What is a Waiver of Exemption?
A waiver of exemption was a provision in a consumer credit contract or loan agreement that allowed creditors to seize, or threaten the seizure of, specific personal possessions or property. The property attached to the loan could include a borrower’s primary place of residence. Lenders could enact this clause even if state law held the property exempt from seizure.
With the implementation of the Credit Practices Rule in 1985, these practices have been banned by the Federal Trade Commission (FTC).
Key Insights
- Former Commonality: Waiver of exemption was once standardized in consumer credit contracts allowing lenders to seize specific personal property upon loan default.
- State vs. Contract Law: Despite state laws exempting certain personal property from seizure, a waiver of exemption clause allowed lenders to override these laws and pursue the borrower’s exempt property if they defaulted.
- Prohibition: These practices were outlawed in 1985 under the Credit Practices Rule managed by the FTC.
Understanding Waiver of Exemption
Before 1985, waivers of exemption were common in credit contracts, often serving as a tool for creditors to secure loans that might not have been available otherwise. In case of a default, it provided an avenue for lenders to recoup their expenses by seizing the property listed as collateral.
Exemption by State Law
Every U.S. state exempts some personal property from being seized due to a civil judgment. Usually, these exemptions cover essential items such as:
- Primary residence
- Automobile
- Necessary household goods (e.g., refrigerator, clothing)
By signing a waiver of exemption, borrowers essentially made these exempted properties available to the creditor for debt satisfaction if a judgment was passed.
One exception to these state laws involves mortgage loans. Here, the creditor retains the right to foreclose on the property in cases of default, independent of personal property exemption laws. These laws are primarily aimed at smaller creditors, such as furniture stores, auto dealerships, and department stores, preventing them from attaching a lien against exempt property.
FTC Regulation on Waiver of Exemption Practices
The FTC provided an example of a typical waiver clause:
“Each of us hereby both individually and severally waives any or all benefit or relief from the homestead exemption and all other exemptions or moratoriums to which the signers or any of them may be entitled under laws of this or any other State, now in force or hereafter to be passed, as against this debt or any renewal thereof.”
The FTC deemed such waivers of exemption not only unfair to consumers but also complex and challenging to understand. The Credit Practices Rule of 1985 abolished these provisions, ensuring that creditors cannot contravene state laws that govern property exemptions.
Additionally, the rule banned creditors from attaching liens to necessary household goods like appliances, clothing, linens, and items with personal rather than monetary value, such as family photos and wedding rings. However, items bought with a loan explicitly may be repossessed by the creditor upon default.
Example: If you financed new furniture from a local store using their credit option, the store may repossess the furniture. However, they cannot seize unrelated items like your car or clothing if you default on the loan.
While the prohibition ensures the safety of some personal property from seizure, the repercussions of defaulting on a loan remain significant. For those struggling with debt payments, seeking support from a debt relief company or credit counseling agency is advisable.
Historical Context: The FTC Ban
Waivers of exemption have been illegal since 1985, following the enactment of the Credit Practices Rule.
Collateral and Repossession
What Can a Lender Repossess?
Creditors can only repossess items mentioned as collateral during the loan agreement. For instance, if you use your house as collateral for a home mortgage, the house is subject to repossession. However, the lender cannot repossess your car unless it was specifically listed as collateral.
Common Forms of Collateral
Collateral can encompass various assets, including:
- Real estate
- Artworks
- Jewelry
- Stocks
- Bank accounts
- Letters of credit
The Bottom Line
Waivers of exemption were marked illegal by the FTC in 1985. Contracts signed before this date remain enforceable, highlighting the importance of understanding all clauses within loan agreements. Modern contracts do not pose issues related to waiver of exemption.
If you find managing debt challenging, consulting with a debt relief company or a credit counseling agency could offer much-needed assistance.
Related Terms: Credit Practices Rule of 1985, collateral, default, lien, homestead exemption.
References
- Federal Trade Commission. “Complying With the Credit Practices Rule”.
- The Federal Reserve Board. “Staff Guidelines on the Credit Practices Rule”.
