When clients who are struggling financially approach the personal bankruptcy lawyers at Dworken & Bernstein, one of the questions they often ask is: “If I file for personal bankruptcy protection, can I keep my home?” For a great number of people, the answer is “yes,” but the reasons why are a little more complicated.
In this blog post, we explain the homestead exemption in personal bankruptcy and the circumstances in which the equity debtors have in their homes – which, for most people, constitutes their largest asset – can and cannot be shielded from creditors.
[Note that this article is not about the “homestead exemption” for purposes of real estate taxation in Ohio. That is an entirely different topic.]
What is the Homestead Exemption?
In simple terms, the homestead exemption is a feature of debtor-creditor law that shields (or “exempts”) the equity debtors have in their residential property (or personal property) from their unsecured creditors. (For most Ohioans, that’s anyone other than the lender that holds the mortgage on the debtor’s home.)
The reasoning behind the homestead exemption is straightforward: As a society, we don’t want creditors to have the power to put debtors out on the street over relatively small debts.
In the specific context of personal bankruptcy, our bankruptcy laws are written to give debtors a “fresh start.”
Few debtors would avail themselves of those laws if filing for bankruptcy guaranteed they would end up homeless.
Homestead exemption amounts
The amount of the homestead exemption varies from state-to-state. In other words, the laws of the state where the debtor lives decide how much of the equity in a home the debtor can shield from creditors.
This is important, because the higher the exemption, the lower the chance a debtor’s liabilities will exceed it. When a debtor’s liabilities exceed the homestead exemption amount, then unsecured creditors can, in fact, force the debtor to sell the home and turn over any equity in excess of the homestead exemption amount to them.
So, for example, if a debtor owes creditors $50,000, has $60,000 in equity in her home, and lives in a state with a $70,000 homestead exemption, the debtor’s entire $60,000 in home equity will be shielded from creditors. If, on the other hand, the state has only a $40,000 homestead exemption, creditors could force the sale of the debtor’s home and foreclose on the $20,000 of her equity ($60,000 minus $40,000) that exceeds the exemption.
The Homestead Exemption in Ohio
As homestead exemptions go, this is a fairly generous amount (though not as generous as in Florida, where the exemption is very nearly unlimited). It means Ohio debtors who file for personal bankruptcy under Chapter 7 of the Bankruptcy Code can protect up to $136,925 in home equity from their creditors and potentially use that equity in making a “fresh start” after receiving a bankruptcy discharge.
This was not always the case, however. Until 2016, the exemption stood at barely more than $20,000.
Experienced Ohio Bankruptcy Counsel
Personal bankruptcy is not a fun process for debtors or creditors, to be sure. The relatively large homestead exemption under Ohio law has given debtors more of an incentive to seek bankruptcy protection and may make it easier for them to get back on their feet, but comes at a cost for creditors.
If you find yourself struggling under growing debt, or are owed money by someone struggling, then contact an experienced Ohio bankruptcy attorney from Dworken & Bernstein today. We represent Ohioans in resolving a wide variety of debtor-creditor issues and may be able to help you, too.
The information presented in this post is not legal advice and does not form a lawyer/client relationship. Laws and circumstances can differ and change.
Please contact us for a personal review of your situation