Property Protected from Creditors – Lender Be Aware, Debtor Be Prepared

It is of course, preferable to not be sued, and if you are sued it is obviously better to win your case and not have a judgment entered against you. The judgment itself is bad for your credit, but the execution proceedings that may follow are the bigger problem. Allowing a creditor take and sell one’s home or to garnish the bank account that represents years of work and effort is obviously a life-changing event. However, sometimes bad things happen to good people, and it is helpful to know which of your assets cannot be attached by creditors.

Perhaps most significantly for married individuals in Pennsylvania, “entireties” property is exempt from execution proceedings by creditors of an individual spouse. This exemption applies to both real estate and personal property, like bank accounts. Although it is best to have this property identified as property held “by the entireties,” usually the simple designation of “husband and wife” in the title will be sufficient. But be aware that this type of ownership does not protect against a judgment creditor of both spouses on the same debt. As a result, when possible, both a husband and wife should not guaranty the same debt. Additionally, in the event that a married couple operates a small business, all other things being equal, it can be advisable to have the business owned (or at least titled) by just one of the spouses.
Pennsylvania law does provide certain exemptions that anyone, married or not, can benefit from. For example, generally, a person’s wearing apparel, Bibles and school books, sewing machines and uniforms cannot be attached by the person’s creditors. Not much protection, but it covers some of the vitals.

Other exempt properties include the following:

  • 401k accounts;
  • Most pension rights;
  • Generally, retirement or annuity fund for a self-employed person to the extent that the amounts do not exceed tax deductible amounts, as well as the income attributable to those deductible amounts;
  • Generally, IRA funds and Roth IRA funds provided that the amounts do not exceed certain contribution limits;
  • Claims in compensation payments under the Workmen’s Compensation Act;
  • Generally, a policy of group insurance or the proceeds therefrom;
  • The net amount payable under any accident or disability insurance;
  • The net amount payable under an annuity contract or a life insurance policy for the benefit of the spouse, child or dependent relative of the judgment debtor; and
  • A beneficiaries’ interest in a trust fund provided that the trust has common “spendthrift trust provisions” and provided that the debtor did not contribute his or her own funds into the trust.

A listing of the available state exemptions is found at 42 Pa. C.S.A. §8124. What will be obvious to anyone reviewing this list is the Legislature’s intention to protect the indigent, retirees, and close relatives of decedents. In addition to the above exemptions, federal law, under the auspices of ERISA, also provides protection (often broader in scope than the Pennsylvania exemptions) for retirement plans and employee benefit plans.

This information is vital for judgment debtors in a crisis situation; conversely it is useful knowledge for lenders or businesses extending credit to potential customers. If a financial statement reflecting primarily retirement assets and entireties assets comes back from a potential customer, the creditor should realize that those assets will generally not be available to pay any judgments obtained, and will be a very unlikely source of payments for bills and invoices sent to the customer.

— Rod Fluck

Posted in Newsletters, Real Estate / Property