Property in North Carolina Safe From Creditors
In North Carolina, and every state, there are particular assets that the government has protected from creditors who are attempting to collect on a debt or through bankruptcy. These are called exempt property. There are various reasons why each exemption was enacted, but since they exist, they are an excellent tool for everyday people to keep in mind before a collection agency or creditor starts calling.
In this article, I will go through each exemption listed in the North Carolina General Statutes, those listed in the North Carolina Constitution and the allowable nonbankruptcy federal exemptions, and I will explain what these mean to you. This article will also cover any exceptions to the rules of creditor exemptions.
The homestead exemption is arguably one of the most important exemptions because it protects the “American Dream” of home ownership. This exemption amount is for $35,000 individually or $65,000 if the debtor is over 65 and has a deceased spouse who owned half of the property as tenants by the entirety or joint tenants with rights of survivorship. Alternatively, a debtor is allowed up to a $5,000 exemption on any property if that amount remains unused as a homestead exemption. Put another way, a debtor may use $30,000 as a homestead exemption and $5,000 on any other property.
What is unfortunate about the homestead exemption is it doesn’t actually protect the home. It merely protects the value you have in your home. For instance, if you have a $120,000 home and a creditor seeks to collect against your home, she may force a foreclosure to satisfy the debt. You would receive the first $35,000 from the foreclosure, your creditor would receive her portion that is owed to her, and anything remaining will go back to you. If there isn’t enough remaining to cover what she is owed, she may attempt to collect against another asset or assets of yours.
Imagine another scenario: This time, you have a $120,000 house, but you have a $90,000 mortgage. If a creditor, besides your mortgagee, attempts to foreclose on your house, they won’t be able to because there is no available equity. If you only owed $80,000 on that same mortgage, your other creditor could force a foreclosure and you’d receive the first $35,000, the mortgage would likely remain on the house (or the mortgagee would receive her share), and the unsecured creditor would receive $5,000 minus whatever costs and fees of the foreclosure. If you haven’t followed so far, I’m illustrating how beneficial a friendly mortgage is, and if you’re in debt to one person severely enough to get foreclosed on, chances are you will have significant mortgages as well. It is more the mortgage than it is the exemption that protects your home.
This homestead exemption will never protect you from someone who has a lien, or mortgage, on your house, nor will you be protected if you voluntarily agree to sell the house to pay a debt but change your mind later. Keep in mind that liens can be automatically attached if you have repairs done and don’t pay the repairman, or have construction done on the house and don’t pay the company you hired to do the construction.
A debtor is allowed to exempt $3,500 in value ion one motor vehicle. This works exactly like the homestead exemption. If you have a $3,500 car, you’re safe. If you have a $20,000 car with an $18,000 lien on it, you’re safe from everyone except the lien holder. If you have a $20,000 car with a $16,000 lien on it, you may be in trouble; however, there are other exemptions you may be able to apply for your car as well, like the tools of the trade exemption or the remainder in the homestead exemption. This is where some exemption planning can come into play. Once you read through the rest of this article, you’ll be able to make better decisions on how you’ll want to apply your exemptions and how you’ll store your assets. Most importantly, if a creditor calls and asks for a lien on your house to show good faith that you’ll pay, just say no. Even if you think you’ll be able to pay, if something bad happens and you no longer can, they’ll likely be able to take the house without leaving you with the exemption.
A debtor is allowed $5,000 plus $1,000 for each dependent for household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments that are used primarily for personal, family or household use. This exemption cannot exceed $9,000, so you’re only allowed to add on 4 dependents. It is very unlikely to have alien on your personal belongings, so you cannot employ the same strategy as you would for your house and car. You can always rent furnishings and appliances, even from a legitimate company you own. Also, many things you own, like family photos, carry no value, so they’ll either be excluded completely, or you may include them in your exemption without losing any of the exemption value.
With this exemption, a common problem is acknowledged, and that is on how to value these belongings. In bankruptcy, it is the duty of the trustee to figure that out, but when dealing with an individual creditor, it is more of a negotiation game, until a court decides otherwise. What I’m getting at is this is one exemption where you’re likely able to negotiate with the creditor to ensure your most important assets do not leave your hand. At the very worst, all your belongings will be auctioned off, and you’ll get a check between $5,000 and $9,000 depending on your dependent situation. You’ll be able to attend that auction and bid on anything you’d want to keep, bearing in mind some of that money is coming back to you.
Always remember, these are your exemptions, and you get to choose what it applies to. Don’t let the creditor strong arm you into giving up something you wanted to keep when you still have exemption value left.
Tools of the Trade
A debtor is able to exempt $2,000 worth of “implements, professional books, or tools of the trade.” This can include my shelf of legal books, a car, a laptop if used for work, a ladder for a roofer, and so much more. What this exemption does not included are items used for hobbies or items owned separately by your company. The hobby items will have to be included in the personal property exemption, unless you can demonstrate it is a legitimate business instead. The items owned by your company cannot be taken by your personal creditors. They may be able to take your ownership interest in the company, unless you’ve set it up properly. Furthermore, certain tools may have purchase money security interests or other liens on them that reduce their value. This enables you to have more items in your exemption than if they were at full value. This exemption, however, won’t protect you from those creditors who have the security interests on the tools.
Careful business planning can help prevent any of your tools from being taken by your creditors. This is partly why it is so important to ensure you’re not operating your business as a sole proprietorship.
Any health aids that are professional prescribed for the debtor or any dependants of the debtor are exempted regardless of value. This exemption is pretty straight forward, and it is needed because we don’t want creditors taking away wheelchairs or supplies needed for a person’s diabetes.
