What Assets are Exempt from Creditors in Florida?
Florida exemptions from creditors includes certain classes of property that Florida law makes unavailable from collection of monetary judgments. Florida’s statutory exemptions are available only to people who permanently reside in Florida. Some of the key assets that are exempt from creditors in Florida include:
- Head of household wages
- Annuities and life insurance proceeds and cash surrender value
- Homestead (up to 1/2 acre in a city and 160 acres in the county)
- Retirement accounts, including Roth IRA, IRA, 401k,
- Disability income
- Prepaid College Funding
- Social Security
- Miscellaneous Exemption
Florida Bankruptcy Exemptions from Creditors
An important concept in Chapter 7 bankruptcy is exemptions or exempt property. Bankruptcy exemptions describe the personal and real property a bankruptcy debtor may keep through the bankruptcy process and retain after the bankruptcy. As soon as a debtor files Chapter 7 bankruptcy in Florida, a Chapter 7 Trustee takes control of the debtor’s “non-exempt” property for the benefit of the debtor’s unsecured creditors. The bankruptcy debtor may retain his exempt property regardless of its value and amount. What property is “exempt” and what property is “non-exempt” depends on the exemption laws of the applicable state.
The most common Florida bankruptcy exemptions include:
- Homestead. Homestead is the debtor’s primary residence situated on up to 1/2 acre in a city and 160 contiguous acres in the unincorporated county.
- Personal property. Debtors who claim a homestead exemption are permitted to also exempt $1,000 of miscellaneous personal property, such as household furniture. Non-homestead debtors may exempt $4,000 of personal property.
- Motor vehicles. Cars are exempt up to $1,000 equity.
- Wages. The wages and earnings of a bankruptcy debtor who is head of household are exempt.
- Retirement accounts. The bankruptcy debtor’s IRA, 401k, pension, and similar retirement accounts are exempt under section 222.21(2)(a) of Florida law.
Common Questions and Answers
The most important exemption from creditors in Florida is the Florida homestead exemption. The homestead exemption in Florida protects up to 1/2 acre of real property in a city and up to 160 acres in the county from property liens and forced sale.
Other than the acreage limitation, there is no monetary cap on the homestead exemption in Florida.
Because the homestead exemption is provided for by the Florida constitution, it is very unlikely that it could be undone—it would take a full constitutional amendment, which is much more difficult than repealing a state statute by the Florida legislature.
In addition, because the Florida homestead exemption stems from the constitution, it cannot be impacted by any other law passed by the state, including fraudulent conveyance statutes.
When two spouses are named as debtors in the same judgment only one of the spouses can be head-of-household. The joint debtors cannot argue that they each support a separate child or parent.
Whenever two spouses each earn money it is possible that neither of them can be head of household. If the spouses have children then the higher earning spouse is probably head of household. But, if the two earning spouses do not have children neither will qualify to claim head of household exemption from wage garnishment. In that case, It is not enough that a debtor spouse earns more than his non-debtor spouse.
The debtor claiming the exemption must be the dependent spouse’s primary source of support when looking at the dependent’s income from all sources. Courts will also consider non-financial factors, including which spouse oversees financial decisions.
Annuities are perhaps the most popular financial product for asset protection planning. Florida statute 222.14 provides that annuities and annuity proceeds are exempt from creditors.
Generally, an annuity is a contract to pay money to a beneficiary over timer in periodic payments. There are several types of annuity contracts. Most annuities are commercial contracts between an owner and a large insurance company. Two individuals may agree to private annuity contracts. Private annuities between family members are often utilized for estate tax planning.
Fixed annuity contracts provide for a fixed periodic payment amount over a defined period of time. A variable annuity contract invests the annuity principal and changes the payment amount from time to time depending upon the value of the annuity’s investment. Florida courts have liberally interpreted this statutory exemption to include the broadest range of annuity contracts and arrangements.
All annuities are exempt from creditors according to Florida Statute 222.13. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors from outside countries including from the United States.
