When you’re in the process of filing for bankruptcy or considering pre-bankruptcy planning, one of your primary concerns may be whether or not you will lose your home.
The good news is that California recently changed its Homestead exemption limits. Read on to learn more about the new law, and how it may impact your California bankruptcy proceeding.
What is the California Homestead Exemption?
Although Chapter 7 and Chapter 13 bankruptcies are considered federal filings, each state provides its own modifications of the applicable law, and California is no different in this respect.
California legislature has long implemented a “Homestead Exemption,” which serves to limit certain classes of creditors and to protect homeowners’ interests in their primary homes. Essentially this law carves out equity in a primary residence that will survive bankruptcy, and which cannot be pursued by certain classes of creditors.
The sum previously shielded by the California Homestead Exemption was no more than $175,000. However, recently passed Assembly Bill 1885, amending Section 704.730 of the California code now provides that a home will be protected at either $300,000, or at the countywide median sale price for a single-family home (utilizing the prior calendar year from when you claim the exception), in an amount not to exceed $600,000. The larger of these two sums will thus be utilized.
This is reassuring news for any homeowner considering bankruptcy in the state of California. But please note that this exemption does not apply to every class of creditors.
Can Your Home Still be Foreclosed Upon with the California Homestead Exemption?
Unfortunately, the homestead exemption may not apply to mortgage holders, or to other creditors to whom you have specifically encumbered your home. What that means is that you should discuss your case with experienced bankruptcy counsel to determine how the Homestead Exemption applies to mortgages, HELOC’s, and other liens on your home.
Where the new California Homestead Exemption becomes a gamechanger is with respect to the liquidation analysis. Under the liquidation analysis in a bankruptcy, a debtor either liquidates unexempt property in a chapter 7 or pays back at least the equivalent of the unexempt property in a chapter 13 reorganization. The new increased homestead in CA provides a minimum of $300K and a maximum of $600k, depending upon the average homes sales in your county of residence. That means debtors will be able to exempt at least $300k of equity in their homes in bankruptcy which in turn will allow more people to qualify for a chapter 7 and allow more chapter 13 debtors to pay less back in their bankruptcy plan.
Another increased benefit the new homestead offers to homeowners in bankruptcy is the removal of judicial or judgment liens under11 USC Sec 522(f). A lien is impaired within the meaning of 11 USC Sec 522(f) when the total of all liens on the property and the exemption amount exceeds the subject property’s fair market value. For example, if a debtor has home worth $500k, and the mortgage and judgment lien together total $300k, the Debtor’s automatic homestead of $300k combined with the total liens of $300k equals $600k, which is more than the value of the home. In such a case, that judgment lien would be eligible to be avoided in bankruptcy.
It’s important here to note that this exemption only applies to your primary residence. You will not be able to protect vacation, investment, or other “second homes” via California’s Homestead Exemption. Another important point is how long ago you acquired your homestead. If you have lived in the home for less than 1215 days, under 11 USC Sec 522(p), you would be limited to a homestead of $170,350. Whether it is acceptable or not to purchase a home within that 1215-day lookback—particularly if you did so to transform the nature of debts or assets, must be discussed as part of bankruptcy planning.
Also, although the Homestead Exemption is supposed to be automatic, there may be instances when it is advantageous to file a claim with your county clerk’s office. This is known as a “declared” or article five homestead exemption filing.
Because of all these moving parts, if you’re considering Homestead Exemption protection, and/or a California personal bankruptcy, it’s important to meet with a law firm such as Financial Relief Law Center, APC as soon as possible to learn more about your specific rights. It cannot be overstated how fact-sensitive these types of cases are.
By retaining us sooner, rather than later, we can also discuss specific bankruptcy planning strategies to help preserve your primary home and other assets. For instance, perhaps it is better to invest money in your home rather than to pay off unsecured debts.
The ability to discharge debts while maintaining equity in your home, by continuing to pay your taxes and mortgage, is potentially a gamechanger, and will also change the analysis of whether Chapter Seven, Chapter Thirteen, or another form of bankruptcy is favored.
Can the New California Homestead Exemptions Work for You?
California’s new Homestead Exemptions may help you keep your home, even post-bankruptcy. The new law may also help you discharge other debts. The ability to potentially reduce or eliminate your unsecured debts—and to keep your home—may seem too good to be true, but California’s Homestead Exemption offers significant protection. This Act along with personal bankruptcy may provide you with an entirely new financial future.
Whether you’re planning for bankruptcy or seeking to learn more about the new California Homestead Exemptions, we’re here for you. Lean on our experience to discuss strategic methods pre-filing. We often find that for our clients, preparation on the front end makes for a far smoother process.
To start with an analysis of your bankruptcy and/or California Homestead exemption matter, please call (949) 570-5466 today to schedule an initial consultation with Financial Relief Law Center, APC, Or utilize our contact form to learn more about your rights.