With very little fanfare, Governor John Kasich signed House Bill 479 into law on December 20, 2012. The law provides a broader level of protection to specified assets of Ohio residents against the claims of creditors. The adoption of the new legislation is intended to stimulate the economy by increasing jobs and encouraging businesses and individuals to invest in real property found within the State. The practical effect however, may be a frenzy of bankruptcy activity and a flood of outside individuals purchasing real estate in Ohio in an attempt to shield their assets from the claims of their creditors. If you recall during the O.J. Simpson trials, one of the preemptive moves that Mr. Simpson made before the civil judgment was issued against him, was to purchase a home of significant value within the state of Florida and establish residency within the State. Aside from the sunshine, this move was made primarily because of the generous homestead exemption laws found in the State of Florida. Homestead exemption laws shield the equity in one’s primary residence from the claims of unsecured creditors.
The changes adopted by House Bill 479: (i) clarify that inherited IRAs (along with IRAs established by a debtor) are exempt from the claims of creditors; (ii) protect 100% of all amounts contributed to 529 College Advantage Savings Plans, held in the name of a debtor; and (iii) dramatically increase the Ohio homestead exemption amount nearly 6 times. On March 27th the homestead exemption amount in Ohio will increase from $21,625 per individual debtor to $125,000 per individual. Of significance is the fact that this amount is a per individual threshold, therefore a husband and wife who jointly own real estate and are co-debtors, can protect up to $250,000 of equity in their primary residence against the claims of creditors. The House Bill amends the existing Homestead Exemption statute found at §2329.66 (b).
Creditors who have an unsecured (no collateral) judgment will not be able to force the sale of a debtor’s home to satisfy the judgment, so long as the equity in the debtor’s home is less than the exemption amount. In practical terms, if a credit card company sued for past due amounts and obtained a judgment against a debtor in an amount less than $125,000, the credit card company will not be able to force the sale of the debtor’s home unless the debtor has more than $125,000 of equity in their home. The protections afforded by the homestead exemption laws apply only to unsecured-involuntarily judgments or liens. Accordingly, a debtor cannot use a homestead exemption to avoid a mortgage obligation or other debt obligations where a primary home is voluntarily pledged as collateral to secure a debt.
It is anticipated that the increase in the exemption amounts will cause a flurry of activity in the Bankruptcy Courts. Also, it is likely that banks and credit card companies will become increasingly selective in whom they extend unsecured loans to.
If you have any questions regarding creditor rights and liabilities, or asset protection from creditors, please call any member of our Financial Institution and Creditor Rights and Liabilities Practice Group or General Corporate and Business Practice Group.
