New York Bankruptcy Laws - Exemption for Causes of Action

Civil Practice Law & Rules Section 5205 (b) sets forth an exemption of causes of actions and damages for taking or injuring exempt personal property. A cause of action to recover damages for taking or injuring personal property exempt from application to the satisfaction of a money judgment, is exempt from forfeiture to a trustee or creditors. A money judgment and its proceeds arising out of such a cause of action is exempt, for one year after the collection thereof, from application to the satisfaction of a liability.

Operation of New York bankruptcy laws

In practice, debtors retain authority over settlement decisions while a cause of action is pending. Notice in particular that the cause of action is not transferred, but only a right to cash received. Trustees who attempt collection of proceeds face two additional hurdles: the value of a cause of action is not expressly limited by this statute, and the debtor is authorized to retain proceeds (and use them) for a period of one year. With the assistance of qualified legal counsel, settlement dates and appropriate uses of proceeds may be timed to retain a substantial portion, and perhaps all, proceeds of personal injury cases after discharge.

In recent years, it seems many New York bankruptcy laws and traditions have been under strict scrutiny. In general, the trend is to limit individual rights while expanding the rights of corporations who file Ch. 11. In NY State, approximately 98% of all cases are filed for individuals under Chapter 7 & 13, while Ch. 11 cases account for approximately 2% of all cases.

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