Loss of Life or Limb
Any amount of compensation for personal injury or wrongful death is exempted except from funeral, legal, medical, dental, hospital, and health charges relating to what gave rise to the compensation. The reason this exemption exists, and the reason I named it how I did, is because your body and your life can never be sold or taken to pay your debts in this country. The compensation you receive from personal injury or wrongful death suits is given to “make a person whole again,” as if money can do that. The monetary awards are not like winning a lottery because you gave up a part of you, or a person you were dependent upon was wrongfully taken from you.
North Carolina courts have held that exemptions under this section are limited to those meant to “compensate,” so any amount of punitive award would not be protected from creditors; however, disability insurance is protected. In re Ragan, 64 B.R. 384 (Bankr.E.D.N.C. 1986).
College Savings Plans
Debtors may exempt $25,000 in a college savings plan that qualifies under section 529 of the Internal Revenue Code, but any amount placed in the account within the prior 12 months is not included in this exemption unless those contributions are ordinary and systematically the same as contributions made prior to the 12 month period. The debtor must also show the funds are for a child of the debtor and the funds will actually be used for the child’s college or university expenses.
If your child’s college expenses are a great concern, and you want to ensure he or she cannot lose the opportunity because of a possible creditor down the road, you may want to consider using an irrevocable trust or some other asset protection strategy. Absent showing of a fraudulent transfer, you can protect assets intended for use by someone else fairly easily.
Alimony, Support, Maintenance, and Child Support
Any amount of alimony, support, separate maintenance and child support payments receive are exempted if “reasonably necessary for the support of the debtor or any dependent of the debtor.” The language is pretty clear on this one, and there aren’t any gimmicks to increase exemptions here.
North Carolina specifically exempts certain types of retirement accounts such as IRAs (408(a)), Roth IRAs (408A), Individual Retirement Annuities (408(b)) and retirement trusts described in IRC 408(c). This is an unlimited exemption and is extremely beneficial to ensure you never lose your nest egg to creditors.
Under Federal nonbankruptcy law, certain employer retirement accounts are also exempted so long as they’re ERISA qualified. You can ask your employer if your 401(k) or other employer sponsored retirement account qualifies under ERISA.
Additionally, any retirement benefits or plans of other states or government units that are exempt under that state or government unit are also exempt under North Carolina law.
Under North Carolina Statutory law, and within the North Carolina Constitution, certain life insurance policies are completely exempt from enforcement of the claims of creditors. So long as your spouse, or children, or both is to benefit from the policy, with no other beneficiaries, that insurance policy is exempt during the debtor’s lifetime. Because of the investment properties of some life insurance plans, the exemption can prove to be very beneficial to some people.
Commonly Owned Property
Here in North Carolina, a husband and wife may own property as tenancy by the entirety. In tenancy by the entirety, neither spouse may sell, lease, or mortgage the property without the written consent of the other. Because of this limitation, the creditors of one may not take the property to satisfy the debt of just one of them. Only if they jointly owe the debt to the creditor may the creditor enforce the debt against property held as tenancy in the entirety. Unfortunately, only real property may be held in this joint ownership form.
All other types of joint ownership in North Carolina may be severed and used to satisfy a debtor’s debt. I’m not saying there aren’t ways to protect real property otherwise, but not in a simple co-ownership scheme.
Property that is not owned by you, however, cannot be used to satisfy your debts unless your creditor can show that you fraudulently transferred those assets to defraud your creditors. Fraudulent transfer is a more complicated subject that will be covered in later articles; however, for now know that it is generally not fraudulent transfer if the transfer is made before you knew of the creditor, the transfer is made in the ordinary course of your property management, or the transfer is made for some legitimate reason besides asset protection, like estate planning or preparing to send your child to college.
Exceptions to the Exemptions
Unfortunately, nothing is certain except death, taxes and politicians making every rule overly complex. Here, we have a few exceptions to the previously mentioned exemptions. I’ll try to use the words “exceptions” and “exemptions” sparingly because they’re too similar, but note those are what they are properly referred to as.
Because it made the law, the government was able to carve out a piece for itself. Any amount unprotected under federal law or owed to North Carolina for taxes, appearance bonds, or fiduciary bonds can still be collected upon in any of your assets by the government entity you owe money to. For example, the IRS can repossess your house for backed taxes despite the exemption.
If you borrow money to buy a house, your creditor may use the full value of the house to satisfy only that loan. Similarly, if you borrow money to add on or repair your house, or you have a repair or improvement made on credit, those creditors may ignore the exemption on the house to ensure they get paid first. Notice, only the homestead exemption is limited for these creditors. If one chooses to try to collect against your car, you still have $3,500 in protected value on that car.
Along the same lines of the repairs or improvements to your house, if you have repairs or improvements made to your car, those creditors will have the full value of your car in which to seek enforcement of the debt. My car is worth $0 bluebook, so that may be a poor bargain for them.
If you offer anyone a lien on any of your assets, they will receive payment before you can claim your exemption. These liens include things like mortgages, liens on your car, your business, your jewelry, furniture, etc. Statutory liens are also included in this, such as tax liens.
Another category of creditors who you cannot use these exemptions to shield your assets from are creditors who you owe child support, alimony or distributive award. The final exception to these exemptions is for criminal restitution orders docketed as civil judgments.
The final final exception to these exemptions is if a judge tells you your assets are not exempt. There are many laws open to vast interpretation by the presiding judge, like fraudulent transfers, so there is some discretion in his hands when you’re before him. He may also make something qualify for an exemption that you wouldn’t have thought possible. Your lawyer will make the very best case for you if you end up in that position, but my hope is that you never have to end up in that position. I only share this knowledge so you’re better prepared in case the worst were to happen.
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