Exempt Assets: Domestic Lawsuits And Their Impact

Exempt assets are protected assets that cannot be taken away by a court order or creditors to satisfy debts, even if you are sued or declare bankruptcy. These include Individual Retirement Accounts (IRAs), child support and alimony, workers' compensation benefits, and cash in checking or savings accounts.

In the US, federal law provides for asset exemptions in bankruptcy, but each state has its own exemption laws. For example, Florida has opted out of federal exemptions and applies its own, which include homestead property, retirement accounts, annuities and life insurance proceeds, and head of household wages.

On the other hand, non-exempt assets are unprotected and can be seized and liquidated by creditors in the event of bankruptcy or a lawsuit. These include non-retirement account investments, stocks, bonds, mutual fund investments, and money in bank accounts.

Retirement accounts

The protection offered by ERISA is because these accounts are technically not owned by you but by your plan administrator. This distinction makes it difficult for creditors to access these funds directly. However, individual retirement accounts (IRAs) that you fund yourself don't have the same level of protection and may be exposed depending on the state you live in. For example, in California, IRAs are protected only up to the amount deemed necessary for reasonable support for you, your spouse, and dependents upon retirement.

Additionally, the federal bankruptcy exemption limit for IRAs and Roth IRAs is currently $1,512,350. This means that retirement accounts that are exempt from taxation are fully exempt in bankruptcy up to this limit.

It's also worth noting that inherited IRAs may not have the same level of protection as traditional retirement accounts. For instance, in 2014, the U.S. Supreme Court decided that inherited IRAs would no longer be sheltered if the inheritor files for bankruptcy, except for IRAs inherited from a spouse.

Overall, while retirement accounts are generally protected from lawsuits, there are certain situations and types of accounts that may be exempt from this protection. It's always best to consult with an attorney to understand the specific laws and protections that apply to your retirement accounts.

Homestead exemption

A homestead exemption is a legal provision that protects a primary residence from some creditors following the death of a homeowner’s spouse or the declaration of bankruptcy. It also minimises property taxes for homeowners. The exemption only applies to one’s primary residence.

The majority of U.S. states have homestead exemptions, but the rules and protection limits vary. For example, in Florida, there is unlimited homestead protection, whereas in Texas, the limit for protection from creditors is $550,000.

The homestead exemption is not available to protect the equity in investment or rental properties. It also does not prevent or stop a bank foreclosure if the homeowner defaults on their mortgage.

To qualify for a homestead exemption, individuals must apply for a homestead property tax exemption, citing their primary residence. The property must be occupied by the individual as their permanent residence.

In addition to the standard homestead exemption, some states offer increased exemptions for individuals over a certain age, disabled veterans, and the surviving spouses of U.S. service members or peace officers/firefighters killed in the line of duty.

Personal property exemption

Personal property includes items such as your car, furniture, computers, phones, and even pets. There is often no significant exemption for personal property, and aggressive creditors could seek to seize these assets for public sale. However, some personal property is exempt from creditors. Medical devices used to treat a diagnosed condition are usually exempt, and this can even apply to vehicles such as vans that have been modified for health reasons.

In Florida, for example, $1,000 of personal property value is protected from creditors, or $4,000 if you do not own a home. In addition, certain generic exemptions are protected, such as health aids, medical savings accounts, and unemployment benefits.

Federal bankruptcy exemptions also protect personal property, including $4,450 for a motor vehicle, $1,875 for jewellery, and $700 per individual item, with a $14,875 aggregate value on household goods, furnishings, appliances, clothes, books, animals, crops, and musical instruments.

It is important to note that once a lawsuit has been filed, you cannot protect your assets, as a judge may rule that you are attempting to commit fraud.

Motor vehicles

Exempt Assets

Exempt assets are protected assets that cannot be taken away by a court order or creditors to satisfy debts, even if you are sued or declare bankruptcy. These assets are specified by both federal and state law. Examples of exempt assets include Individual Retirement Accounts (IRAs), child support and alimony, workers' compensation benefits, and cash in checking or savings accounts.

Non-Exempt Assets

Non-exempt assets, on the other hand, are unprotected and can be seized and liquidated by creditors in the event of bankruptcy or a lawsuit. Examples of non-exempt assets include non-retirement account investments, stocks, bonds, mutual fund investments, and money in your bank accounts.

Protecting Your Motor Vehicle

To protect your motor vehicle from creditors in the event of a lawsuit, you can consider the following strategies:

• Asset Protection Trusts (APTs): These are affordable trusts that can protect your assets from creditors, lawsuits, and other legal actions. The trustees manage and distribute the assets according to the terms of the trust.
• Family Limited Partnerships (FLPs): A legal entity created by a family to hold and manage their assets. Each family member has a share of the profits and losses, while one or more general partners manage the partnership.
• Limited Liability Companies (LLCs): LLCs offer personal asset protection and limit the personal liability of their members for debts. Creditors can typically only go after the LLC's assets, not the members' personal assets.
• Retirement Accounts: Retirement accounts like 401(k)s and IRAs are often protected from creditors. The Federal Employee Retirement Income Security Act (ERISA) specifically exempts employer-sponsored retirement plans.
• Insurance Policies: Umbrella, malpractice, auto insurance, and life insurance policies can provide additional protection for your assets.

It is important to note that no single legal strategy can guarantee the safety of your assets. A combination of strategies, such as an asset protection trust and an umbrella insurance policy, may be more effective.

Motor Vehicle Exemption in Bankruptcy

If you file for bankruptcy, you may still be able to keep your car by using a motor vehicle exemption. This exemption protects at least some of the equity in your car. The amount of the exemption varies by state, and you will need to compare it to the equity in your car. The fair market value of the car, based on its age and condition, is used to determine its equity.

If the motor vehicle exemption covers all of the equity in your car, you can use it to keep the vehicle during bankruptcy. However, if you have equity left over after applying the exemption, this non-exempt asset must be surrendered to the trustee under Chapter 7 bankruptcy. They will sell your car, pay off any loans, and reimburse you for the exemption amount. Any remaining proceeds will be used to pay your unsecured debts.

In some cases, especially if you have a substantial car loan, the trustee may not find it worthwhile to sell the car. Additionally, debtors may be able to negotiate with the trustee to buy the vehicle from the bankruptcy estate.

If you file under Chapter 13 bankruptcy, you do not need to worry about losing your car as you will keep your property while repaying your debts under a repayment plan. However, any equity in your car that is not covered by the exemption will be included in your monthly payments.

Wildcard Exemptions

Many states have wildcard exemptions that protect a certain amount of value in any type of property. You may be able to protect your car entirely by combining the wildcard exemption with the specific motor vehicle exemption. For example, if you do not need the full value of a homestead exemption, you may be able to apply the remainder to your car.

Keeping Your Vehicle Under a Car Loan

If you have missed payments on your car loan, you may lose your car to the lender, regardless of the motor vehicle exemption. To prevent repossession, you can redeem the vehicle by paying its fair market value to the lender, although this may not be feasible for everyone. Another option is to negotiate a reaffirmation agreement with your lender, creating a new loan that continues past the bankruptcy.

Wages

On the other hand, non-exempt wages are unprotected and can be seized and liquidated by creditors in the event of bankruptcy or a lawsuit. For example, non-exempt assets include non-retirement account investments, stocks, bonds, mutual fund investments, and money in bank accounts.

It is important to note that the classification of exempt vs. non-exempt wages can vary depending on the specific circumstances and the laws of the state in which the wage earner resides. Additionally, wage and hour laws are subject to change, so it is crucial to stay informed about the current legislation.

Frequently asked questions