Protecting Your Assets: Exemptions and Judgements / Collections

An exemption is a certain dollar amount of certain types of property that a borrower is allowed to keep when his creditors are suing him and trying to get their money, or when he files a bankruptcy. These amounts can be very important in determining whether you file bankruptcy, what will happen if you do, and which type you should file.

Exemptions are different in each state. They are listed in the code of laws in a special code section, or law. Think of them as a safety net of things you are allowed to keep, no matter how bad things get, although it is not that simple.

To understand them, you have to understand the collection process. To use a simple example, basically, a borrower has a creditor to whom he owes money. If he does not pay, and the creditor does nothing, then it is merely the borrower’s word against the creditor’s. However, if the creditor sues you, or takes the dispute to court, then the creditor is asking a judge to say that the borrower owes money to the creditor. If the judge sides with the creditor then the judge will sign a court order saying that the borrower definitely owes a certain amount of money to the creditor. This is called a judgement.

A judgment collects interest each year for as long as it is valid, or alive. In SC, judgements exist for 10 years from the date they are entered, or filed at the courthouse, and then expire. In NC, they last for 10 years but can be renewed for 10 more. Actually, a borrower could get a judgement against him in NC for 20 years and THEN it could be moved to SC and be alive for another 10 years, for a total of 30 years! Judgements are liens on any real estate in the county in which they are filed. They can be moved from county to county, state to state, and country to country.

The reason you want a judgement if you are a creditor is that you then use it as a tool to get your money. In some states you can take a person’s wages. This is called garnishment and you cannot do that in SC, unless it is for certain things like child support or taxes. You can garnish wages in NC, but it is a complicated process and is not done extremely often. Creditors also can get the sheriff to sell land or houses if they have a judgement lien filed against them. If the borrower has cars, bank accounts, or other valuable property, someone who has a judgement against the borrower can sell these items or collect his money through the sheriff’s office. This is called executing a judgement.

Creditors also can bring special proceedings if they have a judgement. This is where a creditor makes a person against whom he has a judgment appear in front of a judge and testify and prove what assets the borrower has so the creditor can see if it is worth his trouble to keep going after the borrower’s assets.

Exemptions are important because they say what assets a creditor CANNOT take from a debtor when he is trying to collect a debt. They are important in bankruptcy because if a debtor files a chapter 7 bankruptcy, the chapter 7 bankruptcy trustee cannot sell any of the debtor’s assets which are listed in the bankruptcy paperwork as being exempt. Normally, a debtor claims the exemptions of the state in which he files bankruptcy. However, the new bankruptcy law, which took effect in October 2005, complicates this in that a debtor now has to look back to where the debtor has lived for the 2 years previous to the filing date and, to oversimplify it, the debtor is to claim the exemptions of the state in which he lived during that time frame if that state’s exemptions are applicable.

The previous oversimplified statement is not exactly correct, and you should have an experienced attorney specifically tell you what exemptions you may claim. A very common mistake people make when they handle their own bankruptcies is that they do not claim any exemptions at all, which means that the chapter 7 bankruptcy trustee may take everything the debtor owns and sell it, giving the debtor nothing from the sale proceeds.

A brief and incomplete summary of the SC and NC exemptions is as follows:

In SC a debtor may protect $50,000 (new amount, as of 5/06) of equity in his residence or $1000 cash. A debtor also can protect $1200 of equity in one car, all of his ERISA -qualified retirement plan and IRA’s, all of his cash value of life insurance in most circumstances, $2500 of equity in his ordinary household goods, and $750 of tools of trade. This is for one person, so a married couple filing bankruptcy can protect double this. One can see that most people’s assets would be well protected.

There is an effort afoot to amend the exemption statute to raise the the non-Homestead provisions of the exemption statute and bring it from the 1982 cost of living when it was first passed into the 21st century. Hopefully, that effort will be successful. 

In NC you can protect $18,500 of equity in a debtor’s residence but if a debtor does not have $18,500 equity, then he can use the difference between what he has and $18,500 to protect some other asset. This is called a wild card. A debtor also can protect $1500 equity in a car, cash value life insurance, and ERISA-qualified retirement plans and IRA’s. Again, for a married couple filing a joint bankruptcy, the exemptions are double. These also adequately protect most people filing bankruptcy.

 

A major difference in the non-bankruptcy use of exemptions  in NC and SC is that, in SC you have the exemptions as a matter of right. This means that if someone sues you, gets a judgement and tries to collect it, then the sheriff cannot sell your exempt property. In NC, however, you are sent a notice to CLAIM your exemptions which looks like any other ole’ legal paper to most people. If you do NOT fill out the form in a timely fashion when you get it, YOU DO NOT HAVE ANY EXEMPTIONS. This is a very costly mistake.