What Is an Exemption When Dealing With Debt?

An exemption when dealing with debt refers to certain assets or monies that cannot be legally garnished or accounted for when calculating a person's or company's debt. Some debts are exempt from bankruptcy, such as child support. This means that if a person files for bankruptcy, their credit card and personal loans may be forgiven, but their child support must still be paid out. The bankruptcy cannot forgive the debt of child support.

Bankruptcy

In bankruptcy (whether Chapter 7 or Chapter 13), a debt exemption, aside from child support, is an IRS lien. If the IRS audits you and finds you owe $4,000 in taxes, then this is an exempt debt. Other loans and debts may be forgiven in a bankruptcy, but you would still need to pay the IRS the money owed. Other debt exemptions include judgments from court orders and government loans such as student loans for college.

Debt Exemption vs. Nonexemption

To further understand debt exemption, it may be helpful to understand debts that are not exempt. If you have a mortgage with a bank and a savings account at the same bank, generally speaking, if you are not paying your mortgage, the bank has a right to garnish or freeze your savings account either to take the money owed or until you begin making payments again. Your savings account is not exempt, meaning the bank has every right to garnish, freeze or demand payments from the account.

Federal Benefits

Many federal benefits are exempt from garnishment if debt collectors make a claim against you. Your social security benefits, SSI income, military annuities and veterans' benefits are exempt for debt collectors.

Exemptions for Benefits

There are exceptions under some circumstances where benefits would be nonexempt from debt. If you have delinquent federal taxes or student loans, the government has a right to garnish or freeze your benefits. According to the Federal Trade Commission, social security benefits could be deducted before you receive them in order to pay child support or alimony, meaning that in these cases, your federal benefits are nonexempt.

Exempt or Nonexempt Disputes

There are times when there are legal arguments whether funds are debt exempt or not. If a bank receives a garnishment order, they will generally freeze funds until a court orders payment to the aggrieved party or informs the bank that funds should be unfrozen. If funds in the account include exempt monies such as SSI, you would write to the bank, informing them that funds in the account are debt exempt under federal law. If the bank doesn't unfreeze the account, you would go to court and request that the judge deem the funds as debt exempt and order the bank to release them.