Hide & Go Seek?
Even in the most dire financial circumstances involving unpaid debts and back taxes, we as Americans enjoy a safety net of rights and protections. These rights and protections ensure not just fair and equitable treatment under the law, but guarantee us our constitutional freedoms of life, liberty and the pursuit of happiness. In other words, it is unreasonable to expect a person to retire outstanding debts without some very basic necessities. In the world of commercial debt and debt collection, these are appropriately titled “Exemptions.”
While taxpayers will go to great lengths to “shelter” their financial assets from taxation, exemptions are essentially assets that are already sheltered for you. Specifically, “Exempt” Property is property that the Sheriff cannot take.
If a creditor obtains a judgment against your business, he has the option to send the Sheriff to your place of business to begin the collections process. This is a tenuous situation, particularly for those personally named in a judgment along with the business. Customers or clients may become aware of your financial predicament and the subsequent fallout is often irreparable. When this happens, we are frequently asked, “What can they take from my business?”
Obviously, the best solution is prevention of a collection action (see our white paper titled “Warning Signs”). If you and your business are ever faced with this situation, it is important to know what qualifies as Exempt Property. Moreover, it is critical to know what qualifies as Exempt Property in your state. Exemptions vary state to state. Most likely, the judgment creditor will require assets to be disclosed through a legal proceeding after judgment is secured.
Knowing the state exemptions beforehand, therefore, leaves you better prepared to respond – while maintaining the peace of mind knowing what property is “off limits” for collections.
The law allows the defendant of a judgment to keep certain property, which is called Exempt Property. Before the clerk can issue a writ of execution, the defendant must be served with a Notice of Right to Have Exemptions Designated.
Important: Exemption forms are delivered by Sheriff and/or certified and regular mail. Refusal to accept a certified letter generally does not relieve the recipient from the proceedings. Therefore, it is essential that you open and read all your mail, especially when you are facing financial challenges, including outstanding balances in arrears. Discarding your only notification that you have a problem won’t be taken into consideration as a valid defense and the outcome will likely be unfavorable and irreversible.
After receiving the exemption forms, the defendant typically has 20 – 30 days (depending on the state) to fill out the Motion to Claim Exempt Property, mail or deliver it to the clerk’s office, and send a copy to the plaintiff’s lawyer. If a defendant does not return the form in the designated period, the right to claim exemptions is waived.
The laws of each state determine what property is exempt or how much property is exempt. For instance, a primary (homesteaded) residence in Florida may be fully exempt, while a North Carolina residence is exempt up to $35,000 in equity. Furthermore, each state can also elect to abide by federal exemptions criteria normally reserved in bankruptcy proceedings. Although there may be similarities from state to state, there is a significant enough difference to make it important to check specific state regulations to determine what exemptions are available.
FEDERAL EXEMPTION STATES
The following states allow Federal Exemptions:
For each state, statutory exemptions are based on different types of property. In some cases, the type of property is totally exempt and in others, limits are set for the amount of each type of property that can be exempt. (In addition to the exemptions described here, there are other state and federal exemptions, such as 60 days worth of Social Security benefits, unemployment benefits, workers’ compensation benefits, and earnings for personal services.)
If you really want to know where you stand, you can look at all your asset categories, including partner owned, mortgaged or otherwise collateralized assets and their present equity value to your business. Exemption limits are based on the “equity value” of interest in each item of property. To determine equity value in an item, follow these steps:
1. Determine the fair market value of owner interest in the item. “Fair market value” means what the item could sell for (at the flea market, for example). If the item is co-owned with someone else, only the fair market value of the defendant’s share of the property is counted.
2. Determine the amount owed (lien pay-off) to each creditor who has a security interest in the item.
3. Subtract #2 from #1.
Example: A truck that has a value of $5,000 with a $3,000 loan balance. That leaves $2,000 equity value in the truck.
