Exemptions and Lien Avoidance Summary

(§ 522)—Exempt assets are assets that unsecured creditors (and some secured creditors) cannot reach. Some key points about exemptions are the following:

1. Exemptions are for people—not for corporations, partnerships, or LLCs. But, two individuals working together might not be a partnership and each may be able to claim exemptions.  (e.g. the “mom-and-pop” business customer)

1. Exemptions generally apply to assets used by the debtor and dependents of the debtor for household purposes, or as “tools of the trade.”

1. The assets subject to exemptions must be “crossed out” of the balance sheet when evaluating the collectability of the debtor.

1. State exemptions v. Federal exemptions. Thirty-six states elected to opt out of the federal exemptions.  In opt-out states, debtors can only use the state law exemptions.  (If debtor recently moved, which state’s exemptions apply?)  In the other states (and Puerto Rico and the Virgin Islands), a debtor can choose either the federal exemptions or the state law exemptions. Wisconsin has not “opted out”, and Debtors frequently choose Wisconsin State exemptions if they have substantial equity in their property because the Wisconsin homestead exemption ($75,000 per individual) is larger than the federal exemption. If they do not have substantial equity in their home, debtors frequently choose the Federal exemptions because the Federal wild card exemption has no direct equivalent under Wisconsin law.

1. Federal exemptions^.[1]

Partial list of the “popular” items:

• Homestead: $27,900
• Motor vehicle: $4,450
• Household items: $14,875 (but not more than $700 per item)
• Jewelry: $1,875
• Wild card: $1,475, plus up to $13,950 of unused homestead
• Books, tools of trade: $2,800
• Non-credit life insurance contract: No Limit
• Credit life insurance contract: up to $14,875
• Personal injury claim payment: up to $27,900
• Professionally prescribed health aids
• Social security, unemployment, veterans’ disability-type benefits
• Alimony, support, maintenance reasonably necessary for support

NOTE:  A husband and wife can double up all of the federal exemptions.

NOTE:  ERISA-qualified retirement accounts are protected from creditors, with no limit on the value of the account (Patterson v. Shumate, U.S. S.Ct.).  An individual retirement account (IRA) qualified under the Internal Revenue Code may be exempt up to $1,512,350 (and the court can increase the exemption beyond $1,512,350 “if the interests of justice so require”).

1. States with unlimited homestead exemptions:

• Florida
• Iowa
• Kansas
• Oklahoma
• South Dakota
• Texas

But, a “sort of” $189,050 cap on state homestead exemptions for homestead acquired within about 3 years, 3 months of the bankruptcy (1215-day period).

1. Tenancy by the Entireties homestead. Tenancy by the Entireties is a special form of real estate ownership available only to a husband and wife for their homestead.  A creditor of only one spouse, generally, cannot enforce a claim against a Tenancy by the Entireties property.  Many, but not all states allow Tenancy by the Entireties ownership and the scope of the protection varies among the states that do allow it.  Generally, though, in most Tenancy by the Entireties states, if only one spouse files for bankruptcy protection, the entire Tenancy by the Entireties homestead is kept out of the bankruptcy estate—so in effect the bankruptcy debtor-spouse can enjoy an unlimited homestead exemption.  However, creditors of both spouses can seek to enforce the claim against Tenancy by Entireties property (up to the applicable state or federal homestead exemption amount).  Some of the states that allow Tenancy by the Entireties include:

Lien Avoidance.  Generally, assets subject to liens, cannot be kept by the debtor under the exemptions.  However, in certain circumstances, the Bankruptcy Code allows a debtor to avoid (set aside) a lien to free up exemptions (§ 522(f)).

1. Judgment lien. The Bankruptcy Code allows a debtor to eliminate a judgment lien that impairs an exemption (except judgments for domestic support obligations cannot be eliminated).  For example, in Wisconsin, a debtor can set aside a judgment lien that cuts into the debtor’s Wisconsin homestead exemption ($75,000 for a single debtor; $150,000 for joint debtors—e.g. husband and wife).[2]

2. Security interest lien. The Bankruptcy Code also allows the debtor to set aside any non-possessory/non-purchase money security interest in household items, animals, crops, tools of the trade, and professional prescribed health aids, to the extent of the debtor’s exemptions in such assets.  So, for example, a husband and wife in business together may each keep from the otherwise “secured” creditor $15,000 worth of tools of the trade ($30,000 combined) if they filed their bankruptcy in Wisconsin.  (Some courts, in other states, have held that § 522(f)(3) limits the “tools of the trade” security interest avoidance to $6,825[3] per debtor.  However, a Wisconsin bankruptcy court has held that this limit does not apply in Wisconsin cases.)

For more information on this article or other bankruptcy related matters, please contact KMK Attorneys Samuel C. Wisotzkey (swisotzkey@kmksc.com), or Eric R. von Helms (evonhelms@kmksc.com). Both can be reached at (414) 962-5110.

[1] All of the figures stated in Paragraph E and F have been updated effective 4/1/22, and are next scheduled to adjust on 4/1/2025. See Doc. 2022-002299, Published 2-04-22, and available here. Numbers adjusted with the Consumer Price Index (CPI) every 3 years (2022).

[2] See Wis. Stat. § 815.20.  Beware though, that Wisconsin has an additional provision that can result in full avoidance of a judgment lien after a discharge has been granted. Wis. Stat. § 806.19(4).  Accordingly, if you have a judgment lien in Wisconsin and your debtor is in bankruptcy, be sure to consult with experienced counsel as soon as possible.

[3] Last adjusted 4/1/2022.  See n.1 above.

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