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NY Rent Stabilized Apartments Ruled to Be Exempt in Bankruptcy

In a 5-2 vote, the New York Court of Appeals on a huge bankruptcy issue has ruled that rent-stabilized apartments are exempt from the bankruptcy estate, meaning that they will not be sold from under the tenant to pay off creditors in the bankruptcy process. After a very long process that spanned both state and federal courts and numerous debates by both sides, New York's highest court issued a decision that treats rent-stabilized leases as a public assistant benefit, much like disability, unemployment, or other welfare benefits issued by the government. This ruling protects NY tenants' rent stabilized homes in the event that they file for bankruptcy.

This issue came up when an 80-year old widow, Mary Veronica Santiago, filed for bankruptcy in 2011 after falling behind on her bills. The problem arose when her landlord offered to buy her rent stabilized lease in exchange for about $23,000. Although the bankruptcy trustee accepted that offer from her landlord, Ms. Santiago's own lawyers weren't so keen on trading in her lease. They feared that she would eventually be evicted despite an agreement that allowed her to stay in the unit. The apartment located in East Village, holds many possibilities for a potential lucrative opportunity in the real estate market. Ms. Santiago is only paying $703 a month for her two bedroom apartment, near Tompkins Square Park.

When the question, "whether a rent-stabilized lease should be treated as an asset in a personal bankruptcy" came before the United States Court of Appeals for the Second Circuit, it decided in an unprecedented fashion to allow the highest state court to hear and decide the issue. The majority on the NY Court of Appeals panel had agreed that affordable housing is an essential need for many NY residents. In making that decision, the majority considered the rent-stabilization regulatory theme and legislative history. The chief judge, Jonathan Lippman, compared the effect and role of rent rules that freeze rents paid to a landlord with the concept of a benefit paid out by the government.

Rent stabilization laws, a defining element of New York real estate for decades, limit rent increases and allow automatic lease renewals and even survivor's rights to tenants. It becomes clear in the wake of the real estate boom, that rent stabilized apartments have become a crucial benefit to the many lives of NY residents. Many people saw this decision as a potential risk for many rent stabilized apartments, because if it was determined that they were not personal assets to be exempted in the bankruptcy process, people could lose their homes. Tenant advocates say that the sheer fear of being forced out of rent-regulated apartments has deterred thousands of tenants from seeking protection federal bankruptcy courts. This has indeed prevented us from filing many simple bankruptcy cases because of the risk of the client losing their apartment. If the decision decided that rent controlled apartments were part of bankruptcy estate, the legal effect would undermine bankruptcy and rent control laws designed to protect people.

However, a different argument is also being supported and backed by lawyers and members of the public. In a dissenting opinion, Judge Robert S. Smith argued that the majority "grossly misread" the law by treating rent regulation as public assistance. He was joined by Judge Susan Phillips Read, who made the point that not every person who lives in a rent controlled apartment receives public assistance, further separating these two concepts from each other.

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