Putting the ‘Proof’ in Judgment Proof: Challenging a Debtor’s Claimed Exemptions in North Carolina, Part II

In Part 1 of this 3-part series, we discussed the procedure through which a judgment debtor can designate certain property exempt from execution in proceedings to collect a judgment.  Chapter 1C of the N.C. General Statutes governs that process, and it provides that a judgment debtor can designate exempt property either by filing a motion with a schedule of the debtor’s assets (i.e., a “schedule of exemptions”), or at a hearing before the clerk of the court where the judgment was entered.  This Part discusses what happens (or what should happen) after the judgment debtor claims exemptions.

Just to refresh your memory, North Carolina law allows a judgment debtor to designate certain items of property exempt from execution (“execution” is the process through which a sheriff or the sheriff’s designee seizes and sells property to satisfy a judgment.)  If property is exempt from execution, a judgment creditor cannot have that property seized, sold, or otherwise applied toward satisfaction of his judgment.  Some of the available exemptions apply to specific items of property (e.g., the proceeds of a settlement, money in certain retirement accounts, etc.), while others apply to the value of the debtor’s interest in certain property (e.g., up to $35,000 in the debtor’s equity interest in real property, up to $3,500 in the debtor’s equity interest in one motor vehicle, etc.)  I will discuss what happens when the value of a debtor’s interest in certain property exceeds the allowable exemption in greater detail in Part III of this series.  For now, just know that the value of the designated property matters as much, if not more (at least in some instances), than the description of the designated property.

In this Part, we’ll assume the following: (1) you have a judgment that remains unsatisfied (i.e., you have not received the value of the judgment from the judgment debtor); (2) you have served your judgment debtor with notice that he has the right to designate certain property exempt from execution (this is a required step in the judgment collection process, see Part I for more information); and (3) your judgment debtor has filed a motion to claim exemptions with a schedule of exemptions, or your judgment debtor has claimed exemptions at a hearing before the clerk of court.  What should you do next?

The answer, almost always, is that you should object to the judgment debtor’s schedule of exemptions.  In most instances in North Carolina, when a judgment debtor claims exemptions, he does so by filling out and filing Form AOC-CV-415 (Motion to Claim Exempt Property.)  That form requires the judgment debtor to provide certain identifying information (e.g., name and address), and to list the property that he wants to claim as exempt in the appropriate designated space (e.g., item 6 on the form asks the debtor to list personal property valued up to $5,000.)  The form also asks the judgment debtor to list all of his property that is not exempt from execution.  As you might imagine, judgment debtors tend to provide the vaguest possible description for the property that they want to claim exempt.  “Furniture” or “electronics” or “miscellaneous” are commonly-used descriptions.  As you might also imagine, judgment debtors tend to value their property conservatively (and the value of any liens on the property liberally) in their motion.  Finally, it should come as no surprise that item 17—the item that asks that the judgment debtor list his non-exempt property—is, more often than not, left completely blank.  Indeed, I’ve been helping business and individuals collect judgments since I started practicing law, and I’ve never seen a judgment debtor file a motion to claim exempt property where the debtor did not claim that he or she was completely judgment proof.

You have 10 days from the date that the judgment debtor serves his motion to claim exemptions (or, in the rarer case that the judgment debtor requests a hearing, 10 days from the date of the hearing) to file a written objection to the judgment debtor’s schedule of assets.  If you do so, the clerk of court sets the matter for hearing before a district court judge.  That is, the objection essentially operates as a request for a hearing on the judgment debtor’s motion to claim exemptions, a hearing at which the judgment debtor will have to prove that the property that he has designated actually qualifies for exemption.

You, the judgment creditor, want a hearing for several reasons.  First, at the hearing, you will have the opportunity to cross-examine the judgment debtor about the personal property identified in the motion.  You can ask that the judgment debtor itemize that property and, in so doing, obtain a clearer picture of the debtor’s assets.  You can ask the judgment debtor when he bought the property (crucially, exemptions may not apply to property purchased within 90-days of the commencement of collection proceedings.)  You can inquire as to how the judgment debtor arrived at the values that he listed for his property; more often than not, the answer will be that the judgment debtor guessed, and while an owner’s guess is evidence of value, it’s not great evidence.  Finally, if there are items of property listed on a judgment debtor’s motion that you believe are worth more than what the judgment debtor has stated, you can either (a) provide your own evidence of what the property is worth (difficult to do), or (b) ask the court to appoint a qualified person to appraise the property.  The results of such appraisal, together with the other information you obtain at the hearing, will give the court the information it needs to determine the property’s actual value and whether that value is within the limit of any applicable exemption.

The benefits of a hearing extend beyond information gathering to the amelioration of practical concerns.  If a judgment debtor is allowed to claim an exemption in vaguely-described “furniture” or “jewelry,” then the sheriff will not know what furniture or jewelry is exempt and what isn’t, and, in an abundance of caution, will refuse to seize any item in those categories.  Forcing the debtor to itemize his exempt property will enable the sheriff to identify non-exempt property that the sheriff can seize and sell (if exempt property is limited to specific items listed on the motion, then, by logical extension, any unlisted item is non-exempt.)  Finally, never underestimate the importance of a proper valuation of a debtor’s assets.  Judgment debtors frequently undervalue their property in an effort to squeeze that property under the exemption limit.  If an appraiser reports that the property has value in excess of that limit, then you can seize and sell the property, give the judgment debtor money equal to the value of the exemption, and apply the rest to your judgment.

In Part III, I will explore in more detail both what happens when a judgment debtor claims an exemption in property with excess value, and what happens when a judgment debtor claims an exemption in property that does not qualify for the claimed exemption.  You can also check out Part I for a general overview of the exemptions process.  Thanks for reading, and remember, if your judgment debtor has claimed exemptions, object!