October 29, 2020 — Report

State exemption laws, which protect income and property from seizure by creditors, are a fundamental safeguard for families. Exemption laws are designed to protect consumers and their families from poverty, and to preserve their ability to be productive members of society and achieve financial rehabilitation.

Never has the need for strong exemption laws been so starkly apparent. The COVID19 pandemic has exposed the enormous gaps in the states’ exemption laws. Only when stimulus checks started going out to families’ bank accounts and were being garnished by debt collectors did many states realize that they had no laws to protect a basic amount in a family’s bank account. As workers lost jobs and hours, states scrambled to institute moratoriums on wage garnishment, bank account garnishment, and collection lawsuits. But these moratoriums are temporary and some have already expired. Once the pandemic recedes, families struggling to get back on their feet are likely to face a wave of lawsuits for medical bills, back rent, credit card debt, the balance due on repossessed cars, and even utility bills.

Weak exemption laws also exacerbate the racial wealth gap. Communities of color are disproportionately burdened by debt, disproportionately subject to judgments in collection lawsuits, and disproportionately subject to wage garnishment. Because of longstanding discrimination, Black and Latinx households have less wealth and less of a safety net to draw on during challenging financial times. Communities of color have disproportionately suffered the effects of the pandemic—not just job loss and financial hardship but also illness and death.

Without improved exemption laws, garnishment and similar methods of enforcing judgments in collection actions will drain away the wages and resources that families need — and that the local economy needs them to spend at Main Street businesses. Reform of exemption laws will not only protect families from destitution but will act as an economic recovery tool that will steer money into state and local communities.

This National Consumer Law Center report surveys the exemption laws of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. Despite the importance of state exemption laws, this report finds that not one jurisdiction meets five basic standards:

Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;

Allowing the debtor to keep a used car of at least average value;

Preserving the family’s home—at least a median-value home;

Preserving a reasonable amount in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses for several months; and

Preventing seizure and sale of the debtor’s necessary household goods.

Best states: Massachusetts, which modernized its archaic exemption laws in 2010, and Nevada, which also recently improved its laws, come closest to meeting these five basic standards, each rating a high B grade. Solid B states include California, the District of Columbia, Puerto Rico, and Texas. New York, Oklahoma, and South Carolina rate low B grades. Kansas, North Dakota, and Wisconsin fall just below a B.

Worst states: At the opposite end of the scale are several states whose exemption laws reflect indifference to struggling debtors. These states allow debt collectors to seize nearly everything a debtor owns, even the minimal items necessary for the debtor to continue working and providing for a family. Georgia, Kentucky, Michigan, New Jersey, and Utah are the worst and rate an F. Meanwhile, Alabama, Arkansas, Indiana, Maryland, Missouri, Pennsylvania, Wyoming are nearly as bad, rating a low D.

Since 2019, California made several significant improvements in its exemption laws. Idaho, Maryland, Minnesota, Mississippi, New Hampshire, Utah, and Virginia also made improvements. In addition, in eight jurisdictions—Colorado, Connecticut, the District of Columbia, Illinois, Maine, Massachusetts, North Dakota, and Washington—that base their wage garnishment protection on the higher of the state or federal minimum wage, the amount protected from garnishment increased because of increases in the state minimum wage. On the other hand, the dollar amount of key exemptions continued to erode in many states—those that do not have inflation adjustment provisions built into their laws—simply because of inflation and increasing home values.