Using Exemptions to Protect Property From Judgment Creditors

State exemption laws protect certain types of property from collection by creditors.

By , Attorney · UCLA School of Law

When a creditor seeks to collect a judgment against you, all your property that's not exempt under state law could be taken to satisfy the judgment. State laws allow you to keep certain property types, often up to a certain amount. Knowing which property is subject to collection by judgment creditors is important.

Although it's important to know which property is subject to collection by judgment creditors, as a practical matter, few judgment creditors go after tangible personal property, like furniture, clothing, heirlooms, and collections, unless the property is quite valuable, such as a boat or a plane, for example. Judgment creditors prefer to focus on real estate, deposit accounts, paychecks, stocks, and bonds.

Property you have that isn't exempt can be taken to pay your debts. In addition to taking non-exempt property you have available, creditors can generally go after:

  • property you own but don't have on hand
  • property you've recently given away
  • property you're entitled to but don't yet possess
  • future claims, and
  • property that's only partially exempt.

But property that belongs to someone else isn't available to judgment creditors, even if you control the property, because you don't have the right to sell it or give it away.

Property You Own But Don't Have on Hand

Any nonexempt property you own is legally available to a judgment creditor, even if you don't have physical possession. For instance, you might own a share of a vacation cabin in the mountains but never visit.

Or you might own furniture or a car that someone else is using. Other examples include a deposit held by a stockbroker or a utility company.

Property You've Recently Given Away

People facing a judgment are often tempted to give their property to friends and relatives or to pay favorite creditors before the other creditors show up. However, if you give away your property or sell it for less than its value, a judgment creditor could sue you and the recipient of the property for deliberately attempting to defraud the creditor. This action might result in the property being recaptured for the creditor's benefit, and you could be severely fined or prosecuted for your fraudulent activity.

But you can generally choose what property to sell and which creditor to pay first. The exceptions to this rule are:

  • bankruptcy (where the bankruptcy trustee gets to decide about your property)
  • a security interest (where the creditor has a lien on the property), and
  • fraud (where you improperly dispose of property, so there's less left for your creditors—for example, by paying one creditor more than that creditor is owed).

Property You're Entitled to But Don't Yet Possess

A creditor with a judgment against you can go after any assets coming your way once your right to them is firm. The most common examples are salary and commissions earned before or after the creditor got the judgment. Other examples are refunds, vacation and severance pay, insurance payouts, royalties, inheritances, and guaranteed payments (such as from a trust or annuity).

The procedure a creditor uses to seize your property in the hands of a third person is called "garnishment" or "attachment." State law limits how much of your earnings can be taken directly from an employer—it usually depends on the kind of debt.

Future Claims

Creditors aren't only interested in the property you own now; they sometimes set their sights on property or money you might own in the future. For example, you might have a claim against a third party that you haven't acted on—for instance, because you haven't applied for the refund, made the insurance claim, or brought the lawsuit.

Occasionally, a creditor will accept the rights to such a claim to satisfy a judgment. This process is called an "assignment of rights." It lets the creditor pursue the claim in your place.

Usually, you must agree to cooperate with the creditor in pursuing the claim as part of the assignment of rights. Typically, because the value of the claim won't be definitely settled or known when you make the assignment, you and the creditor will negotiate what you think it might be finally worth, plus interest, minus what it will cost to pursue the claim. The claim's value might be further modified, depending on how easy or difficult it looks to collect on the claim successfully.

Property That's Only Partially Exempt

Sometimes, exemptions only protect your property up to a specific value. Property is partially exempt if its value exceeds the amount protected by the exemption. A creditor can seize and sell an asset that is only partially exempt if the creditor pays you the value of your exemption.

What Are Exemptions?

All states have designated certain property types as "exempt," or free from seizure, by judgment creditors. For example, clothing, basic household furnishings, your house, and your car are commonly exempt if they're not worth too much.

Secured Property Is Still at Risk

Be aware that despite the availability of exemptions, if you are still making payments on a major purchase—for example, a home or car—your creditor most likely has a lien on the property to secure repayment. This kind of debt is a "secured" debt.

If you fall behind on your payments, you face the real possibility of foreclosure or repossession of the property, which is the security for the loan.

Negotiating to Keep Nonexempt Property

If an exemption doesn't protect a particular item of property, 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 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

Categories of exemptions include:

  • 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 #1. Say that 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 to pay what you still owe on it and give you the full value of your exemption.

Example #2. You own a car worth $20,000 but still owe $16,000. Selling it would raise $16,000 for the lender and $4,000 for you, thanks to your state's exemption. Because 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 #3. 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.

Wildcard Exemption

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 kind of exemption 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 #1. 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, meaning it 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 #2. 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're Married

Some states allow you to double all or certain of its exemptions if you are married. So, you and your spouse can each claim the full amount of each exemption.

How to Protect Property With Exemptions

A creditor with 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 the creditor took as collateral for a loan.

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 must 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.

Debts for Necessities

In most states, you can't 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.

Getting Help

If you need more information about exemptions in your state, consider talking to a lawyer.

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