The Misconception of Liquidation; Exemptions
One of the most common misconceptions we encounter from prospective bankruptcy clients is the notion that if they file bankruptcy, all their possessions will be taken away. Quite the opposite: most of our bankruptcy clients keep all of their possessions and lose only one thing: debt. The reason for this is the protections afforded debtor under the law of exemptions. In North Carolina, debtors (whether in or outside of bankruptcy) are entitled to protect certain ordinary property.1
Generally speaking, many would consider North Carolina to be fairly “Debtor-friendly”, because of three (3) reasons: first, we recognize tenancy-by-entireties (“TbE”), second, North Carolina does not allow wage garnishment except in rare circumstances, and three, North Carolina exemptions are pretty lofty.
Regarding wage garnishment, Debtors are often surprised and excited to hear that North Carolina is one of the few states in the United States that generally does not allow wage garnishment. Therefore, debtors do not have to worry about a creditor getting a judgment in state court and then going to their employers and demanding that their paycheck be garnished for the payment of that debt. Typical consumer creditors, such as credit cards personal loans, and medical debts, are not allowed to garnish wages. There are, however, a few exceptions to this rule. For instance, your wages can be garnished in North Carolina for specific creditors such as the IRS, North Carolina Department of Revenue, and student loans. Another exception to that general rule is when your employer is from another state that allows wage garnishment. Thus, if you work in North Carolina for a company that has its home office located in another state then your wages may be subject to that state’s laws and if that state allows wage garnishment, then there is a chance that the creditor could garnish your wages.
Regarding TbE (tenancy-by-entireties), a judgment against only one debtor is an automatic lien against any real property that the debtor owns, UNLESS the real property is titled in the name of the debtor and their spouse, as ‘husband and wife’. PLEASE NOTE: Tenants by the Entireties ownership is only applicable to real property (aka ‘dirt’) in North Carolina; personal property (defined as anything NOT real property) is not protected under this type of ownership. In essence, the debts of one cannot attach to the real property of the marriage. Whether in bankruptcy or outside bankruptcy, if the real property is held jointly by husband & wife and there is no “husband & wife” unsecured debt, the real property is immune to liquidation, regardless of the amount of equity.
As to the latter, Debtors may exempt from the bankruptcy estate aka protect from the bankruptcy Trustee’s liquidation an amount of equity in certain properties.
Under North Carolina law, a judgment debtor may currently (2014) exempt as follows:
SELECT NC EXEMPTIONS (N.C.G.S. §1C-1601)
- Residence (“Homestead Exemption”): $35,000.00 equity per individual debtor, $70,000.00 for joint debtors (Equity= Current value minus loan payoff)
- Automobile: $3,500.00 equity
- Wildcard: $5,000.00 per debtor (only to the extent the Homestead exemption, supra, is not fully used)
- Household Goods: $5,000.00 per debtor, plus $1000.00 for each dependent not to exceed $4000.00 total for dependents
- Tools of the trade: $2,000.00
- Life Insurance (beneficiary: spouse and/or dependents)- may be 100% exempt
- IRA, Pension & 401k- may be 100% exempt
- Earnings in the last 60 days necessary for support of family
As a result of these exemptions and TbE property rights, many judgment debtors are “judgment proof” and thus, creditors are unable to collect on the debts. One saving point is that a judgment in North Carolina is enforceable for ten (10) years and in fact, can be renewed for an additional ten (10) years thereafter. Therefore, a creditor should always try to ascertain whether or not a debtor has un-exempt assets before spending significant litigation fees to simply end up holding a worthless, uncollectible judgment.
Arnold & Smith, PLLC has experienced attorneys in the field of creditor and debtor relations and can help navigate the process for you. If you would like to set up a consultation with one of our attorneys, please and not hesitate to contact us. We look forward to assisting you.