So even if the Knicks wanted to let Billups go it makes more sense to sign him to his 1 year extension. Then you can let him heal and hope he can show possible trade partners that he is still an asset. If that works his contract becomes worth more than simply 14 million expiring just because he is still a viable player.
Of course even if this can backfires and he ends up still injury prone its still a 14 million expiring contract.
So I really doubt the Knicks simply buy him out. It is what they decide to do with Billups after the season starts that will show where the team is heading for the foreseeable future. If he plays well they may simply let him stay with the intent to sign him to less in 2012. It depends on a lot of factors not the least of which is the new CBA.