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What is Bankruptcy Exemption

Ohio Bankruptcy Exemptions and How They Work

A bankruptcy exemption protects your property. Bankruptcy exemptions safeguard property, up to a certain limit, so our property is not taken by creditors and the bankruptcy trustee.

Exemptions vary from state to state. There are federal law exemptions apply when we cannot use the state law exemptions. Because the laws vary from state to state, you have to know what exemptions apply to you. Ohio’s exemption laws can be found at ORC 2329.66.

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How do Bankruptcy Exemptions Work?

Bankruptcy exemptions can be complicated to apply. Sometimes you can “double them” if you have a joint case with your spouse. Sometimes you may apply one exemption to several articles of property. For example, you may apply your household goods exemption to any number of items. But your vehicle exemption can only be applied to one single vehicle, and you can’t split it.

Generally, your bankruptcy controls all of your property as part of your “bankruptcy estate.” Bankruptcy exemptions effectively “remove” from the estate the property protected. Sometimes your exemptions don’t fully protect your property. When this happens you might be offered an opportunity to pay the trustee so you can keep the property. Or the trustee may sell the property, and give you money to reflect your “exempted” ownership interests.

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Protect your Home with Bankruptcy Exemption

n Ohio, the current residence exemption is $145,425. This is a per person exemption. It protects your equity up to this amount. If you own your home jointly with your spouse, this doubles your exemption! Remember, equity is the value of your home over and above what you owe on it. So your home could be free and clear, and worth $290,850, and would be totally protected in bankruptcy.

The equity in your home has a great deal of protection. For this reason, it is almost never a good idea to get a second mortgage, or HELOC (home equity line of credit, code-word for 2nd mortgage) to pay debt.

Paying debts you can discharge by mortgaging protected property equals a bad strategy.

Protect Your Car with Bankruptcy Exemption

Bankruptcy exemption protects the equity in your car up to $4,000. But you can only apply your exemption to a single vehicle. So, if you own two cars each worth $2,000, free and clear, you cannot split your $4,000 exemption to cover them both.

Your exemption only protects one car. So, if you own a car worth $8000, free and clear, jointly with your spouse, it can be totally protected. You own one half the equity, your spouse owns the other half. Each of you apply your full exemption to your 1/2 interest in the car.

Protect Your Retirement with Bankruptcy Exemption

Most retirement accounts are fully exempt under both federal and state law. The exemption for retirement funds is practically unlimited. For this reason it is almost NEVER a good idea to rob your retirement fund to pay debts when you consider debt relief options.

Your retirement supports you later in life. Using it to pay debts you can discharge in bankruptcy is a poor strategy.

Exemptions play a critical role in protecting your property. Applying exemptions and planning to make the best use of them is best done by a certified specialist. I’ve encountered situations where I’ve helped my clients plan, and shift assets around, to fully protect them with exemptions. This “exemption planning” is perfectly legal, when properly done.

When you’re considering different options for debt relief, you also consider how best to protect your property.

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