If a judgment creditor takes steps to garnish your wages or take your property in order to get paid, you are entitled to protect a certain amount of property through "exemptions." How you determine whether a particular item of property is exempt involves a series of steps and a little math. The following is a basic blueprint to help you figure out if a judgment creditor can seize your property. Follow each step, in order, below.
(To learn more about property exemptions, including how they work and when you can use them to protect property, see our Property Exemptions topic area.)
First Step: Make an Inventory
List all of your property, in whatever form. This includes physical property and intangible property, such as an interest in future money (called receivables). To learn more about what property a creditor might be able to take, see Property Subject to Collection.
In making your inventory, classify each item of property. How you classify your property is based upon how state and federal exemption laws classify certain items of property. This is important because exemptions vary depending on the type of property. Property classes should include:
cash, bank accounts, tax refunds, and other money
misc. personal property like clothing, furnishings, appliances, etc.
large ticket items like entertainment electronics, cameras
antiques or collectibles
business tools and assets
boats, motor homes, trailers and accessories
life insurance & annuities
pension plans, and
unemployment, workers' compensation and other government benefits, and child or spousal support.
To find out your state's property exemption laws and how property is classified, visit our Bankruptcy Exemptions topic page.
Second Step: Value Your Property
Next, you should assign a value for each item of property. By “value,” this does not mean retail value or replacement cost value. Instead, estimate the value based on a quick-sale approach, or a liquidation value. What would the property reasonably sell for at a short sale, auction, or garage sale?
Third Step: Deduct Liens
For each property, determine whether or not there are any other liens on it. For the purpose of this exercise, you should be looking at liens that existed before the judgment creditor's lien. These might include:
home equity loans (second or third mortgages)
older judgment liens from other secured creditors
car loan security agreements
other security agreements, such as lines of credit secured by personal or business property, and
statutory liens (usually, income tax liens for state or federal taxes, or liens for unpaid property taxes, and sometimes mechanic's liens).
Once you have all of the lien information, subtract the balance of each lien from the value of the property that is covered by that lien. Some liens, like mortgages, may cover only one particular property. Others, like blanket security agreements, cross-collateralized mortgages or prior judgment liens, can cover several items of property.
Fourth Step: Calculate Equity
After you have deducted the value of the liens from the value of the property, the number you have left will usually be either a positive or negative value.
If the number is negative, this means that the property has no value that the judgement creditor can attach. You do not need to determine your exemptions because there is nothing to exempt. You have what's called negative equity.
Example: You have a car worth $10,000. The balance of the car loan is $12,000. This means you have $2,000 in negative equity. A judgment creditor (other than the car lender) cannot take the car.
If the number is positive, this means that the property has equity. The equity is the balance left after subtracting liens from the value of the car. The equity is what a judgment creditor may be able to attach.
Example: You have a car worth $10,000. The balance of the car loan is $5,000. This means you have $5,000 in equity.
If you have equity, then move on to the next steps below.
Fifth Step: Sort Out Ownership
Do you own the property jointly with someone else? If so, go through the following sets of questions:
1. If the co-owner is someone other than your spouse, is the asset an account?
- If yes, did the other owner make most or all of the contributions into the account?
If yes, then the account may be exempt in full or in part, up to the amount that was contributed by the other owner. For more information on traceable contributions, see Bank Levies on Joint Accounts (Nonspouse).
If no, then the entire equity value may be subject to seizure by a creditor. Proceed to the Sixth Step.
- If no, move on to question #3.
2. If the co-owner is your spouse, are you both jointly liable on the debt?
- If yes, then the entire equity may be subject to collection. Go to the Sixth Step.
- If no, then move on to question #3.
3. How do you own the property with your spouse?
- As community property? If yes, then the entire equity in the property is subject to seizure by a creditor. Proceed to the next step in the exemption calculation, below. There is an exception to this rule -- Funds in a bank account traceable to contributions made by your non-debtor spouse may still be exempt. For more information on traceable contributions, see Nolo's article Bank Levies on Joint Accounts (Nonspouse).
- As tenants in the entirety? If yes, then the entire equity may be exempt.
- As common law/separate property? If yes, then a creditor may collect only up to half of the equity. Divide the equity in half and proceed to the next step in the exemption calculation, below.
Sixth Step: Figure Out Your Exemptions
The next step is to determine what exemptions are available to you. For a list of exemptions that are available in your state, visit our Bankruptcy Exemptions by State topic page. Keep in mind that if you are married, you might be able to double the amount of some exemptions.
The exemptions will be applied against the remaining equity in the property after deducting any co-owner interest in that equity. Whatever equity that is left after you have subtracted your exemptions will determine what a judgment creditor can seize.
Example: You own a car that has $5,000 in equity. You do not own the car with anyone else. You live in Ohio. Ohio allows you to take $3,450 in exemptions against the equity in the car. This leaves $1,550 that a creditor can seize. However, you can also stack a “wildcard exemption” on top of the car exemption (provided you don't use the wildcard exemption on any other property). The wildcard exemption in Ohio is $1,150. You have a total of $4,600 in exemptions. When applied against $5,000 in equity, this leaves $400 in equity. The judgment creditor can seize the car, however, when if it does so, it must pay you the amount of your exemption.
Some types of property might be 100% exempt, such as certain government benefits. On the flip side, for some debts, exemptions might not apply.
It may be that after applying all available exemptions, you have relatively little equity left in that property. While a judgment creditor may legally seize that property, that doesn't mean it will or should. The minimal equity may not make that property worth collecting on to a creditor. Or, you can use that minimal equity to negotiate a settlement with the judgment creditor.
Consider Collection Costs
If there is minimal equity after going through this exercise, you should also consider the potential costs in collecting that property. Factoring in the added collection costs helps when considering the reality of a seizure ever happening. More importantly, it may give you added leverage when negotiating a settlement with the judgment creditor.
Example: You have a car with $400 in equity after applying all of your available exemptions. It will cost a judgment creditor roughly $375 to auction it. At best, the judgment creditor would net $25 from the sale. Using these figures, you offer the creditor $50 to settle the debt.
For more articles on exemptions and how to claim them, see our Property Exemptions topic area.