Since 2005, when the nation’s bankruptcy laws changed to heavily favor creditors, the ability of Ohio debtors to protect their most valuable asset — their home equity — was minimal.
But that will change March 27, when a law will take effect that raises Ohio’s homestead exemption on home equity nearly six times the current limit.
The law, which Gov. John Kasich signed Dec. 20, increases the exemption limit single homeowners can declare on the equity in their house to $125,000 from the current $21,625. And the limit is per person, meaning that if a couple in bankruptcy jointly own a house, they can protect up to $250,000 of the home’s equity.
For example, if a couple has a $250,000 home that they have paid off but are forced into bankruptcy, they can protect all of that $250,000 of equity from creditors.
“From a debtor’s perspective, it is a godsend,” said Brian Flick, a Cincinnati-based attorney and former Toledoan who, as a member of the National Association of Consumer Bankruptcy Attorneys, helped lobby Ohio legislators to pass the increased limits.
“If there is equity in their property, they’re able to preserve so much more that if a creditor is able to get a lien on the property, if it impairs that $250,000, we can get rid of it in bankruptcy,” Mr. Flick said.
However, the intent of increasing the homestead exemption was not to protect consumers, it was mainly to protect small business owners.
Jeff Morris, a bankruptcy law professor at the University of Dayton, said entrepreneurs and small business owners frequently work out of their homes and often use their homes as collateral when starting businesses.
Most small business owners fail at least once before succeeding. Under current law, most not only would lose their business in bankruptcy, they’d lose their home as well.
“By protecting that asset, it takes away the risk of losing a home. Otherwise, a small businessman might be less willing to take a risk when he knows that failure could end up costing [his] family a place to live,” Mr. Morris said.
“That’s actually the premise of exemption law, per se, and bankruptcy law. Exemption preserves my incentive to work hard after I’ve crashed. I can make a fresh start and can make another stab at this venture,” Mr. Morris said. “That’s what exemption law is intended to do, protect the core assets, whatever they may be, so that people don’t end up being wards of the state.”
Mr. Flick said that the legislation originally introduced into the General Assembly called for a $1 million homestead exemption and put Ohio on par with other business-friendly states such as California, Texas, New York, and Florida.
Florida has an unlimited homestead exemption, and in the past, some bankrupt executives have been allowed to keep multimillion-dollar mansions as protected assets.
“We’re never going to get in line with that,” Mr. Flick said. But most state legislators were convinced the limits had to rise substantially, he added.
“The creditor lobby fought very hard to keep the limit where it was,” Mr. Flick said.
Eventually, it came down to a $50,000 limit that the creditor lobby wanted and a $250,000 limit that the consumer lobby wanted. The final $125,000 limit ended up being the compromise, Mr. Flick said.
Even though it is less than what was sought, the exemption is still “the most debtor-friendly legislation we’ve ever seen in Ohio,” Mr. Flick said. “If we can remove that stigma as a state and be a little more debtor-friendly, it’s going to make Ohio more friendly not only for borrowers, but for businesses.”
Mr. Morris said the overall effect of the increased limits won’t be known for a while, but it could force creditors to go in a different direction if they no longer can get liens on a debtor’s home.
“It might make people more subject to wage garnishment than in the past,” he said. “Previously, you could have used your house as collateral against debt, but now this could shift some of the collection efforts from the home to the individual.”
Contact Jon Chavez at: firstname.lastname@example.org or 419-724-6128.