You’ve probably heard the homestead exemption and other property exemptions described as “bankruptcy exemptions.” While these exemptions are applied in Ohio bankruptcy cases, they weren’t created just for bankruptcy. State law provides these exemptions to ensure that creditors don’t take money and property Ohio residents need to provide for themselves. The homestead exemption was created specifically to protect homeowners from their creditors who might try to take their homes to cover debts like medical bills and credit card debt.
Outside of bankruptcy, the homestead exemption protects a certain amount of value in your primary residence from judgment creditors. In bankruptcy, the exemption provides the same protection against the trustee from selling your home to pay creditors.
Ohio’s Homestead Exemption is Updated Every 3 Years
Back in 2014, the Ohio legislature gave the homestead exemption a big boost–the exemption jumped from $21,625 to $125,000. In other words, Ohio homeowners were suddenly able to protect nearly $100,000 in additional equity in their homes. But, that number isn’t fixed. Lawmakers recognize that property values and the cost of living change over time, so they’ve built in an automatic adjustment every three years.
The most recent adjustment took place April 1, 2022. The current amount of the Ohio homestead exemption is $161,375. Unless the legislature makes another change–which is very unlikely–that number will remain the same until March 31, 2025.
Married Couples Can Double the Ohio Homestead Exemption
Ohio law extends the homestead exemption and other property exemptions to “every person.” That means that a married couple filing bankruptcy jointly can each claim the Ohio homestead exemption, increasing the amount of equity they can protect to $322,750. That’s more than the typical home value in Ohio.
How The Homestead Exemption Works
Property exemptions apply to your interest in a piece of property, which is not necessarily the same as the value of the asset. In other words, if you have a mortgage, you don’t have to worry about protecting the full value of your home. You only need the exemption to cover your equity.
Equity is the difference between the value of your home and the amount of your mortgage debt.
Let’s say you and your spouse live in Dayton and own a home worth $450,000. That’s more than the homestead exemption, even after doubling. But, you have outstanding mortgage debt of $325,000. Your asset–the equity–is just $125,000 (The home value of $450,000 minus the outstanding debt on the property of $325,000) That full amount is exempt, even if only one spouse is filing bankruptcy. That means that if you otherwise qualify, you can file Chapter 7 bankruptcy, eliminate many unsecured debts, and still keep your house.
Now, let’s take a look at what happens if you have non-exempt equity in the property.
What Happens if You Have Non-Exempt Equity?
Imagine that you and your spouse own the same home described above. But, you have no mortgage debt. That means you own the home free and clear, and your asset is worth the full $450,000 value of the property. If you and your spouse file Chapter 7 bankruptcy together, the bankruptcy trustee can liquidate your home. That means they’d sell the house to get the $127,250 in non-exempt value in the home and distribute it to your creditors.
Of course, many people in this situation choose not to file Chapter 7 bankruptcy. One alternative may be to file for Chapter 13 bankruptcy instead. But, if it turned out that Chapter 7 was still your best option, you would be entitled to the protection of the homestead exemption even if the property was sold. That means the trustee would have to return $322,750 to you and distribute only the leftovers to creditors.
Will the Trustee Always Sell a Home with Non-Exempt Value?
In the example above, there was a substantial amount of non-exempt equity in the home. So, it made sense for the trustee to sell the property, even though most of the proceeds would go back to the homeowner. But, what if the amount of equity is much smaller? For example, what if the value of the home was $330,000, meaning that the homestead exemption covered all but $7,250 of the value in the home.
In this situation, the trustee likely won’t want to sell your home. It would take time and effort and cost money to sell the house. The amount left for creditors likely wouldn’t make the process worthwhile. In that situation, the debtor can usually work out a settlement with the trustee and keep the home.
A Word About Investment Property
It is important to understand that the Ohio homestead exemption applies only to primary residences. Investment property is not protected. Generally,
“primary residence” means the home that you live in everyday–the place where your groceries are kept, where you put the kids to bed, and where you receive your mail and deliveries. The house at the lake that you visit every other weekend is not your primary residence, nor is a house you rent out for income or are allowing your unemployed cousin to use because it’s sitting empty.
If you’re unsure as to the status of your real estate under the law, consult a bankruptcy lawyer before you make any decisions.
Image from Flickr user Joe Shlabotnik