Lien Elimination on Exempt Assets

April 13, 2006

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To eliminate a lien, three conditions must be met. The first condition necessary is really self-explanatory. Either an asset is exempt under the applicable state or federal law or it is not. It also follows that if the asset is not exempt, a lien against it can't be eliminated on the grounds that it impairs an exemption.

Each state enumerates asset exemptions in its laws. These exemptions are sometimes referred to as "post-judgment asset exemptions." In a state court proceeding, after a judgment is rendered against you, you will have to rely on your own state's exemptions. These asset exemptions are found here.

In a bankruptcy proceeding, certain assets are also exempt, and thus outside the reach of creditors. The federal bankruptcy law includes its own list of exemptions, which differ from the state lists. However, under the bankruptcy code, each state may allow its residents to choose between the federal bankruptcy asset exemptions and the state's post-judgment asset exemptions, when a federal bankruptcy action is filed.

Alternatively, a state may "opt out" of the federal exemptions and give its residents only the right to use the state's exemptions in a federal bankruptcy proceeding.

Asset exemptions vary widely from state to state. Some states have developed reputations for writing laws that favor either debtors or creditors.

For example, Florida, Texas and Iowa have generous exemptions that favor debtors. These states provide debtors with, among other things, basically an unlimited homestead exemption. Thus, in these states, it is possible for a debtor to protect a fully owned home worth millions of dollars in either a state court proceeding or a bankruptcy proceeding.

In contrast, Illinois has a reputation of having laws that favor creditors. It provides a debtor with only a $7,500 homestead exemption. Illinois has also opted out of the federal exemption system, so its residents don't have the option of using the more generous federal exemptions in bankruptcy.

Under current bankruptcy law, residency is determined as of 180 days (six months) before the date the proceeding is filed. However, be aware that Congress is considering changing this period.

So, changing your residence (e.g., from Illinois to Texas) can prove to be a very effective asset protection strategy. The move includes a conversion of assets that were not exempt in the old jurisdiction to a state where you can take advantage of an expansive list of exemptions. However, residence changes and asset conversions must be approached cautiously.