Each state has its own asset protection laws and creditor rights laws and those laws have differences from state to state. Asset protection laws describe those assets that may be partly or fully protected from creditors. Creditors’ rights deal with the ability of a creditor to collect on a debt. The following looks at this matter from both the individual’s point of view and the creditor’s point of view.
The following are a few assets that may be protected from creditors pursuant in Ohio pursuant to Ohio Revised Code Section 2329.66:
- Life Insurance and Annuities. Proceeds from annuity contracts and life insurance policies are protected so long as the beneficiaries are the owner’s spouse or children.
- Residence. As it relates to a residence, in Ohio there is an exemption of $5,000 for the homestead. This applies so long as the property is used as the individual’s residence.
- Retirement Assets. In Ohio, qualified retirement plans, IRAs, and Roth IRAs are exempt from creditors.
- Partnership Interests. Pursuant to Ohio partnership law, a creditor usually has no rights against a partner’s interest in a partnership. In order for the creditor to collect against an individual’s partnership interest, the creditor must obtain a charging order against that individual’s interest. That means that the creditor will receive a right to the partner’s distributions when made to the partner.
As a result of these protections, creditors sometimes require business loans to be guaranteed or they take certain assets as collateral. This is an additional way for a creditor to secure its financing arrangement with a business by obtaining a personal guaranty of the debtor. Specifically, when the individual’s business obtains a loan, the lender will ask the individual to sign the loan personally as well as having his or her business sign. Therefore, if the business fails to make the payments on the loan, then the lender can pursue collection against the debtor personally. This allows the lender to have another source of payment if the business cannot re-pay the loan. There are sometimes different requirements but normally when a business is obtaining a loan, then a lender usually requires a personal guaranty of any person who owns at least 20% of the business. The spouse of the primary business owner is also sometimes required to sign a personal guarantee.
The difference between a personal guaranty and a lender obtaining collateral for a loan is that with a personal guaranty, the individual is promising to pay the loan back if the business does not pay the loan. With collateral, a specific asset is pledged as security so that if the business defaults on the loan, the lender can seize the collateral, sell it and pay off the outstanding debt or part of the debt.
However, please note that even if there is a personal guarantee on a loan, the assets that were discussed above still can be protected from the creditor. Thus, when entering into a loan situation, both individuals and creditors must evaluate their rights and responsibilities under the loan before entering into the loan agreement.
Remember to contact your attorney if you are an individual or lender before entering into a loan arrangement.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
405 Chauncey Avenue NW
New Philadelphia, Ohio 44663