Waiver of Exemption

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Waiver of Exemption: What It Was and How It Works

A waiver of exemption was a clause in consumer credit contracts that allowed creditors to seize property that state law otherwise protected from judgment creditors. The Federal Trade Commission (FTC) prohibited these waivers under the Credit Practices Rule of 1985.

How waivers worked

  • The waiver enabled a borrower to forfeit state-granted exemptions (for example, homestead protections or exemptions for household goods) as part of a loan agreement.
  • If the borrower defaulted and the lender obtained a judgment, the lender could pursue property that would normally be shielded from seizure.
  • These clauses were used to make loans available or better secured for creditors, especially in retail and small‑loan situations.

Why they were banned

  • The FTC ruled waivers unfair and difficult for consumers to understand.
  • The ban prevents creditors from overriding state law that establishes which personal property is exempt from seizure.
  • The rule also protects essential household goods (appliances, clothing, linens) and items of strong personal value (family photos, wedding rings) from being subject to creditor liens—unless those items were purchased with the loan and specifically agreed as collateral.

Mortgage exception and limits

  • Mortgage loans remain subject to foreclosure: state personal property exemption laws do not prevent a mortgagee from foreclosing on real estate used as security for the mortgage.
  • The Credit Practices Rule aimed mainly at preventing small lenders (furniture stores, appliance retailers, auto dealers, department stores) from attaching liens to a debtor’s home or other exempt property.
  • Lenders may repossess only items that were explicitly pledged as collateral at the time of the loan (for example, furniture bought on store financing can be repossessed if the loan is for that furniture).

Typical waiver language (example)

FTC examples of waiver clauses often read like: “Each of us hereby waives any benefit or relief from the homestead exemption and all other exemptions…as against this debt.” Such sweeping language was a target of the 1985 prohibition.

What lenders can repossess

  • Only property specifically agreed upon as collateral when the loan was originated.
  • Real estate used as mortgage collateral may be foreclosed.
  • Goods purchased with the loan (e.g., financed furniture) can be repossessed by the creditor.

Key takeaways

  • Waivers of exemption were outlawed in 1985 by the FTC’s Credit Practices Rule.
  • Modern consumer loan contracts cannot require borrowers to give up state‑law exemption protections.
  • Mortgages and items explicitly financed as collateral remain enforceable.
  • If you’re struggling with debt, consider contacting a reputable credit counselor or debt relief service for assistance.

Note on older contracts

Contracts that included waivers of exemption and were signed before the 1985 rule may still have enforceable terms under the law as it existed when they were executed.