Regulators at both the federal and New York level have taken repeated enforcement action in this industry, and advance fees for such services are restricted.

None of that means settlement is never appropriate. It means the structure of the typical commercial program creates the exposure, and that a consumer entering one should understand what happens during the months before the first offer is made.

Where settlement genuinely fits

• A lump sum is already available — a retirement distribution, a family loan, proceeds from a sale — rather than needing to be accumulated over a year
• The number of creditors is small and the balances are known
• No suit has been filed, or a suit exists and is being defended at the same time
• Bankruptcy is unavailable or carries a specific cost, such as loss of non-exempt property or a professional licensing consequence
• The debts at issue would not be discharged anyway

How the firm handles it

Negotiation is conducted through counsel, in writing, with the terms documented before any money moves: the exact amount, the payment mechanics, the reporting the creditor will make, and an express statement that the payment resolves the account in full. Where a judgment exists, the agreement provides for a satisfaction. Where a lien exists, it provides for a release. Verbal assurances from a collection representative are not a settlement.

Judgments, liens, frozen accounts and wage garnishment

Most people first learn about a judgment when a paycheck shrinks or a debit card is declined. By then several steps have already occurred, and knowing which one you are at determines what can be done.

How a judgment becomes a collection tool

1. The lawsuit. A creditor sues. If the defendant does not answer, a default judgment may be entered without any hearing on the merits.
2. Entry and docketing. The judgment is entered by the clerk. Docketing it with a county clerk generally creates a lien against real property the debtor owns in that county, which surfaces at a sale or refinance.
3. Discovery of assets. An information subpoena with restraining notice requires the debtor, and often a bank, to answer questions about accounts, employment and property.
4. Restraining notice and levy. A restraining notice served on a bank freezes funds. A levy and execution then take them.
5. Income execution. A wage garnishment served through the sheriff or marshal directs an employer to withhold from each paycheck.

Limits that apply to wages

New York limits an income execution to a percentage of disposable earnings, and imposes a floor tied to a multiple of the minimum wage below which wages generally cannot be reached at all. Multiple garnishments do not stack without limit. Support obligations are treated under a separate and more aggressive framework. The percentages, the wage floor and the interaction between competing executions must be confirmed against the current rules, which change with the minimum wage.

The Exempt Income Protection Act

New York requires a bank served with a restraining notice or levy to leave a baseline amount in the account untouched, and to apply a larger protected amount where exempt payments were directly deposited within a defined recent period. The bank is required to send an exemption claim form. The protected amounts are adjusted on a recurring schedule and must be confirmed.

In practice, banks over-freeze. Accounts holding nothing but directly deposited Social Security are restrained; joint accounts are frozen for one owner’s debt; the claim form is never mailed. Each of those is addressable, and where a creditor restrains plainly exempt funds there may be a claim against the creditor as well as a route to release the account.

Attacking the judgment itself

Where a default judgment was entered on defective service — a summons left at an old address, an affidavit of service that describes a person who does not exist — a motion to vacate may be available, and it can be paired with a defense on the merits such as the statute of limitations or a failure of proof. Vacating the judgment removes the lien and the garnishment with it.

Creditor harassment and collection defense

Consumers being pursued for debt have more rights than they are usually told, and the burden in a collection lawsuit rests on the party that sued.

What a collector may not do

The federal Fair Debt Collection Practices Act governs third-party collectors and debt buyers. New York layers its own debt collection regulations on top of it, and those apply more broadly. In substance, a collector may not:

• Call at times or places known to be inconvenient, or continue calling after being told in writing to stop
• Contact you at work after being told the employer prohibits it
• Contact you directly once it knows you are represented by counsel
• Misrepresent the amount owed, the legal status of the debt, or who it is collecting for
• Threaten arrest, wage garnishment or suit that it cannot legally take or does not intend to take
• Discuss the debt with third parties beyond limited permitted contact
• Fail to provide required disclosures about the debt and about the consumer’s right to dispute it and request verification

Where a collector violates these rules, statutory remedies and attorney fee provisions may be available. Keeping the voicemails, the letters and a log of calls with dates is what turns a complaint into a case.

