What is a waiver of exemption?

A waiver of exemption was a clause that permitted creditors to take or threaten to confiscate certain personal belongings or property. It was used in consumer credit contracts and lending agreements. The principal home of the borrower may be included in the property that the loan attaches. Lenders might have this condition even if the parcel was immune from seizure under state law.

Under the Credit Methods Rule, the Federal Trade Commission (FTC) forbade these practices in 1985. 1. Deconstructing the Waiver of Exemption.

Waivers of exemption were often included in credit contracts before 1985. Creditors used them to obtain a loan that they may not yet be able to get without the waiver clause. The clause gave the lender a way to recover costs in the event of a default by selling the property pledged as collateral for the loan.

Specific personal property is immune from seizure in a civil judgment in every state in the Union. Property deemed requirements of life, such as a person’s principal residence, vehicle, and essential household items like clothes or a refrigerator, are often immune from seizure. A house mortgage is one exception to the prohibition against property seizure. Mortgage loans, in which a creditor always has the option to foreclose on the property in the case of a default, are exempt from state personal property laws.

Instead, the restrictions are designed to prevent smaller lenders from putting a lien on the debtor’s property, such as those in the department store, furniture, appliance, or car dealership industries. If a borrower signs a waiver of exemption, the creditor who gets a judgment to settle a debt might use the exempt property.

The FTC oversees the waiver of exemption procedures.

“Each of us at this moment 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 Federal Trade Commission provides as an example of a typical waiver clause.1. According to the FTC, these waivers of exemption are poorly understood and unjust to consumers. The 1985 restriction said that creditors may not violate the state law’s order governing property exemptions; it did not expressly exclude any collateral.

“Complying with the Credit Practices Rule,” Federal Trade Commission. Reached on November 20, 2020.

Additionally, the Credit Practices Rule of 1985 forbade creditors from placing liens on necessities such as clothes, appliances, and linens and on sentimental objects like wedding bands and family pictures that were judged more valuable than money. Household goods acquired explicitly with a loan are exempt from this provision; in such instances, the creditor who issued the loan has the right to reclaim the items after a default.

Consider, for illustration purposes, that you used the store financing option to purchase a brand-new bedroom set from a nearby furniture retailer. The retailer might repossess furniture bought with a loan. If you cease making loan payments, the retailer may not come for your clothes or automobile.