Demystifying Debt Collection: Understanding Exempt Income and Property

Exempt Property: This article explains what happens to debts that you are unable to pay off as well as what types of income are shielded from creditors.

You may be “judgment proof,” but you still can owe money to a creditor. Learn what a creditor can and cannot take from you. Even if you don’t have many assets, you could still face repercussions if a judge orders you to pay someone money.

If you owe a lot of debts and can’t pay them, you might have considered filing for bankruptcy. Before you do, you should find out if you are “judgment proof. ” If you are judgment-proof, bankruptcy may not be the best solution to your debt problems.

In the realm of personal finance, navigating debt collection can be daunting. However, knowledge empowers you to protect yourself and ensure your financial well-being. This article explores the idea of exempt property and income, which protects you from claims by creditors.

What Does Exempt Mean in Debt Collection?

State and federal laws designate specific income and property as exempt from debt collection. This implies that creditors cannot compel you to utilize exempt assets to settle your debts. Understanding these exemptions can significantly impact your financial security and peace of mind

Exempt Income: Safeguarding Your Earnings

Several income sources are shielded from creditors’ attempts to collect debts. These include:

Public Assistance (PA): Financial aid provided to low-income individuals and families.
Supplemental Security Income (SSI): Federal income supplement program for low-income seniors, adults, and children with disabilities.
Social Security: Retirement, disability, and survivor benefits.
Social Security Disability (SSD): Income for individuals unable to work due to a disability.
Veterans benefits (VA): Financial assistance provided to veterans and their dependents.
Child Support: Court-ordered payments for child care expenses.
Spousal Maintenance: Court-ordered payments for a former spouse’s financial support.
Workers Compensation: Benefits for employees injured on the job.
Unemployment Insurance: Temporary financial assistance for individuals who have lost their jobs through no fault of their own.
COVID-19 Emergency Relief Payments: Financial aid provided to families and individuals during the pandemic.
Railroad Retirement Benefits: Retirement and disability benefits for railroad workers.
Black Lung Benefits: Compensation for coal miners suffering from black lung disease.

Retirement Funds: Your nest egg is also largely protected from creditors, including:

Public and Private Pensions: Retirement income plans sponsored by employers or government agencies.
Retirement Savings Accounts: 401(k), 403(b), and Individual Retirement Accounts (IRA) are shielded, offering peace of mind for your future.
Private Trusts: The principal and a significant portion of distributions from private trusts are exempt.

Earned Income: A portion of your wages is also protected from garnishment for private debts, such as credit card bills and personal loans. This protection varies based on your income level. If you receive PA or SSI, all your earned income is exempt. Otherwise, the following rules apply:

Income below 30 times the minimum wage per week (after taxes) is entirely exempt. As of January 1, 2024, the NYC minimum wage is $16.00 per hour, translating to a weekly exemption limit of $480.00*.
Income exceeding $480.00 per week*: 90% of gross income or 75% of disposable income, whichever is higher, is exempt.

Important Note: These exemptions apply to private debts. Child support, taxes, and government student loans have different collection rules. Additionally, under New York State law, health care providers cannot garnish your wages for medical debt.

Recent Paychecks: If all the money in your bank account comes from recent paychecks, you should be safe even if it’s frozen. 90% of income earned within the last 60 days is exempt from debt collection when it comes to shopping.

Exempt Property: Shielding Your Belongings

Beyond income, specific personal property is also exempt from creditors’ claims, including:

Household Goods: Furniture, clothing, appliances essential for daily living.
Medical Equipment: Wheelchairs, prosthetics, and other necessary medical devices.
One Television, Radio, Computer, and Cell Phone: Essential communication and information tools.
Personal Items: Jewelry, art, and other belongings, with a value limit of $1,000.
Work-Related Items: Tools of the trade up to $3,000 in value.
$1,000 in Personal Property or Cash: If you’re not claiming a homestead exemption.

Vehicles and Debt Collection

While your car can be seized to satisfy a private debt, there are exemptions:

Equity below $4,000: If the difference between your car’s value and outstanding loan amount is less than $4,000, it’s exempt. For instance, a $10,000 car with an $8,000 loan is entirely exempt.
Cars for People with Disabilities: Vehicles modified for disability use are exempt up to $10,000.

The “Judgment Proof” Status: When You Owe, but Can’t Be Forced to Pay

If your income consists solely of exempt funds and you lack significant assets, you might be considered “judgment proof.” This means creditors cannot collect from you, even with a court judgment as all your resources are protected by law.

However, remember that judgments still have consequences. They can impact your credit score and limit future borrowing options. It’s always advisable to avoid judgments if possible.