Since every state allows different exemptions, we will outline the general areas for exemptions without providing specific details for each state. For questions on exempt property in a specific state, research “exempt property” for your state of residence.
EXEMPT PROPERTY CATEGORIES
• Residence: this may include land, house, mobile home or other property used as a residence, or burial plots. (Additional protections may apply to real property or mobile homes owned by married persons and unmarried persons who are 65 years of age or older).
• Household Items: including clothes, household furnishings and goods, appliances, books, animals, crops, and musical instruments which are used primarily for personal, family, or household use.
• Automobile: one per individual seeking exempt property
• Healthcare financial aid necessary to work or sustain health.
• Work/Trade Items: includes books, tools, or other implements used in the tradeoff a debtor or dependent of the debtor.
• Life Insurance policies listing a spouse and/or children as beneficiaries.
• Compensation for personal injury or for the death of a person depended upon for support (unless the judgment is for services related to the compensated injury).
• Individual retirement accounts, including individual retirement annuities and Roth retirement accounts or other state or governmental retirement accounts.
• Alimony, support, separate maintenance, and child support payments necessary for support.
• College savings plans under certain conditions.
• Other items specific to the state: as mentioned earlier, every state allows different exemptions so there may be others not listed above.
PROPERTY NOT EXEMPT
• All of property, for failure to claim exemptions on time!
• The value of property in excess of the exemption amounts allowed.
• Claims of the Federal Government or its agencies, to the extent that federal law so provides.
• Claims of the State or its subdivisions for taxes, appearance bonds, or fiduciary bonds.
• Claims for liens placed by law against specific property.
• If a creditor takes a security interest in connection with the purchase of an item, the item is not exempt from a judgment for the property by that creditor.
• Orders for child support, alimony, or property distribution related to divorce or alimony.
• Judgments against corporations.
PROTECTING EXEMPTION RIGHTS
1. Notify the Clerk of Court and judgment creditor(s) of a change addresses after a judgment is entered. In the event personal service cannot be made by the Sheriff or certified mail, service of the exemption notice can be made by regular mail to the “last known” address, whether or not actually received.
2. Carefully read all mail and Court notices received. Time limits for claiming exemptions begins on the day after the exemption notice is served.
3. Read and follow the instructions stated on the Motion form. Complete each section of the Motion. Make sure to list all property, including shares of property owned with others. Attach additional pages if necessary. Values should be based on what is reasonably believed the item could sell for, at a flea market, for example. If an item has no equity value (see above), list the item with a “$0″ value.
4. Make sure to follow instructions at the end of the Motion for signing, dating, and serving the Motion. One copy of the Motion must be filed with the Court, and a copy must also be sent to the creditor – all within the court mandated time limit.
Another Important Note About Protecting Your Exemption Rights
Past history has proven that defendants failing to fully disclose or “hiding” assets, be they exempt or non-exempt, subject themselves to intense scrutiny and possible legal repercussions above and beyond the collection action. First, a plaintiff discovering the existence of a previously undisclosed, non-exempt asset will immediately become suspicious of the defendant’s intentions and consider the probability that other non-exempt assets exist. With assistance from any attorney, the plaintiff will redouble efforts to identify further assets, which could even include passing along the cost of locating them. Second, deceptive tactics contradict goodwill and compromises, if not outright eliminates any opportunity for a negotiated settlement that my reduce the amount of money collected.
If a business has a judgment against it and the owner is forced to reveal assets, it is imperative to know and understand property exemptions in that particular state. This means knowing what, if anything, is at risk and how to properly protect exempt assets.
Furthermore, it is not too late to seek assistance. It is always possible to reach a positive settlement with the creditor that will put a company in a position to be successful again – even if the collection action is in progress!
If a sheriff has been out to visit your business or you are faced with revealing assets, the staff at Emerge180 is experienced in responding to these situations. Your initial consultation is always free of charge, your results are always guaranteed and your information is always confidential.