Judgment exemptions? Huh?
Remember way back in January when we talked about Post-Judgment Collections? Well, let's review for a quick sec. Let's say you got hurt in a car accident that was caused by Melvin, and your medical bills ended up being $48,000. Melvin's liability coverage has limits of $30,000; since your liability coverage is also $30,000, you don't have access to first-party underinsured motorist coverage. Since Melvin's insurance company's policy limits offer is going to be insufficient, your next option is to file a lawsuit and get a judgment for the full $48,000 (remember that this is just an example; medical bills are just special damages, and you also have to take general damages into consideration).
So you go to court, you plead your case to the jury, and they come back with a judgment of $150,000. Now, Melvin's liability carrier is still going to cover the first $30,000, as they're contractually obligated to do. But you still have $120,000 outstanding, and as we know from the first article, your next option is typically going to involve pursuing recovery from Melvin's personal assets.
But Melvin's (probably) judgment-proof!
Well, that might be true. North Carolina allows "judgment debtors" to exempt certain property from judgments, and most people are able to claim at least some of those exemptions. But in order to find out for sure (and it's worth finding out), you need to do some digging. Let's start by exploring what the exemptions are.
North Carolina's statutory exemptions are governed by § 1C-1601(a) of the General Statutes. Keeping in mind that this is a broad strokes pictures, here's what they are:
- The debtor's aggregate interest, not to exceed $35,000 in value, in real property or personal property that the debtor or a dependent uses as a residence.
- The debtor's aggregate interest, not to exceed $5,000 in value, of any unused exemption amount to which the debtor is entitled under subdivision 1, above.
- The debtor's interest, not to exceed $3,500 in value, in one motor vehicle.
- The debtor's aggregate interest, not to exceed $5,000 in value for the debtor plus $1,000 for each dependent of the debtor, not to exceed $4,000 total for dependents, in household furnishings/goods, apparel, appliances, books, etc.
- The debtor's aggregate interest, not to exceed $2,000 in value, in any "tools of the trade."
- Life insurance policies.
- Professionally prescribed health aids for the debtor or a dependent thereof.
- Compensation for personal injury.
- Individual retirement plans.
- Funds in a college savings plan.
- Retirement benefits under the retirement plans of other states.
- Alimony, support, child support payments, etc.
Whoa. That's a lot. So how do I find out what Melvin's assets are?
The easiest way is through a process that we call "discovery." The discovery process allows you to submit written questions, requests for admissions, and requests for the production of named documents to the other party to your lawsuit. The responding party then answers the questions and provides the requested documents, which allows you to refine your litigation strategy and, in our present case, determine whether pursuing the other party individually is going to end up being worth your while. There's a lot of information that you can request; in North Carolina, the scope of "relevance" for discovery is a whole lot bigger than the scope of relevance for admitting evidence in the actual trial. As long as your discovery requests are "reasonably calculated to lead to the discovery of admissible evidence," you're more or less good to go. Again, broad strokes here.
That's the upside of discovery. In this case, there are two downsides. First, the other party gets to submit discovery to you, too. They get to ask questions about your injuries, the mechanics of the accident, your income, your family, and a whole litany of other topics. Second, you don't get access to the discovery process unless and until you file your lawsuit. As you may know, lawsuits are really expensive and they take a really long time. So in the above example, you know that the policy limits offer of $30,000 is insufficient to pay your bills. But you don't know whether Melvin has any assets that you can recover. So now your options are (i) to take the offer from the insurance company, or (ii) file your lawsuit, send discovery requests and hope against hope that Melvin has recoverable assets. If he doesn't, you're likely in a situation where your recovery is still going to be limited to $30,000, less whatever your litigation costs are.
Outside of the discovery process, you can also search for real property in the Register of Deeds' office or even hire a private investigator. There's also a secondary discovery process specifically prescribed for after a judgment is received, and it's substantially similar to the process discussed above. The major difference is that you can actually summon the judgment debtor into court to testify about his or her assets under oath.
So what does this look like in real life?
Alright. Super-complicated example time. Let's say that you file your lawsuit, issue discovery requests, and find that Melvin has the following assets:
- One house in Wake County, which Melvin uses as his primary residence. Melvin has $40,000 in equity, and the bank is owed another $120,000 via a deed of trust.
- One house in Durham County in which Melvin's 20-year-old, unemployed son lives. Melvin has $10,000 in equity, and the bank is owed another $90,000 via a deed of trust.
- One 2004 Nissan Sentra, owned outright by Melvin, with a fair market value of $4,500.
- One 2015 Dodge Viper, purchased outright by Melvin but owned by his son, with a fair market value of $85,000.
- One bass boat with a fair market value of $8,000.
- All of the equipment that Melvin uses to operate his landscaping business (which is an unincorporated sole proprietorship), valued at $12,000.
- All of the furniture in both houses, valued at a total of $25,000.
- Melvin's savings account, carrying an account balance of $13,500.
- Melvin's retirement account, carrying an account balance of $155,000.
- Melvin's home dialysis machine, valued at $7,000.
Alright, so which assets can Melvin exempt right off the bat? We know that the Viper is owned by Melvin's son, even though Melvin bought it, so that's out. We know that Melvin's retirement account is statutorily exempt, and so is his home dialysis machine. So those three things are off the table right away (assuming, of course, the Melvin moves to exempt them after being properly notified of his right to do so).
