By Erich Paetsch, Creditor’s Rights & Bankruptcy Attorney
Understanding Exemptions
A debtor uses exemptions to protect certain assets or equity in those assets from the claims of creditors. A debtor may only use exemptions to shield assets from the claims of a creditor arising from an involuntary lien. Exemptions do not help a debtor that has pledged a voluntarily lien like a deed of trust or a security agreement. The largest exemption exists for a debtor’s residence, often referred to as a homestead. Oregon lenders most commonly confront exemption issues when responding to garnishments and when deciding how to collect defaulting loans. The exemption amount is determined at the time it is claimed and not when the loan originated.
Recent Efforts to Change Oregon’s Exemptions
The 2023 Regular Session of the Oregon Legislature introduced two separate bills proposing changes to Oregon’s exemption laws. The first, House Bill 3577 (Or. Leg. Assembly 2023), saw little activity and never received a public hearing or committee vote. H.B. 3577 was simple: it primarily increased the homestead exemption to $300,000 or $500,000 for joint owners.
In contrast, House Bill 2008 (Or. Leg. Assembly 2023) saw significant activity including hearings and proposed amendments. H.B. 2008 was more ambitious than H.B. 3577 and proposed changes to exemption amounts including the homestead, altered garnishment processes and Oregon’s debt collection laws. Importantly, the Oregon Department of Justice expressed concerns with H.B. 2008’s impact on its efforts to collect child support and restitution. Fortunately, H.B. 2008 did not become law.
In response to the failure of H.B. 2008, Senate Bill 1595 (Or. Leg. Assembly, 2024) was introduced in the 2024 Regular Session of the Oregon Legislature. The scope of S.B. 1595 is broad, proposing changes to exemption amounts, garnishment forms and practices and amending Oregon’s Unlawful Trade Practices Act (the “UTPA”) impacting certain debt collection practices. The new law seeks to resolve tension between increasing exemption amounts and the State of Oregon’s desire to preserve access to federal funding by keeping existing exemption amounts for collecting child support, spousal support, or restitution.
Governor Kotek signed S.B. 1595 in to law on April 4, 2024. Changes to the UTPA are effective immediately while changes to exemption amounts and garnishments take effect on January 1, 2025. As a political compromise permitting passage of S.B. 1595, Oregon now has separate and distinct exemption amounts depending on who is the creditor. By creating separate exemptions, one primarily for child support, spousal support and restitution and another for all other creditors, the Courts must now resolve complex legal questions. At the same time, the changes in exemption amounts require an evaluation of underwriting practices and long-standing assumptions surrounding collection and recovery.
Exemption Changes
While not all exemption amounts have changed, S.B. 1595 includes significant changes to Oregon’s standard exemption amounts starting on January 1, 2025. The vehicle exemption amount increases to $10,000 from $3,000. Most significantly, the homestead exemption is increasing from $40,00 to $150,000 for an individual and $50,000 to $300,000 for joint owners. These amounts are subject to changes in the designated consumer price index and the State Court Administrator must update the homestead exemption amounts annually by July 1st of each year.
Reflecting the political compromise permitting passage of S.B. 1595, the changes to the vehicle exemption and homestead exemption are not changing for certain creditors. Child or spousal support obligations or a judgment for restitution are different in S.B. 1595. Instead of increasing the exemption amounts for these creditors, the vehicle exemption remains at $3,000 and the homestead exemption at $40,000 for an individual and $50,000 for joint owners.
Prior to January 1, 2025, Oregon’s homestead exemption had not changed for an extended period. Lenders commonly include equity in a residential home in their underwriting analysis and might request a guaranty to capture that equity in the event of a default. However, with the significant increase in the homestead exemption, lenders may want to obtain a voluntary lien—like a deed of trust—instead of relying upon a guaranty and an involuntary judgment. This change eliminates the risk posed by the higher exemption amounts in the event of a default.
Any prospective changes in underwriting practices cannot alter assumptions made at the time existing loans were approved by a lender. Consequently, lenders should consider as part of workout, forbearance, or similar actions how to capture equity in a homestead with the voluntary cooperation of a distressed borrower. There is also the potential to leverage claims for child spousal support or restitution to limit the available exemption amounts considering the separate exemption scheme in Oregon.
Unresolved Questions
The bifurcated exemption scheme creates significant challenges in interpreting, implementing, and applying S.B. 1595 for both state and federal courts. For example, what happens when a debtor and non-debtor jointly own a vehicle or home and one of them has unpaid spousal support? Can a Chapter 13 debtor dismiss and refile her Chapter 13 bankruptcy plan to capture more equity from a homestead to the detriment of creditors? When should spouses file joint or separate petitions if different exemption amounts apply? These questions and more, certain to be the subject of litigation as S.B. 1595 becomes the law of the land on January 1, 2025.
Conclusion
The impacts on financial institutions from the passage of S.B. 1595 could be significant. Making changes in how lenders consider equity in a homestead and how to account for that equity may limit the impact of S.B. 1595. At the same time, lenders should also consider how the inability to capture equity in a residence impacts decisions when a default arises. For example, how does this change impact an internal charge off decision? While lenders consider questions that the new legislation creates, Oregon court must also unravel the challenges a bifurcated exemption system produces for lenders and debtors.
Erich Paetsch is a partner in the Litigation practice group.
The information in this article is not intended to provide legal advice. For professional consultation, please contact Saalfeld Griggs PC at (503) 399-1070 or visit www.sglaw.com. © 2024 Saalfeld Griggs PC