What Is a Waiver of Exemption?

What Is a Waiver of Exemption?

Let me explain what a waiver of exemption used to be. It was a clause in consumer credit contracts or loan agreements that let creditors seize or threaten to seize specific personal possessions or property, even if state law exempted them. This could include your primary residence. Lenders could use this even against state protections.

The Federal Trade Commission stepped in and banned these under the Credit Practices Rule in 1985.

Key Takeaways

You need to know that a waiver of exemption was a standard part in consumer credit contracts, allowing lenders to take certain personal property if you defaulted on a loan. Every U.S. state exempts some personal items from seizure in civil cases, but signing a waiver meant you gave up that protection, letting the lender go after those items if you didn't repay.

These waivers got outlawed after the Credit Practices Rule came out in 1985.

Understanding a Waiver of Exemption

Before 1985, you'd often see waivers of exemption in credit contracts. They helped creditors secure loans that might not have been offered otherwise. If you defaulted, the lender could sell the listed property to recover costs.

Remember, every state exempts necessities like your main home, car, and essential household goods such as refrigerators or clothing from seizure. But if you signed a waiver, you made those available to the creditor in a judgment to settle the debt.

Important Note on Mortgages

There's an exception to the ban on property seizure: home mortgages. State personal property laws don't apply here because creditors always have the right to foreclose on the property if you default. These laws target smaller lenders, like those in furniture, appliance, auto, or department stores, to stop them from putting liens on your home.

FTC Regulation of Waiver of Exemption Practices

The FTC provides an example of a typical waiver clause: 'Each of us hereby 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 FTC called these unfair to consumers and hard to grasp. The 1985 rule didn't ban specific collateral but said creditors can't go against state laws on property exemptions.

Additionally, the rule stopped creditors from putting liens on necessary household goods like appliances, clothing, linens, or personal items like family photos and wedding rings. It doesn't cover goods bought directly with the loan, where the lender can repossess on default.

For instance, if you finance a bedroom suite from a furniture store and stop paying, they can take back the furniture, but not your car or clothing.

Fast Fact

Even though the FTC ban protects some of your property from seizure, defaulting on loans has other serious consequences you should avoid. If you're having trouble with debt, consider a debt relief company or credit counseling agency for help.

When Did the FTC Ban Waivers of Exemption?

Waivers of exemption became illegal in 1985, as per the Credit Practices Rule.

What Can a Lender Repossess to Satisfy a Loan?

A lender can only repossess items you agreed to at the time of the loan. For example, if your house is collateral for a mortgage, it's at risk. But your car isn't unless you offered it as additional collateral when signing.

What Are Common Forms of Collateral?

Collateral comes in various forms, including real estate, art, jewelry, stocks, bank accounts, and letters of credit.

The Bottom Line

Waivers of exemption were made unlawful in 1985, but contracts signed before then are still enforceable, even if you weren't aware of the waiver. For any modern contract you sign, waivers aren't a concern.