Death benefits paid from a life insurance policy after the death of the insured are exempt from the insured’s creditor under Florida Statute 222.13. Cash value in insurance policies protected from the policy owner’s creditors by Florida Statute 222.14. Florida law exempts the cash value of a debtor’s policy insuring the debtor’s own life. But the law does not protect the cash value of life insurance when the insured is someone other than the debtor. For example, a husband cannot exempt the cash value of a policy he owns insuring the life of his spouse or child.
If there is a joint judgment against two spouses, and one spouse owns an insurance policy for benefit of second spouse, the joint creditor may garnish a death benefit payable to surviving debtor spouse after the death of the insured spouse. The money could be protected if the policy were owned by an irrevocable insurance trust.
A 529 plan is a popular tax-advantaged tool that parents use to save for college. Florida prepaid college tuition plans and Florida’s 529 College Saving Plan are protected from creditors by Florida Statute 222.22.
Florida has one of the lowest automobile exemption allowances in the country. Florida residents may protect up to $1,000 of equity in an automobile pursuant to Florida Statutes. The exemption applies to automobile equity: the car’s wholesale value less the amount of any car financing. The fact that a debtor needs his automobile to go to work does not provide any protection.
Leased vehicles are not at risk because the debtor does not own the automobile. Similarly, “upside down” cars where the car finance balance is greater than wholesale value are not attractive creditor targets.
There are no comparable statutory creditor exemptions applicable to other motorized vehicles such as boats or airplanes.
Federal law protects social security payments from recipient’s creditors. Social security benefits, including both social security income and disability, are exempt from garnishment under Section 207 of the Social Security Act. These benefits retain their exemption after being deposited in to the debtor beneficiary’s financial accounts. It is against the law to even threaten garnishment of social security income.
There are exceptions to federal protection of social security benefits. The U.S. Government may garnish up to 15% of social security checks to collect money owed to the federal government. The same percentage (15%) of monthly social security payments may be garnished to enforce a court award of alimony or child support. In addition, the Internal Revenue Service may levy upon social security payments to collect tax debt.
Yes, Florida is a debtor friendly state. Florida has arguably the strongest homestead exemption in the entire country. In addition, Florida’s tenants by entireties allows allows a married debtor to protect joint assets from separate debt. Finally, Florida has an unlimited wage garnishment exemption for the head of family, plus exemptions of annuities, life insurance, and retirement accounts.
Yes, a 401k is entirely protected from creditors in Florida, along with other common retirement accounts: 403b accounts, IRAs, inherited IRAs, Roth IRAs, SIMPLE IRAs, among others.
Head of Household Exemption from Wage Garnishment
Wage garnishment can be an effective collection tool. One of the first things a creditor will do after obtaining a money judgment is serve a writ of wage garnishment on the debtor’s employer. Florida permits a continuing wage garnishment which means that a single writ of wage garnishment applies to the debtor’s future wages until the judgment is paid or until employment terminates.
Florida statutes do not permit wage garnishment for certain debtors. Section 222.11 of Florida Statutes states that a creditor may not garnish earnings include, wages, salary, commissions, and bonuses payable to a debtor who is “head of household.” A “head of household” is someone who provides the primary financial support for a family dependent. Dependents include children or parents. The dependent may live in a separate residence and may even earn part of their own support.
A creditor may not garnish a head of household’s earnings even after they are deposited into a bank account (provided they are traceable and identified). Exempt earnings remain protected in a bank account for up to six months.
The definitions of dependents for purposes of the head of household wage garnishment exemption should not be confused with rules regarding income tax dependents. You may support someone for purposes of establishing head-of-household exemption status even if you do not claim that person as a tax dependent.
Waiver of Head of Household Exemption
A debtor can waive his wage exemption so long as the waiver is informed and done in writing. Many lenders include head-of-household exemption waivers inside loan documents. A debtor may be surprised when a creditor garnishes wages even though the debtor is a head-of-household when the debtor inadvertently signed a waiver in credit documents.
