In a recent poll conducted by TheTrackr.com, 29% of Americans reported that their home was their most valuable asset. Homeownership plays a critical role during the bankruptcy process. The role that homeownership plays in the bankruptcy, however, is about to change substantially due to legislation that has been passed by the California state legislature and scheduled to become effective on January 1, 2021. 

Before this law, people who filed for bankruptcy in California were at risk of losing their homes. Previously, individuals who resided in California and who were eligible to use the state’s bankruptcy exemptions could pursue either California System 1 or California System 2. Under System 1, single homeowners who are not disabled can exempt up to $75,000 of the equity in their home equity if they are single, up to $100,000 if they live with a family member, $175,0000 if they are over the age of 65 or mentally or physically disabled, and $175,000 if they are 55 or older and single, have a low income, and creditors seek a forced sale of the home. In California System, 2, homeowners can exempt up to $29,275 of their home’s equity. The California Judicial Council updates this System 2 exemption every three years.

After this new homestead exemption law is passed, individuals who were once at risk of losing significant equity in their homes can file a Chapter 7 petition for bankruptcy and protect a much larger amount of equity in the home as well as erase debts. Like most other bankruptcy laws, however, California’s homestead exemption plays a complicating role in the bankruptcy process. The following explores how the utilization of the homestead exemption might play out in your bankruptcy case.

California’s Existing Homestead Exemption Law

California’s current homestead exemption (which can be found at CCP 704.730) was enacted over 40 years ago and at the time it was passed covered the full value of most homes. This homestead exemption, however, has not been adjusted since it was created. Currently, the exemption covers approximately only 15% of the median value of many homes in California. As a result, California’s new exemption has the effect of significantly increasing the degree to which a person can protect his or her home during the bankruptcy process. 

Additional Details about California’s New Homestead Exemption Law

California’s AB 1885 increases the homestead to whichever is greater, $300,000, or the countywide median sale price of a single-family home in the calendar year before the time when the exemption is sought. This threshold is capped off at $600,000, though. This new regulation comes after August 2020 when the California State legislature passed a bill increasing the amount of a person’s primary residence that can be protected through bankruptcy. This regulation protects against things like the sale of a home in bankruptcy as well as the sale of a home outside bankruptcy through judicial foreclosures sought by unsecured creditors. This new homestead exemption, however, does not protect against voluntary liens foreclosing.

How the Homestead Exemption Would Play Out 

To give readers a better idea of how California’s homestead exemption would work, it helps to consider some scenarios like the following situations:

• If a California resident owes $400,000 in credit card debt but owns a house in Los Angeles County worth $800,000 with a mortgage principal balance of $250,000, that person could file for bankruptcy and erase the $400,000 in credit card debt without losing ownership of the home.
• If this same person had filed for Chapter 7 bankruptcy before this new law became effective, the individual would only be able to protect $75,000 if he or she was a single homeowner, $100,000 if he or she owned the house as a married couple, or $175,000 if he or she was over the age of 65.

Nuances of the Homestead Exemption

When it comes to how California’s existing homestead exemption applies, there are some nuances that people who own their home and who are pursuing should understand, which include:

• Homestead exemptions protect against judgment creditors. Homestead exemptions serve to protector people who owe money from judgment creditors. These creditors obtain judgments, which are legal determinations that a person owes a certain amount of money. Equipped with these judgments, creditors can collect on money owed through garnishment and liens. The homestead exemption helps to make sure that a person has a place to live even if they owe money to someone.
• Creditors can still force sales of a home. California homestead exemptions play a powerful role, but creditors can still force the sale of a home to pay a debt. In this situation, a homeowner is still guaranteed the dollar amount owed under the exemption.
• Refinancing can remove the exemption. People who subject a primary residence to refinancing or who withdraw equity give creditors the right to foreclose on a home without any attention being paid to the homestead.
• The debt is classified as belonging to one spouse. If a married couple owns a homestead, the debt is considered to be the obligation of only one spouse but this spouse can utilize the homestead available to the couple.
• The law does not apply to federal agencies. California’s homestead exemption does not limit the powers of federal agencies. Instead, the Constitution’s Supremacy clause states that federal law supersedes state law. The Internal Revenue Service has a much smaller group of exemptions for taxpayers and these exemptions do not provide as much protection for a person’s home.

Speak with an Experienced Bankruptcy Attorney

If you own a home with equity and are currently faced with substantial debt, one of the best things that you can do is promptly retain the assistance of an experienced bankruptcy attorney. During a free case evaluation, a bankruptcy lawyer can review your options, particularly in light of this new homestead law. Contact attorney Melanie Tavare today for assistance.