Homestead exemptions have been enacted in most states to protect homeowners from their creditors. Outside of bankruptcy, a homestead exemption protects your primary residence from judgment creditors. Inside the bankruptcy process, the homestead exemption prevents the trustee from selling your home to satisfy creditor claims. The basic idea behind the homestead exemption, and exemptions in general, is that creditors shouldn’t be able to take everything you have, your home being no exception.
Ohio’s Homestead Exemption Just Got A Lot Bigger!
As of March 27, the Ohio homestead exemption is now $125,000, which represents a 500% increase from the previous homestead number of $21,625. Married couples filing a joint bankruptcy case can double the exemption to protect up to $250,000 of home equity in a primary residence.
How It Works
The homestead exemption applies to equity, not overall real estate value. You can calculate home equity by subtracting any outstanding mortgage balances from the appraised value of your home. Need an example?
Let’s say you and your wife live in Dayton and jointly owe a judgment creditor $1,000,000. You own a home also worth $1,000,000 that has a mortgage lien of $850,000. Your home equity is $150,000. Due to the judgment as well as other debts, you and your wife file for chapter 7 bankruptcy.
In the example above, you’ll be able to file bankruptcy, shed all of your unsecured debts, and still keep your home.
Because Ohio’s new homestead exemption allows married couples to protect up to $250,000 of equity in a primary residence. With only $150,000 of equity in the example above, you’re in the clear despite the fact that your house has an appraised value of $1,000,000.
What Happens if the Cards Fall the Other Way?
For the sake of discussion, let’s say your home equity was $500,000 instead of $150,000. What then?
Well, in this example, the trustee would sell the home, but you and your wife would be entitled to the amount of your exemption. After the home was sold, you’d be receive a check for $250,000. The rest would go to your creditors.
What Happens if it’s a Close Call
Let’s change the facts again and say that your home in Dayton has $257,000 of appraised equity, putting you only $7,000 over the limit. Do you lose the home?
Trustees don’t want to sell your home. It causes them to incur costs and takes valuable time and money. In cases where equity barely peeks out over the exemption limit, it is almost always possible to negotiate a cash settlement with the trustee and keep your 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. The facts of each case matter, but a primary residence can usually be defined as a home that you live in everyday. The place where your groceries are kept, where you put the kids to bed, where the paper is delivered. You get the idea. The house at the lake that you visit every other weekend is not your primary residence.
If you’re unsure as to the status of your real estate under the law, consult a lawyer.
Image from Flickr user Joe Shlabotnik