Creditor Judgments and Exemptions

Exempt property is property that a creditor cannot seize in order to satisfy a judgment. Depending upon the state in which you live, certain property is exempt from creditors, including judgment creditors and, in some cases, even the Internal Revenue Service.

You should be aware of and understand your particular state's exemption laws to determine exactly what property can and cannot be taken from you for the payment of debts. State exemptions typically include your homestead (most states allow a certain portion of your equity to be exempt), a specified portion of your wages, pension and unemployment benefits, public assistance and insurance benefits, tools that you need for your business, and a certain amount of personal property. Keep in mind, however, that property named as collateral for a loan is not exempt up to the amount of the loan, even though your state may list such property as a legal exemption.

In calculating the extent to which any property you that have is exempt from creditors, be sure to determine whether the property is owned by you alone or jointly with your spouse, and whether you live in a state whose laws prohibit joint property from being taken for the debt of only one spouse. You must also consider the extent to which you actually own your property; in other words, any liens and equity associated with the possessions must be taken into account. Liens will be present for any loan made to you for which the purchased property was named as collateral (such as a mortgage or car loan). They can also be attached to your property by law (such as contractor's liens), or from judgments entered against you by a court. Equity is the amount of money that would be left over to you if your property were sold and the loans against it paid off. If not exempt, this money would then be available for you to pay other creditors.

If you have assets that are secured, you must remember that the creditor can take the property for payment of the debt. If the property is valuable, and little is owed on your loan, you might want to sell the possession yourself and pay the creditor directly, then use the balance to pay off other debts that you may have. If you have little or no equity in the property (in other words, the balance due on the loan equals or exceeds the property's value), consider selling it and asking the creditor to accept the buyer as a new borrower, thereby releasing you from your financial obligation (unless, of course, the buyer pays cash). If the creditor initiates steps to repossess the property, any costs, including attorney's fees, may be added to the amount that you already owe.

If you're expecting a judgment to be entered against you in the near future, it's very important to remember this: before transferring any property in order to avoid the judgment creditor, contact an attorney. Any transfer may be attacked by the creditor as a fraudulent conveyance, which is the illegal transfer of property for the sole purpose of hindering or defrauding a creditor. The same holds true if you're considering filing for bankruptcy; a property transfer could be set aside by the court as a preference (in other words, the right of the creditor to receive payment is upheld as a priority). Proper planning to protect your assets should always include sound legal advice.


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