Protecting Yourself: Practical Tips

Here are some steps to safeguard your exempt income and property:

Send a Cease Letter: If contacted about a debt you can’t or won’t pay, send a cease letter instructing the collector to stop contacting you and explaining your exempt status.
Inform Your Bank: Notify your bank of exempt funds in your account to prevent freezing.
Respond to Summons: Don’t ignore court summons. Contact the NYC Financial Justice Hotline for guidance.

Remember: Your Exempt Funds Are Protected

Your exempt income is protected even after it is deposited into a bank account, even if you are the subject of a judgment. For optimal protection, aim for direct deposit and keep your balance under $3,425 for benefits and $3,840 for earned income.

If your exempt funds are frozen, contact the debt collector and demand immediate release. The NYC Financial Justice Hotline can assist if needed.

Tax Refunds and Debt Collection: An Exception

It’s important to note that tax refunds are not exempt from debt collection. They can be seized to satisfy outstanding debts.

Additional Resources: Empowering Yourself

For further information and support, explore these valuable resources:

Debt Collection Basics: Understand your rights under the Fair Debt Collection Practices Act (FDCPA).
Disputing the Debt: Learn how to challenge the validity of a debt.
Recognizing Debt Collection Abuse: Identify and report unfair debt collection practices.
Negotiating with Debt Collectors: Explore strategies for settling debts with collectors.
Frozen Bank Accounts: Get help if your bank account has been frozen due to a judgment.

Remember, knowledge is power. By understanding exempt income and property, you can navigate debt collection with greater confidence and protect your financial well-being.

What property is safe from creditors?

Exempt property includes most of what you need to live:

household goods, with a maximum of $60,000 for a family and $30,000 for an individual
Vehicles, one for each licensed driver in the house.
Your farm, up to 10 acres of urban property (for a single person or a family), and up to 100 acres or 200 acres of rural property (for a single person or a family) NOTE: Your homestead may be foreclosed upon if you fall behind on your mortgage, property taxes, or home equity payments. Avoid using a home equity loan to settle medical expenses or credit card debts since you risk losing your house if you don’t make the equity loan payments on time.
Additional exempt property, such as two guns, tools for your trade, athletic gear, bicycles, two horses, twelve head of cattle, and other things

What kinds of income are safe from creditors?

The law protects certain kinds of income from the claims of creditors. If your income is from a protected source, it is exempt from claims of creditors. Examples of exempt income are:

Social Security or Social Security Disability Income
Veteran’s benefits
Public assistance (welfare) benefits
Retirement benefits
Worker’s Compensation and vocational rehabilitation benefits
Unemployment benefits
Court ordered child support and spousal support

What income is exempt from creditors? Attorney James Giardina explains.

FAQ

What money Cannot be garnished?

In addition to federally and state-provided assistance, things like child support payments, student loans, workers compensation and pension funds are also exempt. If you have less than two months’ worth of certain benefits in your account, these are automatically exempted.

What type of bank accounts Cannot be garnished?

Retirement accounts like 401ks and IRAs have special protection from creditors and debt collectors. Under federal law, 401ks and other ERISA-qualified plans cannot be garnished by creditors. IRAs also receive protection up to $1 million (adjusted for inflation) under federal bankruptcy law.

Why seniors should not worry about old debts?

Many seniors are “judgment proof,” which means their income is derived from retirement, Social Security, or other accounts that can’t be garnished. Debt collectors may not bother to take seniors in this situation to court, since they’re unlikely to get the money that way.

Can a creditor take all the money in your bank account?

Yes, a debt collector can take money that you owe them directly from your bank account, but they have to win a lawsuit first. This is known as garnishing. The debt collector would warn you before they begin a lawsuit.

What income is exempt from claims of creditors?

The law protects certain kinds of income from the claims of creditors. If your income is from a protected source, it is exempt from claims of creditors. Examples of exempt income are: Warning : Do not mix exempt income in a bank account with other money (for example, a spouse’s earnings), or it is no longer protected.

Do you own property if you are exempt from creditors?

You do not own anything of great value aside from exempt property like your homestead, a vehicle, household items and tools of your trade. Your income is from a protected (exempt) source. What kinds of income are safe from creditors?

Can a creditor seize a property that is partially exempt?

Property is partially exempt if its value exceeds the amount protected by the exemption. A creditor can seize and sell an asset that is only partially exempt if the creditor pays you the value of your exemption. What Are Exemptions? All states have designated certain property types as “exempt,” or free from seizure, by judgment creditors.

What types of income can be protected from judgment creditors?

Like Social Security, many other types of income you may receive are protected (“exempt”) from being taken by judgment creditors. Unpaid commissions for services performed ( up to $12,500 for a single person or $25,000 for a family). In addition to the above benefits, a few other types of savings accounts and money can be protected, such as: