Putting the ‘Proof’ in Judgement Proof: Challenging a Debtor’s Claimed Exemptions in North Carolina: Part I

Imagine this scenario: your business sells a contractor $30,000 worth of supplies on credit, the contractor never pays you back, so you take him to court and you get a judgment against him for the entire amount of the debt. Months later, you still don’t have your $30,000. The case starts to wear on your nerves. Then, one day, you’re on your way to work when you see your debtor flying down the road in a brand-new luxury car. You call your lawyer, tell him the news, and ask how soon the sheriff will go out to seize the vehicle. The lawyer is non-committal, so you ask him, point blank, “The sheriff can seize the vehicle, right?”

Maybe. Maybe not.

In North Carolina, a judgment is a powerful thing, but that power has its limits. In order to protect people from permanent impoverishment, North Carolina’s Constitution and General Statutes have long permitted judgment debtors in this state to declare certain property exempt from execution. For example, the General Statutes allow a judgment debtor to claim an exemption in, among other things, up to $35,000 in a homestead, up to $3,500 in one motor vehicle, and up to $5,000 in certain miscellaneous personal property (unlike the statutory exemptions, which have been amended from time to time since their original enactment of the current exemptions statute in 1981, the constitutional exemptions have remained static and, consequently, low, resulting in most folks claiming their statutory, rather than constitutional, exemptions.) For those keeping track at home, that’s $43,500 worth of stuff, and that’s not even half the list of possible exemptions.

Going back to our example, then, the answer to whether the sheriff can seize the vehicle depends on two things: (1) did the judgment debtor do what he needed to do to claim his exemptions; and (2) does the property qualify for the exemption?

How does a judgment debtor claim an exemption? Before a judgment creditor can issue execution (i.e., the document that tells the sheriff to get the debtor’s stuff and sell it), the creditor must first serve the debtor with a notice of the debtor’s rights to have exemptions designated. This form notice advises the debtor of the existence of the above-described property exemptions and of the process that must be followed to claim them. The notice also advises the debtor that the debtor has twenty days to do one of two things: (1) the debtor can file a motion to claim exempt property with a schedule of assets (most common); or (2) the debtor can file a written request to the clerk of court to set a hearing where the debtor will seek to claim his or her exemptions. If the debtor files the motion, then the creditor has ten days from the date the motion is served to file a written objection to the debtor’s schedule of assets. If the debtor requests a hearing, then the creditor has until ten days after the hearing to object to the debtor’s schedule of assets. Either way, if the creditor objects, the matter goes before a district court judge for a determination of the value of the debtor’s property and the applicability of the claimed exemption. If the creditor does not object, then the exemptions are set.

As a judgment creditor, you will almost always want to object to a debtor’s schedule of assets. I’ll talk about the reasons why that’s true in Part II of this series.

But, let’s assume that here, for the purpose of our example, the debtor claimed his $3,500 exemption in the motor vehicle and that the judgment creditor did not object to the debtor’s claiming that exemption. Now, the creditor is at the mercy of the debtor’s valuation of the vehicle. So, if the debtor claimed that the vehicle was worth only $3,499, then, at least for the purpose of an initial attempt at execution (the creditor and debtor have to repeat the entire process each time before execution is issued), that’s what it’s worth, and the sheriff won’t touch it. Similarly, if the debtor claims the vehicle is worth $30,000, but that it is subject to liens in the amount of $27,000, there is not sufficient equity in the vehicle to pay the debtor the exemption, and the sheriff won’t touch it. Only if the debtor indicates that the value of his equity in the vehicle (i.e., the value of the vehicle less liens) is greater than the value of the exemption will the sheriff seize and sell the property.

So, let’s answer the question in our example: can the sheriff seize the judgment debtor’s brand-new luxury vehicle? Assuming the debtor followed the correct procedure to claim exemptions and valued his equity in the property at $3,500 or less (likely if the vehicle truly is brand new, as most folks finance their vehicle purchases), the answer is no.

Want more information? Check out Part II (objections to asset schedules) and Part III (improper exemptions), coming soon!

Are you in need of legal services in North Carolina? Contact the Charlotte attorneys at Weaver, Bennett & Bland today to learn more about our areas of practice or to schedule a consultation.