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

For a general discussion of the procedure for claiming exemptions and challenging claimed exemptions, see Part I.  For a discussion of post-objection hearings, see Part II.  Those parts, taken together, paint a picture of exemption proceedings and why a careful review of a debtor’s claimed exemptions benefits judgment creditors in virtually every instance. Part III involves two specific issues that can arise in the course of exemptions proceedings: (1) excess value in a claimed exemption; and (2) claimed exemptions in property to which no exemption applies.

First, a brief refresher.  Every individual (i.e., non-corporate entity) in North Carolina has constitutional and statutory rights to declare certain property exempt from judgment execution.  If property is “exempt” from execution, then a judgment creditor cannot have the property seized or sold for the purpose of applying the value of the property toward the balance of its judgment.  Chapter 1C of the N.C. General Statutes governs proceedings to claim exemptions and provides, among other things, that if a judgment debtor files a motion to claim exempt property, a judgment creditor has 10 days to object to the debtor’s schedule of exemptions.  If the judgment creditor does so, then the debtor’s motion—that is, his request to designate certain property exempt—is set before the district court for hearing.

At the hearing, the parties argue about two things: first, the applicability of a claimed exemption (e.g., is a piece of real property a “homestead” so that it qualifies for the $35,000 homestead exemption); and second, the value of the property.  Chapter 1C requires the district court judge presiding at the hearing to decide both issues in a written order.  That is, after the hearing, the court enters an order that says whether particular items of property are exempt and, if so, up to what dollar value.

What happens when the court concludes that a judgment debtor has claimed property with excess value exempt?  Consider this scenario: a judgment debtor has one car and the court has concluded that the car is worth $10,000.  The judgment debtor owes $6,000 on the car to the lender that provided the purchase money for the vehicle.  So, the debtor’s equity in the vehicle (i.e., the fair market value of the vehicle less the value of any liens) is $4,000.  North Carolina law only allows a $3,500 exemption in one motor vehicle, meaning that the vehicle has $500 of “excess” value.  In this circumstance, the district court may order the vehicle sold, but the first $3,500 from the sale will belong to the judgment debtor, not the judgment creditor.  The judgment creditor only has a right to the amount in excess of the exemption limit.

The result where no exemption applies is much more straightforward.  Imagine that a judgment debtor owns two pieces of real property (a judgment creditor’s dream.)  The judgment debtor lives in one of the properties and rents the other.  Instead of claiming the homestead exemption in the property that he lives in, however, the judgment creditor has claimed that property exempt as the entireties property of him and his wife (property held by married persons in the entirety is, generally speaking, not subject to execution.)  He then claims the homestead exemption in the property that he rents, hoping that, in this way, he can exempt both properties from execution.

Not so fast.  North Carolina courts have held that the homestead exemption only applies to a debtor’s home or place of residence.  It does not apply to just any real property.  Since the debtor rents this property, the court will not allow him to claim it exempt under the homestead exemption (there are other potentially applicable exemptions, but let’s assume that none apply here.)

So, what should the creditor do?  As with the vehicle, the creditor could ask the court to order the property sold.  The creditor could also have a writ of execution issued to the local sheriff and ask the sheriff to sale the property at auction.  Whatever the creditor decides, it will want to think carefully about its decision before moving forward: deciding what to do with a real property asset when collecting a judgment is one of the most important strategic decisions that you and your lawyer can make in your case.  But, that is a topic for another day.

Under either of the above scenarios, if the judgment creditor had failed to object to the debtor’s schedule of exemptions, then the debtor’s motion would have been granted as is.  That is, it is possible, depending on the debtor’s claim about their respective values, that both the vehicle and the real estate would have been treated as exempt from execution.  That just goes to show the importance of objecting to a schedule of exemptions and how knowing the procedures at play in exemption proceedings can make or break your efforts to get paid.