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Is Any Property Outside a Creditor's Reach?

If a debtor voluntarily paid his/her judgment, there would be no need for a collection attorney. Since the failure to pay a creditor back happens more often than not, should a creditor want to enforce a judgment, he needs a competent collection attorney. One of the best tests of competency is how a collection attorney responds to a debtor's claim of exemption. A judgment debtor utilizes a claim of exemption to protect his property from a judgment creditor.

Next, a writ of execution (a court order granted to put in force a judgment of possession obtained by a plaintiff from a court) is used to authorize the sheriff to levy assets of the debtor. Although it only costs $40.00 to levy a bank account, the complexity occurs when the debtor claims an exemption on the funds levied.

Fortunately for creditors, a case recently came down that answers the question about whether money that a person sets aside for the "qualified higher education expenses" of his children under Internal Revenue Code section 529 (so-called 1443660093_document-dollar.png"section 529 savings accounts") is exempt from collection.

In O'Brien v. AMBS Diagnostics (4/21/2016 - Second Appellate District Case No.: B263364), Diagnostics obtained a large judgment against Timothy O'Brien (O'Brien). The creditor had a Writ of Execution issued and served a notice of levy upon Fidelity Investments. O'Brien filed a Claim of Exemption seeking a judicial declaration that three section 529 savings accounts held in his name (then valued at $54,765.39, one for each of his three children) and four individual retirement accounts held fully or partially in his name (then valued at $465,350.04) were all fully exempt from enforcement of the judgment.

For all seven accounts, O'Brien invoked the exemption for "individual retirement accounts" set forth in CCP section 704.115. The trial court held a hearing and granted O'Brien's claims for exemption for all of the section 529 savings accounts and for the full amount of all four retirement accounts. With respect to the section 529 savings accounts, the trial court noted the absence of any "statutory or case authority" as to whether section 529 savings accounts are exempt from levy, but reasoned that the same public policy applies to both the private retirement plans and the 529 plans.

In regards to the individual retirement accounts, the court concluded that exempting the full amount of the retirement accounts was necessary because O'Brien was self employed and, upon his retirement would have only the net after tax income from his private retirement plans and whatever social security income he and his wife might receive. The Appellate Court found otherwise.

The California Legislature has exempted certain items of property from levy by creditors with money judgments. Those exemptions are set forth in CCP sections 704.010 through 704.210. Additionally, Section 529 of the Internal Revenue Code creates a narrow exemption from federal income taxes for money that is earned as part of a "qualified tuition program." (26 U.S.C. § 529.) Under this exemption, an individual may contribute cash, after paying income taxes on it, into a 529 savings account; the individual may later withdraw money from that account-without having to pay any income tax on the account's earnings-if that money is used to pay the "qualified higher education expenses" of a relative. (§ 529, subds. (a), (b), (c)(1), (c)(3) & (e). The Appellate Court noted that exemptions are creatures of statute and that no property is exempt unless made so by an express provision of law. Therefore, the 529 accounts are not exempt from execution and the courts cannot enlarge statutory exemptions only the Legislature can.

With respect to the retirement accounts, the Appellate Court found that the trial court abused its discretion because the private retirement plan exemption is not an all-or-nothing affair. On the contrary, it exempts these accounts only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires and for the support of the spouse and dependents of the judgment debtor. The trial court refused to "weigh or take into consideration what O'Brien's and his wife's current wages and salaries", but those are facts that the case law dictates must be considered in assessing O'Brien's ability to replenish his retirement account prior to his retirement.

The matter was remanded for the court to apply all of the relevant factors in deciding what portion of the four retirement accounts is necessary for the support of O'Brien and his dependents.

The moral of this case is that a competent collection attorney can and should be able to create a compelling argument that helps the trial court carefully analyze whether and to what extent an exemption should be allowed. To discuss your collection issue with an experienced collection attorney, contact Ronald P. Slates today.

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