Bankruptcy: California Homestead Exemption Increase
On January 1st, 2021, the new California Homestead Exemption amount went into effect, exempting a minimum of $300,000 equity, up to $600,000, adjusted annually for inflation.
The old California exemption was woefully low for modern real estate prices, between $75,000 and $175,000, meaning that there was often no way to protect your home from creditors in the case of a bankruptcy.
Governor Newsom signed AB 1885 on September 18th, 2020, which tied the exemption to the median sales price for a single-family home in your county within the minimum and maximum amounts ($300K-$600K). (Technically, they look at the median price in the year prior to the year you claim the exemption.) This means that it is far more likely that you will be able to keep your house in a Chapter 7 bankruptcy case.
THE PURPOSE OF THE HOMESTEAD EXEMPTION
A homestead is real estate that acts as your residence. This is distinguished from other kinds of real estate assets which creditors might seize in a bankruptcy in order to settle debts—the homestead exemption is meant to protect your home. (The exemption in AB 1885 specifically protects homes from being used to “satisfy a judgment debt” and is distinct from the property tax exemption that is also sometimes called a “homestead exemption.”)
BANKRUPTCY UNDER CHAPTER 7
Individuals typically file for bankruptcy under either Chapter 7 or Chapter 13 of the United States Bankruptcy Code. Chapter 13 bankruptcy is a “reorganization” bankruptcy which provides for a repayment plan to allow you to keep your assets, including avoiding the foreclosure and sale of your home. In a Chapter 7 bankruptcy, by contrast, your assets are liquidated and sold off to settle your debts. However, the homestead exemption allows you to exempt the equity in your home from this liquidation, up to the exemption amount. (See “Bankruptcy: Chapter 7” and “Bankruptcy: Chapter 13” for more detail).
If you still have a large amount of home equity left over after the exemption, the trustee may still sell your house and give you the exemption amount, but it is far less likely that you will lose your home in a Chapter 7 bankruptcy under the new exemption amount.
EXCEPTIONS TO THE EXEMPTION
There are a few limitations you need to be aware of when determining how much of your home equity is protected under this exemption. First, you need to have lived in California for 730 days to claim California residency, but you need to have owned the home for 1215 days (almost 3-and-a-half years) to be able to claim the full exemption. Otherwise, you’ll be limited to no more than about $170,000 under the Bankruptcy Code. So sometimes waiting a few months to file for bankruptcy can be in your best interest.
You also can’t have made extra payments to your mortgage specifically in order to “save” your assets: the exemption can be reduced by any amount meant to “hinder, delay or defraud creditors.”
Under the new exemption amounts, though, many people may be able to keep their homes, making a Chapter 7 bankruptcy a much more plausible option for some. There are many factors to weigh to determine the best strategy when you are facing a bankruptcy, however. Your best first step is contact an experienced California attorney who knows how to protect your home and assets!