The Bankruptcy Code provides a remedy to save debtors who have waived head of household protection in loan documents. Section 522 (e) of the Code invalidates otherwise effective waiver om favor of an unsecured creditor that a debtor has signed with respect to exemptions. For example, money a debtor has in financial accounts traced to head of household wages may be exempt in bankruptcy notwithstanding the debtor’s waiver of the exemption in loan documents.
Head of Household Exemption for Self-Employed Workers
Business owners may not be able to take advantage of the head of household exemption. There are court cases stating that “salary” paid to the sole owner of an LLC or corporation is not “earnings” for purposes of the garnishment exemption. These courts characterized the business owner’s earnings as profit distributions instead of salary when the sole owner controls the amount and timing of the payments.
In these cases, salary paid to the owner debtor fluctuated based on business cash flow, and there was no written employment agreement. Business owners need to carefully organize their business and compensation structure to qualify for the garnishment exemption.
Exemption of Life Insurance and Annuity Proceeds
The exemption of life insurance cash value and the annuity exemption continues even after the debtor has received money from the life insurance policy or the annuity. Insurance and annuity payments remain protected after they are deposited in a financial account if the funds can be accurately traced back to the exempt annuity or insurance policy. These do not have to be segregated in a separate account so long as the money in the account is traceable to the annuity or insurance policy.
The cash value of life insurance may not be exempt if invested in another asset. Support for example, that someone purchases a CD with proceeds from a cash value life insurance policy. The cash value of life insurance is exempt under Florida Statute 222.14. The statute exempts proceeds of life insurance and annuity contracts in any form. The issues would be whether the funds remain exempt after conversion of the the cash value to a certificate of deposit.
Courts have liberally applied the life insurance and annuity exemption to include cash proceeds after being deposited into a bank account. One case specifically exempted a CD purchased with life insurance proceeds.
The courts probably will limit the extent of conversion of proceeds in to another form of asset. There is relatively small difference between life insurance cash deposited in a bank account and a CD purchased at the same bank. If the same person were to use the insurance cash to invest in a rental property or purchase securities at a different financial institution a court may find that the extent of conversion changed the exempt nature of the insurance money.
Exemption of Pensions and IRAs
Pensions, 401k plans, IRAs, and other tax deferred retirement assets are protected from creditors in Florida pursuant to Section 222.21 of Florida Statutes. All forms of tax deferred retirement plans are protected. The statutory exemption specifically includes pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters.
Individuals typically hold a substantial portion of their financial wealth within IRA accounts and other tax qualified retirement plans. There is strong public policy in favor of protecting retirement plans from creditors. The exemption protects money the debtor needs to support himself and his non-debtor family members during retirement. Without protected retirement funds a debtor and his family could become dependent upon state government subsidy and care..
Defined Benefit Plans
A defined benefit plan can be protected even with a sole owner participant. The issue is that a define benefit plan with a sole owner participant may not be ERISA compliant plan. (ERISA is short for Employee Retirement Income Security Act). The question, therefore, is whether a retirement plan can still be exempt in Florida even though it is not ERISA compliant.
Previous version of the relevant Florida statute disallowed such exemption because the plan would not have been ERISA compliant.
However, the Florida legislature amended the statute to exempt retirement plans even if they are not ERISA compliant.
In 2009, the U.S. Court of Appeals for the 11th Circuit confirmed that Florida’s amended exemption statute exempts these plans. The case is In re baker, 590 F.3d 1261 (11th Cir. 2009).
Inherited IRAs and Roll-over IRAs
In past years there was a legal issue whether Florida’s IRA exemption extended to rollover IRAs and inherited IRAs. The Florida legislature resolved the issue in 2011. A 2011 amendment to Florida Statute 222.21 expanded the definition of an exempt IRA to include both rollover and inherited IRA accounts. Florida’s statutory protection of inherited IRAs takes precedence over a U.S. Supreme Court ruling that inherited IRAs are not exempt under bankruptcy law.
