New California Law Grants Homeowners Greater Bankruptcy Protection
For many financially stressed California homeowners, fear of losing their home to foreclosure has kept them from filing for Chapter 7 bankruptcy to ease their debt load. However, California enacted new legislation in September that allows homeowners who file for Chapter 7 bankruptcy to retain up to $300,000 in their home’s equity beginning January 1, 2021. In some high-priced areas, homeowners can keep up to $600,000 in home equity.
The California legislature passed AB 1885 to increase the state’s homestead exemption for Chapter 7 bankruptcy to either $300,000 or the median sale price for a single-family home in the county during the previous calendar year, up to a maximum of $600,000. The legislation does not protect homeowners from creditors foreclosing on voluntary liens, like mortgages or home equity loans.
Before the new legislation was enacted, the so-called “System 1” homestead exemption for an individual homeowner was only $75,000. The exemption rose to $100,000 if the homeowner lived with a family member and topped out at $175,000 for homeowners over the age of 65 (or are disabled) and have a low income. The current exemption was enacted 45 years ago and reflected the full value of most California homes at the time.
What is California’s Homestead Exemption?
In a Chapter 7 bankruptcy, most of the assets of the individual, couple, or business filing for bankruptcy–referred to collectively as “the debtors”– become part of the bankruptcy estate that is sold off by the bankruptcy trustee to repay creditors. This is why Chapter 7 bankruptcy is often called a “liquidation bankruptcy.” In return for giving up most of their assets, Chapter 7 debtors are relieved of most of their debts.
Federal bankruptcy law permits states to exempt certain property from the bankruptcy estate, effectively protecting it from being sold to satisfy creditors. California has adopted two systems for bankruptcy exemptions that allow you to decide how to best protect your property and assets. Each system treats the homestead exemption differently, but most homeowners with accumulated home equity choose the System 1 exemption that offers greater protection for their equity. The System 2 homestead exemption tops out at $29,275 but allows for that exemption to be used for other purposes if it is not used on your home.
If you choose a System 1 homestead exemption, you can keep up to $75,000 in their home’s equity (raising to $300,000 in 2021). Essentially, the exemption prevents a bankruptcy trustee from seizing and selling your house if your equity is less than California’s homestead exemption. If your home equity is greater than the exemption, the trustee may still seize your home and use the accumulated equity to pay off creditors, but only after repaying you the exempt amount.
By way of example, consider the following scenario: A homeowner owns a home valued at $500,000 and owes $250,000 on her mortgage. That means the homeowner has $250,000 in home equity and the trustee cannot force her to sell her home under the new law. However, under the current law, the same homeowner would only enjoy a $75,000 exemption. Since she has $250,000 in home equity, the trustee would sell her home, give her $75,000 as her exemption and use the remaining $175,000 to repay creditors.
You can see the substantial advantage to debtors under the new law. Your home is likely protected under the new exemptions enacted and that take effect on January 1, 2021.
Types of Homestead Exemptions
Since California is a “opt out” state, California actually offers its residents two kinds of homestead exemptions to protect homeowners in Chapter 7 bankruptcy from unsecured creditor claims against their property–the declared exemption and the automatic exemption.
Your bankruptcy attorney can elect to use Federal Exemptions to protect your home or California Exemptions. This is a complicated issue and this is where your experienced bankruptcy attorney will use their experience, training, and your particular situation to the your advantage.
What is the Exemption for Riverside County?
AB 1885 allows homeowners to claim an exemption of the larger of $300,000 or the median home price for the county the previous year (up to $600,000). Therefore, the amount that can be claimed will vary significantly based on where the home is located in California and the state of the local housing market in the year the homeowner declares bankruptcy.
In Riverside County, the median home price was roughly $390,000 in 2019. But the average home price in the county has been climbing steadily over the past year and had grown to more than $440,000 by August 2020.
California’s method for calculating the size of the available homestead exemption will likely benefit homeowners in some communities while limiting the exemption for those living in others. For example, according to Realtor.com, the median price of homes recently sold in Menifee is $409,000, which is below the countywide median of $440,000. This means Menifee homeowners filing for bankruptcy in 2021 will be able to claim an exemption that is roughly $30,000 greater than if the amount had been based on home prices in their city. On the other hand, homeowners in Riverside will likely receive an exemption that is about $27,000 lower than they would if the exemption was based on the $467,000 median selling price for their community.
Additional Questions About the Homestead Exemption?
At Raxter Law, we understand that filing for bankruptcy protection from creditors can be an intimidating experience, especially when you are a homeowner worried about losing your home and your accumulated equity. The law regarding California’s Homestead Exemption is complex and our team of experienced bankruptcy attorneys will be sure that you receive all of the benefits it offers. We will also stand by you throughout the bankruptcy process to ensure that you and your assets are protected from creditors to the fullest extent allowed under the law. If you have any additional questions about the Homestead Exemption or the bankruptcy process, do not hesitate to reach out to the legal team at Raxter Law for answers.
27851 Bradley Rd, Ste 145, Menifee, Ca 92586
10429 Hole Ave, Riverside, Ca 92505
Please contact us at (951) 226-5294