Using Exemptions to Protect Property From Judgment Creditors
State exemption laws protect certain types of property from collection by creditors.
If a creditor has obtained a judgment against you and seeks to enforce it by taking your cash, or by seizing and selling other property, you most likely can keep at least some of that property by using “exemptions.”
What Are Exemptions?
All states have designated certain types of property as “exempt,” or free from seizure, by judgment creditors. For example, clothing, basic household furnishings, your house, and your car are commonly exempt, as long as they’re not worth too much. However, any property you have that is not exempt can be taken to pay your debts.
Secured Property Is Still at Risk
Be aware that despite the availability of exemptions, if you are still making payments on a major purchase—typically on a home or car—your creditor most likely has a lien on the property to secure repayment. This is called a “secured” debt. If you fall behind on your payments, you face the real possibility of foreclosure or repossession of the property that is the security for the loan.
Negotiating to Keep Nonexempt Property
If a certain item of property is not protected by an exemption, you might be able to negotiate with the creditor to keep it. For example, you can offer to pay the creditor the property’s value in cash, or you can offer the creditor another item of exempt property of roughly equal value instead. Also, the creditor might reject or “abandon” the item if it would be too costly or cumbersome to sell. In that case, you also get to keep it. So remember, even when we say that you have to give up property, you still might be able to barter with the creditor about which property gets taken.
Types of Exemptions
There are several categories of exemptions:
- exemptions of a type of property, up to a specified value
- exemptions of a type of property, regardless of value, and
- “wildcard” exemptions that can be applied to any property.
Specific Property, Up to Specified Value
The first kind of exemption protects the value of your ownership in a particular item or type of property, but only up to a set dollar limit.
Example: The New Mexico state exemptions allow you to keep $4,000 of equity in a motor vehicle. If you were subject to collection, you could keep your car if it was worth $4,000 or less.
Even if the property is worth more than the dollar limit of the exemption amount, you can keep the property if selling it would not raise enough money both to pay what you still owe on it and to give you the full value of your exemption.
Example: You own a car worth $20,000 but still owe $16,000 on it. Selling it would raise $16,000 for the lender and $4,000 for you, thanks to your New Mexico exemption. Since there would be nothing left over to pay your creditors, the creditor wouldn’t take the car. Instead, you would be allowed to keep it as long as you are—and remain—current on your payments.
However, if your equity in the property exceeds the dollar amount of the exemption, the creditor or trustee may sell the property to raise money. A creditor would return your exemption amount to you, plus any money left over from the sale after costs are deducted and the judgment is paid.
Example: You own a car worth $20,000, and your state says $4,000 of your equity in it is exempt. Let’s say you only owe $10,000 on that car. Selling the car for $20,000 would pay off the lender in full, pay your $4,000 exemption, and leave a portion of the remaining $6,000 (after the costs of sale are deducted) to go to your judgment creditor. In this scenario, you are entitled to the full value of your exemption—$4,000—but not to the car itself.
Specified Property, Regardless of Value
Another type of exemption allows you to keep specified property, regardless of its value. For instance, a given state’s exemptions might allow you to keep a refrigerator, freezer, microwave, stove, sewing machine, and carpets with no limit on their value.
Some states provide a general-purpose exemption called a “wildcard” exemption. This exemption gives you a dollar amount that you can apply to any type of property. This is like the wildcard in poker, which you can use as any card you want. The same principle applies here. You can apply the wildcard exemption to property that would not otherwise be exempt.
Example: Suppose you own a $3,000 boat in a state that doesn’t exempt boats but does have a wildcard of $5,000. You can take $3,000 of the wildcard and apply it to the boat, which means the boat will now be considered exempt. And, if you have other nonexempt property, you can apply the remaining $2,000 to that property.
Or, you can use a wildcard exemption to increase an existing exemption.
Example: If you have $5,000 worth of equity in your car but your state only allows you to exempt $1,500 of its value, you will likely lose the car. However, if your state has a $5,000 wildcard exemption, you could use the $1,500 motor vehicle exemption and $3,500 of the wildcard exemption to exempt your car entirely. And you’d still have $1,500 of the wildcard exemption to use on other nonexempt property.
Doubling Exemptions If You Are Married
Some states allow you to double all or certain of its exemptions if you are married. This means that you and your spouse can each claim the full amount of each exemption. For instance, in the California exemption system that applies to judgment creditors, the exemption for motor vehicles may not be doubled, but the exemption for tools of the trade may be doubled in some circumstances. Also, you can double for a single piece of property only if title to the property is held in both of your names.
How to Protect Property With Exemptions
A creditor who has a judgment against you can get a writ of execution from the court and ask the sheriff to seize some of your property and put it up for auction. This is called “an attachment and execution” or a “levy of execution.” The property doesn’t have to be property that the creditor took as collateral for a loan. (Learn more about attachments and levies.)
Unless you act, the sheriff will seize and sell property that is protected by an exemption. The sheriff won’t know what property is protected (exempt) without your help. You can prevent the sale of exempt property and get it back, or prevent its seizure in the first place by filing a notice of exemption or by taking similar steps specified by your state law. In some states, you need to file papers with the sheriff or an official by a deadline. In other states, the sheriff will let you set aside exempt property at the time of seizure.
(To learn more, see How to File a Claim of Exemption.)
Debts for Necessities
In most states, you cannot request a claim of exemption to protect your wages if your debt was for basic necessities, such as rent or mortgage, food, utilities, or clothing. The law says that you should pay for your necessities, even if you suffer a hardship in doing so.
Still, you can request a claim of exemption hearing if the debt (now part of the judgment) was for a basic necessity. The creditor may not challenge your claim. Or, the judge might not care whether the debt was for a basic necessity and may consider only whether or not you need the money to support your family.
For more articles on exemptions and how to claim them, see our Property Exemptions: Protecting Property From Judgment Creditors area.)
This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.