I recently was asked during a consultation whether FEMA grants made to hurricane victims are exempt from creditor garnishment. I doubt there is any court decision on this issue inasmuch as this year’s weather is so unique and FEMA grants are made to areas designated as major disaster areas.
My guess is that if FEMA money is applied to repair your primary residence the use of the money could not be attacked as a fraudulent transfer since it would represent money applied to exempt homestead. The more interesting issue is whether a creditor could garnish a debtor’s claim or application to FEMA or money awarded by FEMA before the debtor receives the money.
I think that, technically, FEMA applications and grants are not exempt from garnishment. However, a court would likely be sympathetic to most debtors who suffered major damage to their home , and courts would probably try to find a way to exempt the claims. For example, FEMA applications and grants made to spouses jointly would be exempt form the creditors of just one spouse as tenants by entireties property.
If a debtor is expecting a FEMA grant which might be garnished by an aggressive creditor, one solution is to borrow repair funds from a bank and pledge the FEMA claim or grant as part of the security for the repair loan. The bank’s security interest in the FEMA money would protect that grant or loan proceeds from any creditor. When FEMA is ready to pay the claim, it would pay directly to the bank who is the debtor’s assignee of the claim.
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