Q: I’m getting ready to file a Chapter 7 bankruptcy. Can I keep any of my property after bankruptcy?
A: Yes. “Exempt property” refers to property the debtor in bankruptcy can keep. For example, you can keep cash of up to $450 (the “cash-on-hand exemption”) and household goods worth up to a total of $12,250 (the “household goods exemption”), as long as no one particular item is worth more than $575. The theory behind these exemptions is that, as a debtor filing bankruptcy, you need to keep some property to emerge from bankruptcy with your financial fresh start. Even though bankruptcy is federal law, these two exemptions are set forth in Ohio’s state statutes.
Q: Do I get to keep my home after bankruptcy?
A: If your mortgage is current and the house worth less than what you owe the mortgage lender, you can usually keep your home. Even if there is no mortgage, you may be able to keep your home if it is worth less than the amount of Ohio’s homestead exemption. This exemption is now $132,000, assuming your house is held in only one name. If your house is held jointly by you and a spouse, the exemption is $264,000. If your house is worth more than what you owe the lender, you may be able to keep your home so long as the equity does not exceed the applicable homestead exemption. The homestead exemption only applies if you or a dependent of yours is living in the home. This means that you can’t apply the homestead exemption to a property that you own, but rent out to others.
Q: Are there any catches?
A: Yes. The law was changed on March 27, 2013. Before then, the exemption was much lower – only $21,265 for a house held in one name. The new law says the higher exemption of $132,000 applies only to claims arising after March 27, 2013. It is unclear exactly what this means. Let’s say, for example, that one of your creditors has a judgment lien on your house that was filed before March 27, 2013. That creditor may claim that the old law (with its homestead exemption of $21,265) applies or that no homestead exemption applies. The trustee appointed in your bankruptcy case also may argue this, which likely will mean that the court must decide which law applies in your case. This is why it is very important for you to consult with a bankruptcy attorney to see how the new law will apply to your situation.
Q: Do the changes to the Ohio exemption law affect any other property?
A: Yes. Another change to the law makes it clearer that you can keep an IRA account when you file a bankruptcy. Some brokerage firms offering IRAs require their customers to pledge their IRAs as collateral to secure any amounts the customers might owe to the firm, but Internal Revenue Service regulations do not allow this. Some bankruptcy trustees were taking the position that any pledge of the IRA for collateral negates its exempt status, which would allow the bankruptcy trustee to liquidate the IRA for the benefit of creditors. The change in Ohio law is intended to make it harder for the bankruptcy trustee to assert that an IRA can be liquidated in bankruptcy in order to satisfy creditors.
Q: What else should I know about bankruptcy exemptions?
A: One of the many issues that arise when applying bankruptcy exemptions involves insurance policies with cash surrender value. If you own a policy that insures your life and the beneficiary is your spouse or children, then the policy’s cash value is exempt. This means that you can keep the policy if you file a bankruptcy. However, if the policy beneficiary is someone else who is not your dependent, or if the policy is on the life of your child, then the policy is not exempt. This means that the trustee can cash the policy in for its cash surrender value and distribute the proceeds to your creditors. In a bankruptcy situation, many other issues involving exemptions arise. Your bankruptcy attorney should be able help you sort out these issues.
This “Law You Can Use” column was provided by the Ohio State Bar Association. It was prepared by attorney Julie E. Rabin, a principal in the Cleveland firm of Rabin and Rabin LPA.