Historically, a creditor could take everything you owned in payment of your debt. In the Middle Ages and before, creditors could even take possession of the children of a debtor or the debtor himself if he couldn’t pay. Today, debt slavery is forbidden by law (not to mention all moral sensibility). Moreover, the law doesn’t just protect your person from a creditor. It protects certain property that you need to survive.
A creditor can’t leave you on the street in the cold. One of the most important protections offered to debtors by law is the Ohio bankruptcy homestead exemption.
What is a homestead exemption?
The homestead exemption protects a certain amount of equity in your home from creditors. Your equity is the amount of your home that you’ve paid off. For example, if you borrowed $100,000 and used it to purchase a home and you still owe $70,000, you have $30,000 of equity in your home. If you live in a state where the homestead exemption is $30,000 or more, creditors cannot seize your home for payment. If you live in a state in which the homestead exemption is only $10,000, creditors may be able to sell your home and pay you $10,000.
The homestead exemption is important in two arenas. First, a creditor who sues you for collection and gets a judgment against you (a judgment creditor) is bound by the exemption. If you fall within the exemption, that creditor cannot seize and sell your home. Second, the exemption protects you in bankruptcy. When you file for bankruptcy under Chapter 7, your nonexempt assets are sold and the proceeds are used to pay your creditors. If you fall within the homestead exemption, your home is safe from sale in bankruptcy.
Ohio Homestead Protection Amounts
Until recently, the Ohio bankruptcy homestead exemption was just $21,625. The exemption was raised in 2013 to $125,000 and today, it stands at $136,925. If you’ve paid off less than $136,925 of your home, it’s safe from creditors. If you’re a married couple filing jointly for bankruptcy, the homestead exemption doubles.
Let’s look at an example. Say you live in Dayton and you own a home worth $500,000 with an outstanding mortgage of $400,000. You’ve incurred some large debts and your creditor has a court judgment against you for $300,000. Is your home safe? Your home equity is the value of your home less the outstanding mortgage. In this case, that’s $100,000. You’re under the $136,925 cutoff point, so your home is safe. Your creditor will have to seek other ways to get its money. In this example, if you file for Chapter 7 bankruptcy protection, your home is safe, too.
Let’s say you own that same home, but you only owe $100,000 on your mortgage. Now your home equity is $400,000. In this case, your judgment creditor could sell your home and pay you $136,925. The good news is that you’re entitled to that money. The bad news is that you’ve lost your home. Under Chapter 7, the trustee would be able to sell your home and pay you the $136,925, too.
What if you fall right on the edge? Say you own your $500,000 home and you owe $370,000. Your home equity is $130,000, just under the cutoff. Good news — your home is safe. As long as you fall under the exemption amount, no matter how close you come, your home is unquestionably safe from creditors.
What if you fall right on the edge the other way? What if your home equity is $140,000? Technically, a judgment creditor or bankruptcy trustee may sell your home. Realistically, however, selling a home takes a lot of time and effort. If you fall just over the exemption amount, your creditor or trustee will probably agree not to sell your home in exchange for payment in the amount that your home equity exceeds the Ohio bankruptcy homestead exemption.
Can creditors take your home?
We’ve talked a lot about what how exemption amounts affect whether a creditor can sell your home, but how do they get that right in the first place?
When you’re delinquent on a debt, creditors will usually try to collect from you on their own or through a collection agency before taking you to court. They’ll call and send letters and they may offer to work out a payment plan. Alternately, you can reach out to your creditors when you’re behind on your payments and try to work out a payment plan. If none of this works, the creditor may sue you for collection.
When a creditor sues you for collection, you’ll receive a notice from the court of the suit and you’ll have to go to court. If you don’t, the court will decide in favor the creditor by default. If you do, you’ll be able to argue your side of the story and try to show the court that you either don’t owe the debt or that you owe less than your creditor is claiming. Once both sides have been heard, the judge will issue a decision. She’ll determine how much, if any, you owe. That decision is binding. You may be able to appeal, but the appeals process is expensive and time-consuming and you may not get a different outcome.
Once the creditor has a legal judgment against you, it can ask the court to help it collect. Courts and creditors have several options. They can garnish your wages, levy your bank accounts (take money straight out of them), or place a lien on your home. When a creditor places a lien on your home for the amount of the judgment, it may simply wait until you sell or refinance your home. However, the creditor may also ask the court to force the sale of your home.
Selling a home takes time and effort. A judgment creditor will only force the sale if it will receive enough equity to cover its costs, which may include any other liens (such as a mortgage) on the property. Unless that’s the case, the creditor will wait for you to sell or refinance before it collects.
In either case, the homestead exemption is there to protect you.
How can I protect my home from creditors?
If you have a substantial amount of debt, your home may be at risk. When a creditor sues for collection, gets a judgment, and places a lien on your home, that judgment debt becomes secured debt. Secured debt is not dischargeable in bankruptcy. So, if you’re struggling with large amounts of debt, you should consider bankruptcy before the court renders a judgment against you. Before the creditor places a lien on your home, the debt is unsecured and may be discharged in bankruptcy.
The decision to file for bankruptcy is a serious one. If you’re struggling with debt, reach out to an experienced bankruptcy attorney to discuss your situation and your options for how best to protect your home, especially if it is your only significant asset.