Wisconsin law has long recognized that there are certain assets that are exempt from collection activities by a creditor. The purpose of the law is to allow a debtor to keep certain fundamental assets from the hands of his creditors - even though he may admittedly owe the creditor a significant debt - so that the debtor may "sustain life and the opportunity to avoid becoming public charges." See Wis. Stat. 815.18(1). Not only may a debtor keep the proverbial "shirt on his back," but a debtor is also allowed to keep other assets free and clear from the reach of creditors such as limited value of business property, consumer goods, insurance benefits, income, retirement benefits and motor vehicles. Only if a debtor owns exempt assets that are valued at more than the exempt values (or if the creditor holds a secured position by virtue of a security agreement or mortgage) can those exempt assets be subject to collection efforts by a creditor.
Changes to the exemption law serves to raise many of the exemption limits, and it creates new exempt property for a debtor's ownership in "closely held businesses." Some of the highlights include:
Homestead exemption
This provision is probably the most troublesome change for creditors. The new law raises the homestead exemption from $40,000 (an amount which could not be doubled for a married couple) to $75,000 (which can now be doubled for a married couple). The net effect is that a married couple can now claim a combined exemption on their homestead of $150,000. For the unsecured creditor (a creditor who does not hold a consensual mortgage on the home), this means that the creditor cannot collect any equity from the homestead by virtue of a docketed judgment lien unless the home is worth more than the combined value of (1) the total debt owed to any prior mortgage holders and lien holders, plus (2) the amount of any unpaid real estate taxes, plus (3) the equity exemption amount. It was difficult enough to come across that situation when the exemption limit was only $40,000. Now that the marital exemption limit is $150,000, a docketed judgment will rarely be of any significant benefit (other than through a potential short sale situation).
Motor Vehicles
The new law increases the exemption for motor vehicles owned by the debtor from $1,200 to $4,000 in aggregate value. Much like the homestead exemption above, unsecured creditors will be unable to execute on a vehicle unless the value of the vehicle is more than the combined value of (1) the total debt owed to any mortgage holders, plus (2) the equity exemption amount.
Business Property
The new law increases the exemption from $7,500 to $15,000 in aggregate value.
Consumer Goods
The new law increases the exemption from $5,000 to $12,000 in aggregate value.
Depository exemption
The new law increases the exemption from $1,000 to $5,000, but continues to apply only to accounts used for a debtor's personal use (it does not apply to accounts used for business purposes). The practical effect of this change is that banks who receive a garnishment notice on a debtor's personal account cannot apply any money to the garnishment unless there is at least $5,000 in the account at the time the bank received service of the garnishment notice. Savvy debtors will soon learn to open numerous accounts, each with a deposit of not more than $5,000.
Personal Injury Exemption
The new law increases the exemption from $25,000 to $50,000 per claim and includes money received for pain and suffering or compensation for actual pecuniary loss.
Interest in Closely Held Business Entities
The new law also purports to create a brand new exemption for ownership by a debtor in a closely held business (defined as a corporation, partnership or limited liability company owned by not more than 25 individuals that employs the debtor or in whose business the debtor is actively involved). If a debtor holds an interest in a closely held business, the debtor may claim an exemption not to exceed $15,000 in aggregate value. This creates two issues: First, this new provision may have an effect on a creditor's ability to "charge" a debtor's interest in such business entities (a collection strategy commonly used by creditors to take an involuntary interest in the distributions made by a business entity to a debtor to satisfy the debt). Second, it may require the creditor to obtain a valuation of the business (at the creditors cost, of course) to determine whether any equity exists over the exempt amount.
It should be noted that these new exemption rules do not alter a secured party's right to enforce consensual liens - including a real estate mortgage on a debtor's homestead, a Department of Transportation lien on a vehicle or a general business security interest properly perfected with the Wisconsin Department of Financial Institutions. This new law makes it even more advantageous for a creditor to seek some degree of security for repayment of a debt, rather than relying on its legal right as an unsecured creditor to seek payment on a judgment - a right that is being slowly eroded by debtor friendly amendments to Wisconsin law.
Please do not hesitate to contact any of our Banking & Creditors' Rights Team members to discuss any questions or comments.
