Law of Debtors and Creditors: 2005 Casebook Supplement 239
C. PROPERTY EXEMPT FROM SEIZURE
1. Introduction
If you have ever seen a cartoon of a skinny little guy who is broke and wearing only a barrel, you may have wondered why the creditors left the barrel. The law in every state makes at least some property exempt from execution and other legal process so that no debtor can be reduced to absolute destitution. The policy reasons include a desire to avoid results so draconian as to threaten the social fabric of the community (the same rationale forbids taking a pound of flesh). In addition, exemption policies also express a healthy dose of self-interest for those with assets. The concern that a creditor not leave the debtor with so little property that the debtor and the debtor's family will become a charge on the community means that exemption laws are often directed toward making certain that every debtor retains enough basic property to have a chance to get out of the hole and make a fresh start (applicants cannot go to most job interviews nude). Another policy reason for some property exemptions is that some items of personal property, such as clothes, have little resale value for the creditor, but are crucial to the debtor. Although the line between the two is fuzzy, the law distinguishes between seizing property to satisfy a debt and seizing property solely to inflict more pain on the debtor.
When property is defined as "exempt" under state law, general creditors cannot seize it to satisfy their judgments. But consensual agreements, such as mortgages on homes, security interests on cars, or pawnshop possession of jewelry, are not so constrained. As part of the granting of a security interest, the debtor waives the exemptions as to these creditors. This means they are entitled to seize the property for nonpayment of their outstanding loans even when the property is otherwise declared exempt. Note the neat divide among creditor groups: home mortgage lenders, car lenders, and pawnbrokers care little about the scope of exemption laws, while credit card issuers, health care providers, tort victims, and others who cannot get a security agreement in advance feel the teeth in the exemption statutes.
All property not listed as exempt is denominated non-exempt and will be sold by the trustee so that the proceeds can be distributed to the creditors. This is often the general unsecured creditor’s last chance to get paid.
2. A State/Federal System
Every state has exemption laws, although the amount of protection varies widely. Once a debtor files for bankruptcy, federal law pre-empts state collection efforts with the automatic stay, but the question about which property to declare as exempt becomes even sharper. After all, the deal in Chapter 7 is that the debtor will give up all non-exempt property. So what property will federal bankruptcy laws protect?
The 1898 Bankruptcy Act deferred to the states on exemption issues. This meant, for example, that a Texas debtor in bankruptcy could protect whatever a Texas debtor outside bankruptcy could protect, while a Delaware debtor in or out of bankruptcy could protect whatever property Delaware exempted. The fact that Texas and Delaware protected very different items or values was irrelevant.
When the bankruptcy laws were modernized in 1978, many experts believed that it was time to develop uniform national exemptions, but that proposal drew fire from two camps: those in Congress who represented states with much smaller exemptions who thought the uniform proposals were too generous and (you guessed it) those in Congress who represented states with far more generous exemptions who thought the federal exemptions were too stingy. A compromise was born: the federal Bankruptcy Code would establish uniform federal exemptions, but states would be permitted to opt-out of those exemptions, denying their own citizens the benefits of the federal protection when they filed for bankruptcy. 11 U.S.C. §522(b)(2). Thirty-five states have opted out. 14 Collier ?Intro.03. The constitutionality of opt-out has been challenged, has been affirmed, and has ceased to be a widely disputed issue. See, e.g., In re Lauch, 16 B.R. 162 (Bankr. M.D. Fla. 1981).
We reproduce two sets of state exemption laws. The first is from Texas, and the second is from Delaware.
TEXAS EXEMPTION STATUTES
Texas Property Code Annotated (Vernon 2005)
§41.001. interests in land exempt from seizure
(a) A homestead and one or more lots used for a place of burial of the dead are exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property.
(b) Encumbrances may be properly fixed on homestead property for
(1) purchase money;
(2) taxes on the property;
(3) work and material used in constructing improvements on the property if contracted for in writing. . . .
(c) The homestead claimant's proceeds of a sale of a homestead are not subject to seizure for a creditor's claim for six months after the date of sale.
§41.002. definition of homestead
(a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.
(b) If used for the purposes of a rural home, the homestead shall consist of
(1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; or
(2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.
(c) A homestead is considered to be urban if, at the time the designation is made, the property is
(1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and
(2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality
(A) electric;
(B) natural gas;
(C) sewer;
(D) storm sewer; and
(E) water.
(d) The definition of a homestead as provided in this section applies to all homesteads in this state whenever created.
§41.003. temporary renting of a homestead
Temporary renting of a homestead does not change its homestead character if the homestead claimant has not acquired another homestead.
§42.001. personal property exemption
(a) Personal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if
(1) the property is provided for a family and has an aggregate fair market value of not more than $60,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property; or
(2) the property is owned by a single adult, who is not a member of a family, and has an aggregate fair market value of not more than $30,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property.
(b) The following personal property is exempt from seizure and is not included in the aggregate limitations prescribed by Subsection (a)
(1) current wages for personal services, except for the enforcement of court-ordered child support payments;
(2) professionally prescribed health aids of a debtor or a dependent of a debtor; and
(3) alimony, support, or separate maintenance received or to be received by the debtor for the support of the debtor or a dependent of the debtor.
(c) This section does not prevent seizure by a secured creditor with a contractual landlord's lien or other security in the property to be seized.
(d) Unpaid commissions for personal services not to exceed 25 percent of the aggregate limitations prescribed by Subsection (a) are exempt from seizure and are included in the aggregate.