So let's start with the houses. In this scenario, the houses get sold and Melvin gets the first $35,000 in proceeds off the top. Let's say that you ask the sheriff to execute the judgment by selling the Durham house, which ends up selling for $100,000. Melvin gets the first $35,000, and the bank gets the remaining $65,000, leaving you nothing. So it probably wouldn't be a good idea to enforce the judgment by selling the house. If you sell the Wake County house, it's probably going to be a similar story. If that house sells for $100,000 and the bank gets the first $90,000, then that only leaves you with $10,000 towards the satisfaction of your judgment. If you sell both houses, then Melvin gets the first $35,000 and the banks are owed a total of $210,000; so the houses probably aren't the best place to look.
The Nissan Sentra is Melvin's only car, so he's going to want to claim his full statutory exemption of $3,500 on that. That leaves you with $1,000, and that's assuming that the car sells at auction for the full $4,500 of its value. I'd probably leave the Sentra alone for now.
The bass boat is, for our purposes, a "motor vehicle," and Melvin will almost certainly use his $3,500 exemption on his Sentra, since presumably he needs that more. So by executing against the boat, it's likely that you could get $8,000 or thereabouts; whatever it fetches at auction. Cha-ching!
Next up is Melvin's landscaping equipment. I know, it's weird for a landscaping professional to only own a Nissan Sentra. Bear with me. Melvin can claim a $2,000 against his "tools of the trade," leaving $10,000 that you could conceivably collect. Keeping in mind that this equipment probably won't end up going for its actual value, this could be a good resource to look at for enforcing your judgment.
Now we come to Melvin's furniture. Remember that he can claim an exemption of $5,000, plus $1,000 for his son, who is a dependent of Melvin's under these facts. Assuming that the son is Melvin's only dependent, that's $6,000 that he can exempt. So that leaves you with $19,000, or however close you can get to that amount by selling the furniture at auction.
Finally, we have Melvin's savings account. Since it isn't a retirement account or a college savings account, it's fair game and you should be able to pursue the $13,500 in the account.
So at the end of the day, you're really only able to recover against the Sentra ($1,000), the bass boat ($8,000), the landscaping equipment ($10,000), the furniture ($19,000), and the savings account ($13,500), for a total of $51,500. With the liability carrier kicking in its policy limits of $30,000, you're looking at $81,500, or just over half of your $150,000 judgment. Fun stuff, huh?
Anything else I should know?
There are a few things. Number one, chapter 1C of the North Carolina General Statutes provides a "claw-back" provision that allows the recovery of any property falling under subsections (2), (3), (4), or (5) that was purchased by the debtor within 90 days before the initiation of judgment collections proceedings. So if a month before proceedings begin, Melvin goes out and buys a John Deere tractor for $2,000, then tries to exempt it under subsection (5) as a "tool of the trade," the judge is going to say "Not so fast, Melvin!"
Number two, the example above is about the simplest that I could come up with, and it's still pretty complicated. These scenarios in the real world get far, far trickier, and they can turn into an absolute nightmare in a very short amount of time. Realistically, you're going to be dealing with real and personal property owned by the debtor and his spouse (which will prevent you from enforcing against that property in most cases), professional equipment owned by the debtor's corporation (which will almost always prevent you from getting to that property), and bank accounts that might or might not be exemptable retirement or college savings accounts. On top of these examples are a multitude of other complications that can and will pop up. You really have to be prepared to encounter a "Gordian knot" situation when it comes to a judgment debtor's assets.
Number three, you can't realistically expect a judgment debtor to just sit around and let you take his or her stuff. Between the time the lawsuit is filed and the time you go to the sheriff for execution, there might be anywhere between one year and five years' worth of litigation. You can bet that during the time, the debtor is going to get busy moving his assets around so that you can't get to them. It's not uncommon to see property get sold, placed in irrevocable trusts, deeded to the debtor's kids, and more, and it's not unheard of for debtors to move, change their name, and otherwise do anything they can to try and dodge you.
Number four, you'll remember that you have to put the debtor on notice of their right to exempt property before you can try and enforce your judgment. If you don't remember this, check out January's article on Post Judgment Collections.
So what's the practical effect of all this?
Well, there are two things I want to leave you with. Number one, it should be apparent by now that post-judgment collections are extremely expensive, extremely time-consuming, and extremely unpredictable. There's a solid possibility that you could chase a debtor's assets around for five years, recover nothing, and end up with a bunch of wasted time and money for all your trouble. It follows that you should do everything you can to avoid being put in this situation, and the easiest way to do that is to make sure that you're insured as well as possible. Remember that if your liability policy carries maximum limits of $100,000, then your underinsured coverage will kick in another $70,000 after Melvin's liability carrier pays out its $30,000. That gets you to $100,000 in a much quicker and easier fashion than selling all of Melvin's stuff to get to $81,500.
The second thing is that I cannot put into words how much I recommend that you not handle post-judgment collections on your own. If the prospect of handling these issues without an attorney doesn't scare you, then, well, it should. If you're dealing with a situation where you're having to enforce a judgment against a defendant, then I implore you to go talk to an attorney. This is high-stakes stuff with a razor-thin margin of error. Please, please don't try to handle it on your own.
Sorry to end this article on a dark note. If you need a pick-me-up, check out some MC Hammer. Best of luck!