Here’s something to help you sleep a little more soundly.

Under Rhode Island law, up to $300,000 of the equity in your house is protected from the claims of most creditors, said Matthew J. McGowan, a Providence lawyer and a contributing author for a national legal manual.

In general, “equity” is your house’s fair-market value minus your mortgage. So if your house is valued at $250,000, and you have mortgage loans with a principal balance of $130,000, you have $120,000 in home equity.

Originally, state law protected only $100,000 of the equity in your house from creditors.

Over the years however, the General Assembly gradually increased the amount of the protection to its current level of $300,000.

Technically, the protection provision is known as the homestead estate exemption. It’s the result of legislation originally introduced by state Sen. Daniel J. Issa, D-Central Falls. The provision was approved in 1998 and took effect in 1999.

“It’s more important now than ever before because house prices have escalated way beyond what we could have dreamed” when the legislation was first proposed, Issa said last week.

So what’s the big deal? Here’s an example:

Suppose you have a lot of credit-card debt, you can’t afford to pay it and the credit-card company sues you to try to recover the amount it’s owed.

Let’s also say that your house is worth $350,000, and the outstanding principal amount on your mortgage is $200,000. As a result, you have $150,000 in home equity.

Can the credit-card company force you to sell your house to pay the debt? No. Why? Because under Rhode Island law, up to $300,000 of your home equity is protected from such creditors, McGowan said in an interview at Salter McGowan Sylvia & Leonard Inc., a law firm in Providence, where he is a principal.

And you don’t have to take any steps to make sure that protection is in place; it’s automatic, he said.

Here’s another example:

Suppose you’re in a car accident. Someone’s injured, and you don’t have enough insurance to cover the full amount of your liability.

Let’s also say that a court enters a judgment against you — the negligent driver — on behalf of the injured person. As a general rule, you won’t have to sell your house to come up with the necessary funds to cover the amount of the judgment, McGowan said.

The Rhode Island law won’t protect your house from the claims of all creditors. “There are exceptions,” Issa said. For example, “You still have to pay your taxes; you still have to pay your mortgage,” he said.

McGowan said that the law won’t protect the equity in your house in the following circumstances:

•You default on your home mortgage loan or home-equity loan.

•You’re delinquent on local property tax or other municipal assessments. (These include sewer liens, water liens, lighting district assessments and fire district assessments.)

•You owe back taxes to the state or federal government.

•You owe money to the state Department of Human Services (for reimbursement of medical assistance that you’ve received through the agency, for example).

•You entered into a contract for the debt before you acquired your house, or entered into a contract for debt to acquire it.

•You owe a debt to a federally insured deposit institution or state-licensed lender.

Still, it’s important to know that the state’s provision will protect the equity in your house from the claims of many other creditors. It’s helpful not only for doctors, lawyers and other professionals, but also for other homeowners who may be the target of lawsuits.

Rhode Island’s law is generally as strong as — or stronger than — other states’ laws in this regard, and offers a comparatively high amount of coverage, said McGowan.

“The homestead exemption provides some fairly generous protection against people losing their homes,” he said.

For instance, Connecticut’s provision is generally limited to $75,000, Washington’s to $40,000, and Oregon’s to $30,000, he said.

(The Massachusetts provision is $500,000, but you must file some paperwork to put it in place. Florida’s provision is unlimited, and is part of that’s state’s Constitution, McGowan said.)

A few other points:

•Automatic Coverage: Keep in mind that the protection under Rhode Island law is automatic; there are no applications to fill out or forms to file.

The law’s original intent was to provide automatic coverage, but not everybody saw it that way. So for a time after the law took effect, many homeowners filed a formal “declaration of homestead” with their city or town hall.

Issa later proposed language to make the point clear. As a result, because of a law enacted in 2002, “You don’t have to file”’ in order to get the protection the law affords, Issa said.

Here’s how the law reads: “The estate of homestead . . . shall be automatic by operation of law, and without any requirement or necessity for the filing of a declaration, a statement in a deed, or any other documentation.”

•Principal Residence: In general, Rhode Island’s homestead estate exemption applies only to your principal residence, not to your vacation property or other home, McGowan said. Here’s how the law reads: “An estate of homestead may be acquired on only one principal residence . . . . ”

•Trusts: If your home is owned by a trust that you’ve established, it’s not clear whether the equity in that home would be covered under Rhode Island’s homestead estate exemption, McGowan said.

“There are some significant questions about whether a house titled in the name of a trust . . . will qualify” for the protection, he said. State law “is not clear on this,” he said. (In general, your home is more likely to qualify for the protection if it’s held in a revocable trust, less likely if it’s held in an irrevocable trust — but it’s all a matter of speculation, he said.)

•Tenancy by the Entirety: If you’re married, and own your home under a special form of ownership that’s available to a husband and wife — known as a tenancy by the entirety — the home has additional protection, assuming that the claim is against one spouse.

For example, say your spouse has personally signed a bank loan for a business, the business goes bust, the bank gets a judgment and the judgment is officially recorded on the title to the tenancy-by-entirety property.

The property would be protected under the Rhode Island law for as long as you and your spouse remain married, McGowan said.

What if, in this example, you have $1 million in equity in your home, and the judgment is for $800,000?

The law would still prevent the forced sale of your house to pay off the debt, as long as the tenancy-by-entirety form of ownership remains intact, McGowan said. “The debts of one spouse cannot be used as the basis to deprive both spouses of a tenancy-by-the-entirety property,” he said.

And this provision applies to any property held under the tenants-by-entirety form of ownership — whether it’s your principal residence, vacation home or other such property, he said. (Under Rhode Island law, you must have evidence and intent to create a tenancy by entirety, such as a deed, he said.)

For this reason, it may be better for a married couple to own real estate as tenants by the entirety, rather than through a simple joint tenancy or tenancy in common, he said.

(Keep in mind, though, that if the debt and ensuing judgment is against both spouses, the tenancy-by-entirety protection mentioned above won’t work — although Rhode Island’s homestead estate exemption would still apply, McGowan said.)

•Bankruptcy: What if you file for protection from creditors under federal bankruptcy law? In a typical personal bankruptcy case, most of your debts would be wiped out, you’d still get to protect up to $300,000 of equity in your home from most creditors — and a number of the exceptions listed above generally wouldn’t apply, McGowan said.

“It’s very unusual now for someone to lose his or her home in a bankruptcy case because you have even greater protection,” said McGowan, who wrote the Rhode Island chapter of West’s Bankruptcy Exemption Manual, a book that’s well-known in legal circles and published by Thomson/West, a national publisher of legal texts.

(Keep in mind, however, that filing for bankruptcy is a serious step, and has a number of complications and other consequences, so be sure to obtain legal advice.)

TODAY’S TIP: For more details on this topic — including a full list of debts to which the Rhode Island provision does not apply — you may read the law yourself at this General Assembly Web site:

www.rilin.state.ri.us/Statutes

(Click on Title 9, then the link: “CHAPTER 9-26 Levy and Sale on Execution” then the link: “9-26-4.1 Homestead estate exemption”.)

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

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