§42.002. PERSONAL PROPERTY
(a) The following personal property is exempt under Section 42.001(a)
(1) home furnishings, including family heirlooms;
(2) provisions for consumption;
(3) farming or ranching vehicles and implements;
(4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;
(5) wearing apparel;
(6) jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a);
(7) two firearms;
(8) athletic and sporting equipment, including bicycles;
(9) a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license or who does not hold a driver's license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;
(10) the following animals and forage on hand for their consumption
(A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;
(B) 12 head of cattle;
(C) 60 head of other types of livestock; and
(D) 120 fowl; and
(11) household pets.
(b) Personal property, unless precluded from being encumbered by other law, may be encumbered by a security interest under Section 9.203, Business & Commerce Code, or Subchapter F, Chapter 501, Transportation Code, or by a lien fixed by other law, and the security interest or lien may not be avoided on the ground that the property is exempt under this chapter.
§42.003. DESIGNATION OF EXEMPT PROPERTY
(a) If the number or amount of a type of personal property owned by a debtor exceeds the exemption allowed by Section 42.002 and the debtor can be found in the county where the property is located, the officer making a levy on the property shall ask the debtor to designate the personal property to be levied on. . . .
§42.005. CHILD SUPPORT LIENS
Sections 42.001, 42.002, and 42.0021 of this code do not apply to a child support lien established under Subchapter G, Chapter 157, Family Code.
§42.0021. additional exemption FOR CERTAIN SAVINGS PLANS
(a) In addition to the exemption prescribed by Section 42.001, a person’s right to the assets held in or to receive payments, whether vested or not, under any stock bonus, pension, profit-sharing, or similar plan, including a retirement plan for self-employed individuals, and under any annuity or similar contract purchased with assets distributed from that type of plan, and under any retirement annuity or account described by Section 403(b) or 408A of the Internal Revenue Code of 1986, and under any individual retirement account or any individual retirement annuity, including a simplified employee pension plan, and under any health savings account described by Section 223 of the Internal Revenue Code of 1986, is exempt from attachment, execution, and seizure for the satisfaction of debts unless the plan, contract, or account does not qualify under the applicable provisions of the Internal Revenue Code of 1986. A person’s right to the assets held in or to receive payments, whether vested or not, under a government or church plan or contract is also exempt ***
(b) Contributions to an individual retirement account, other than contributions to a Roth IRA described in Section 408A, Internal Revenue Code of 1986, or an annuity that exceed the amounts deductible under the applicable provisions of the Internal Revenue Code of 1986 and any accrued earnings on such contributions are not exempt **** Amounts treated as qualified rollover contributions *** are treated as exempt amounts under Subsection (a). ***
§1108.0531. EXEMPTIONS FOR CERTAIN INSURANCE AND
ANNUITY BENEFITS
(a) Except as provided by Section 1108.053, this section applies to any benefits, including the cash value and proceeds of an insurance policy, to be provided to an insured or beneficiary under:
(1) an insurance policy or annuity contract issued by a life, health, or accident insurance company, including a mutual company or fraternal benefit society; or
(2) an annuity or benefit plan used by an employer or individual.
(b) Notwithstanding any other provision of this code, insurance or annuity benefits described by Subsection (a):
(1) inure exclusively to the benefit of the person for whose use and benefit the insurance or annuity is designated in the policy or contract; and
(2) are fully exempt from:
(A) garnishment, attachment, execution, or other seizure;
(B) seizure, appropriation, or application by any legal or equitable process or by operation of law to pay a debt or other liability of an insured or of a beneficiary, either before or after the benefits are provided; and
(C) a demand in a bankruptcy proceeding of the insured or beneficiary.
§1108.053. EXCEPTIONS TO EXEMPTIONS
The exemptions provided by Section 1108.051 do not apply to:
(1) a premium payment made in fraud of a creditor, subject to the applicable statute of limitations for recovering the payment;
(2) a debt of the insured or beneficiary secured by a pledge of the insurance policy or the proceeds of the policy; or
(3) a child support lien or levy under Chapter 157, Family Code.
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DELAWARE EXEMPTION STATUTES
10 Del. Code Ann. (2004) §4902
EXEMPT PROPERTY
(a) Every person residing within this State shall have exempt from execution or attachment process, or distress for rent, the following articles of personal property: The family Bible, school books and family library, family pictures, a seat or pew in any church or place of public worship, a lot in any burial ground, all the wearing apparel of the debtor and the debtor's family.
(b) In addition to the articles specifically named in subsection (a) of this section, each person residing in this State shall have exempt the tools, implements and fixtures necessary for carrying on his or her trade or business, not exceeding in value $75 in New Castle and Sussex Counties, and $50 in Kent County.
(c) All sewing machines owned and used by seamstresses or private families, shall be exempt from levy and sale on execution or attachment process and also from distress and sale for rent. This provision shall not apply to persons who keep sewing machines for sale or hire.
(d) All pianos, piano playing attachments and organs leased or hired by any person residing in this State, shall be exempt from levy and sale on execution or from distress for rent due by such person so leasing or hiring any such piano, piano playing attachment, or organ in addition to other goods and chattels exempt by law. The owner of any such piano, piano playing attachment or organ or such owner's agent, or the person so leasing or hiring the same shall give notice to the landlord or the landlord's agent that the instrument is hired or leased.
§4913. exemption and attachment of wages
(a) Eighty-five percent of the amount of the wages for labor or service of any person residing within the State shall be exempt from mesne attachment process and execution attachment process under the laws of this State; but such limitation shall be inapplicable to process issued for the collection of a fine or costs or taxes due and owing the State.