If there’s a silver lining for debtors in this bad economy, it’s that you won’t lose everything. The state provides a range of “exemptions” that prevent creditors from taking the essentials of your life.
But the Nevada legislature has expanded the state’s exemptions to protect assets well beyond the essentials. The 2011 legislature created unlimited assets shelters for individuals with closely held corporations, life insurance policies and annuities. This is on top of a $550,000 homestead exemption, one of the largest such exemptions in the country.
The expanded exemptions appear consistent with Nevada’s business policies, holding itself out as the Delaware of the West. Obviously the state wants to provide an incentive for the wealthy to move to Nevada; the state prospers when its residents have resources.
Still, the scope of the amendments raises the question of diminishing returns. When exemptions become shelters, it becomes harder for local individuals, businesses and lenders to collect their debts—and potentially triggering a domino effect as their own businesses suffer. Similarly, lenders and vendors may be more reluctant to do business with Nevadans because of collection risks created by unlimited exemptions. The resolution of Nevada’s policy is beyond the control of lawyers, but the ramifications are playing out in the state’s courts.
The issues are put in context with a primer on exemptions. States recognize the bare necessities in life: clothing, shelter, a vehicle and the like. So states adopt exemptions that protect an individual’s interests, up to a certain level, in these essentials. The exemptions prevent creditors from liquidating an individual’s every last personal possession to pay debts. It does not make sense to leave a debtor destitute with nothing more than suspenders and a wooden barrel. Public policy favors leaving a debtor with enough assets to provide a self-sustaining household rather than creating a ward of the state. Hon. William Houston Brown et al., Bankruptcy Exemption Manual § 1.1 (2010).
Read more...The Writ, official publication of the Washoe County Bar Association (pages 14-15)