The statute of limitations

Consumer debt in New York is subject to a limitations period, and New York has adopted specific consumer credit protections requiring a collector to give notice when it is suing on a debt that may be time-barred. Two points are widely misunderstood:

• A time-barred debt can still be sued on. The limitations period is an affirmative defense. If the consumer does not appear and raise it, a default judgment can be entered on a debt that was too old to collect.
• A payment can matter. Depending on the circumstances and the applicable rules at the time, making a partial payment or acknowledging a debt in writing can affect the analysis. The safe course is to get advice before paying anything on an old account.

The length of the period and the rules on revival have both changed in recent years and must be confirmed against current law.

Debt buyer proof problems

Much consumer collection litigation is brought by companies that bought portfolios of charged-off accounts in bulk. To win, a plaintiff generally has to prove the account existed, prove the terms, prove the balance, and prove an unbroken chain of assignment from the original creditor to itself. Portfolio purchases are frequently documented with a generic bill of sale and a spreadsheet extract, and affidavits are often signed by someone with no personal knowledge of the original creditor’s records. New York’s consumer credit rules impose specific pleading and proof requirements in these cases.

Bankruptcy vs. debt settlement: an honest comparison

These are different tools and neither is universally better. The comparison below is about mechanics, not marketing.

How the firm approaches the choice

1. Establish what is actually owed. Pull the credit reports, identify who holds each account now, and separate secured from unsecured and dischargeable from non-dischargeable debt.
2. Find the deadlines. A sale date, a return date on a summons, a garnishment already running or a restrained account changes the sequence immediately.
3. Run the exemption analysis. What property exists, what it is worth, what the liens are, and which exemption scheme protects more.
4. Build a real budget. Whether a plan payment is sustainable, or whether a lump sum genuinely exists, determines which options are available at all.
5. Compare on the numbers. Total cost, what survives each path, and what happens if it goes wrong.

Documents to bring

The first meeting goes faster and produces better advice if you bring whatever you have of the following. Missing items are normal — bring what exists.

• A list of every debt you know of, with the creditor, the approximate balance and the account status
• Every collection letter, summons, judgment notice, garnishment or restraining notice, with the envelope
• Recent pay stubs for everyone in the household, covering the last several months
• The last two years of filed federal and New York tax returns
• Recent bank statements for every account, including any account that is currently frozen
• The recorded deed to any real property, plus current mortgage and home equity statements
• Vehicle titles or registrations and any auto loan or lease documents
• Retirement and pension account statements, and any life insurance policy with cash value
• Documentation of any property transferred, sold or gifted in the last several years
• Business records if you own or owned a business — entity filings, tax returns, personal guaranties
• Any prior bankruptcy paperwork, including the case number and the discharge order

What working with the firm looks like

1. Free initial consultation. A phone call or a half-hour meeting at either office to identify what is happening, what deadlines are already running, and whether any of this needs to move this week.
2. A complete picture of the debt. Credit reports pulled and read, every account identified with its current holder, and secured, priority and unsecured obligations separated from one another.
3. Exemption and budget analysis. What you own, what it is worth, what the liens are, which exemption scheme protects more, and what a realistic monthly budget supports.
4. A written recommendation and a fee quote. The option that fits these facts, what it costs, what it does not solve, and what the alternatives would have done.
5. Immediate defensive work where needed. Answering a summons, moving to vacate a default judgment, addressing a frozen account or a garnishment while the larger plan is prepared.
6. Preparation and filing. Credit counseling completed, schedules prepared accurately, the petition filed, and the meeting of creditors attended with you.
7. Through to discharge and after. Trustee requests answered, the financial management course completed, reaffirmations and lien issues handled, and the discharge order explained — including what to do if a creditor contacts you afterward.

Frequently asked questions