Disability income benefits under any disability insurance policy are exempt from collection under Section 222.18 of the Florida Statute. The exemption includes health, life, and accident disability insurance proceeds.
Miscellaneous Statutory Exemptions
Florida statutes provide several specific creditor exemptions such as exemptions of professionally prescribed health aids, hurricane savings accounts (with restrictions), medical savings accounts, and unemployment benefits.
Using Florida Exemptions in Other States
When a creditor obtains a judgment in another state against a Florida resident the creditor may enforce the judgment collection through the foreign court that issued the judgment. Florida residents may not export their Florida exemption to other state’s courts. Florida residents cannot use Florida exemptions to protect personal property located in states other than Florida.
If you work in another state, you are subject to the wage garnishment laws of the state where the work is performed. Furthermore, if a Florida resident owns or maintains real or personal property outside of Florida, the debtor’s protection of that property is determined by the exemption laws of the state where the properties are located.
Where Are Debtor’s Assets Located?
It is important to determine where certain assets are legally located in order to understand the exemption and collection law applicable to the asset. The location of real property is obvious. But, some debtor’s effectively relocate foreign real estate by owned the property in an LLC and holding the LLC interests in Florida. In this manner, the debtor owns moveable LLC interests in Florida, subject to Florida laws, rather than owning the underlying real property situated outside Florida.
Asset location is an issue primarily when debtor’s plan to protect financial accounts. Most financial institutions provide that their customers’ financial accounts are situated at the branch office where the account is maintained or in the state where the customer resides when the account was opened.
For example, if a Georgia resident opened an IRA account at a Georgia branch of a national financial institution, and the debtor then moved to Florida, Florida exemption laws might not apply to the IRA account. The account may instead be anchored at the Georgia branch where it was opened. The new Florida resident is better protected if he moves his existing financial accounts to a Florida branch of the same financial institution or to a new institution with Florida offices.
Wages, salary, and commissions are in the state where the employee performed the work. A judgment creditor may garnish a Florida resident’s earnings in the court of any state where the Florida earned the money. A judge in the foreign state would not apply Florida’s head of household earnings exemption to a writ of wage garnishment.. Only earnings payable in Florida for work performed in Florida are protected from wage garnishment when the debtor is head of household.
Exemption of Child Support Payments from Garnishment
Some clients want to know if child support payments are exempt from garnishment.
For example, suppose a mother receives child support payments from her ex-spouse. The mother does not work and does not have any separate income. The mother uses some of the child support payments to support the children that live with her. The mother saves the remaining amount of child support payments in her personal bank account.
The mother has a monetary judgment against her. Can the judgment creditor garnish the the funds in the bank account?
In that situation the funds are likely exempt. The head of household exemption exempts money earned from someone who is head of the family. The exemption applies to funds held in a bank account for up to six months. In the above example, the money was earned by the head of household, who is the ex-spouse and was subsequently deposited into a bank account. Even though the mother is not the wage-earner, she can still probably claim that the funds are exempt. Further, this result matches the purpose of the law, which is not to leave the family, and in this case the children, destitute and reliant on the state.
Voluntary Waiver of Florida Exemptions
Florida law permits debtors to waive in favor of a particular creditor any of the asset exemptions provided by Florida Statutes. Many lenders include waiver provisions in their standard loan documents. Some debtors inadvertently waive Florida asset protections by signing documents during a loan closing that include exemption waivers.. To be effective and enforceable, exemptions waivers must be conspicuous and not hidden from reasonable discovery in fine print legalize. Borrowers should watch out for exemption waivers in loan documents and carefully consider whether the loan contract warrants waiver of their asset exemptions.
What to Do Next
We help people go through their assets and income and determine what is at risk of collection from a judgment creditor. We then develop a plan to protect any exposed assets from collection. If you’re interested in protecting your assets from monetary judgment creditors, contact us or schedule an appointment online.