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Waiver of Exemption What It Is How It Works

Waiver of Exemption What It Is How It Works

Waiver of Exemption: What It Is, How It Works

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.

The Federal Trade Commission (FTC) banned these practices under the Credit Practices Rule of 1985.

Key Takeaways

– A waiver of exemption was once a common provision in consumer credit contracts that permitted lenders to seize certain personal property in the event of a loan default.

– Every U.S. state exempts some personal property from being seized as a result of a civil case; however, a borrower who signed a waiver of exemption effectively allowed their lender to sue them for said property if they fail to repay their debt.

– Waivers of exemption were outlawed following the promulgation of the Credit Practices Rule of 1985.

Understanding a Waiver of Exemption

Before 1985, waivers of exemption were common in credit contracts. Their inclusion was a way for creditors to secure a loan that may not have been available without the waiver clause. In case of a default, the provision provided the lender an avenue to recoup expenses by selling the property listed as securing the loan.

Every U.S. state exempts some personal property from seizure in a civil judgment. Generally, property considered necessities of life—such as an individual’s primary home, car, and necessary household goods like a refrigerator or clothing—are exempt from seizure. Any borrower who signed a waiver of exemption made such exempt property available to a creditor who obtained a judgment to satisfy a debt.

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One exemption to the ban on property seizure is a home mortgage. State personal property laws do not apply to mortgage loans, as a creditor always retains the right to foreclose on the property in the event of a default. Instead, these laws are meant to prohibit smaller lenders, such as those in the furniture, appliance, auto dealership, or department store businesses, from attaching a lien against the debtor’s home.

FTC Regulation of Waiver of Exemption Practices

The FTC offers the following 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 unfair to consumers, in addition to being difficult to understand. The 1985 prohibition did not specifically ban any forms of collateral, instead mandating that creditors may not contravene (or go against the order of state law) that governs property exemptions.

Further, the Credit Practices Rule of 1985 separately prohibited creditors from attaching liens to household goods considered necessary, including appliances, clothing and linens, and items deemed of more personal than monetary value, such as family photos and wedding rings. The rule does not include household goods purchased explicitly with a loan, in which case the creditor who made the loan has the right to repossess after a default.

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As an example, imagine you bought a new bedroom suite of furniture from a local furniture store using a store financing option. The store may repossess the furniture purchased with the loan. However, if you stop paying the loan, the store may not seize your car or clothing.

While the FTC outlawing waivers of exemption means some of your personal property is safe for seizure, the other potential repercussions of defaulting on a loan are still best avoided. If you’re struggling with your debt payments, a debt relief company or credit counseling agency may be able to help.

When Did the FTC Ban Waivers of Exemption?

Waivers of exemption have been illegal since 1985, as stated in the Credit Practices Rule.

What Can a Lender Repossess to Satisfy a Loan?

A lender may only repossess items agreed upon at the time of the loan. For example, if you use your house as collateral for your home mortgage, the house is susceptible to repossession. However, your car is not eligible to be repossessed unless it was offered as additional collateral at the time of the loan signing.

What Are Common Forms of Collateral?

Collateral can take many forms, but some of the most common are real estate, art, jewelry, stocks, bank accounts, and letters of credit.

The Bottom Line

Waivers of exemption were deemed unlawful in 1985; however, any contracts signed before that date are still enforceable, even if you didn’t notify them of the waiver of exemption. Waivers of exemption are not an issue for any borrowers signing a modern contract.

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