Claiming the Homestead Exemption in a California Bankruptcy
When a debtor files a Chapter 7 petition, the U.S. bankruptcy trustee is authorized to sell certain of the debtor’s assets to pay the creditors. However, much if not all of those assets can be shielded from liquidation through the use of exemptions allowed by federal or state law. One of the important exemptions for Chapter 7 filers in California is the state homestead exemption, which can save a debtor’s home from seizure and sale.
A homestead is the principal place of residence of the debtor or his or her spouse. The homestead exemption covers the homeowner’s equity in the property up to a specified amount. Equity is the value of the home in current market conditions, less the balance of all outstanding mortgages.
The California homestead exemption is currently set at a minimum of $300,000. In a county where the median sales price of homes is more than $300,000, the exemption amount is that median sales price, not to exceed $600,000. The state periodically adjusts exemption limits based on the change in the annual California Consumer Price Index for All Urban Consumers.
The homeowner’s equity is protected up to the applicable homestead exemption. For example, suppose that a debtor owns a home worth $275,000, which is less than the $300,000 median sales price in the county. The outstanding mortgage balance is $125,000. The equity of $150,000 is fully protected by the homestead exemption. The U.S. trustee cannot seize the home and sell it to pay creditors. If the home value is higher, so that the equity exceeds $300,000, the trustee could sell the home to realize the excess amount. The debtor would be able to retain up to $300,000 in net sale proceeds.
However, the debtor must have lived in the home for at least 1,215 days before filing bankruptcy. Otherwise, the maximum exemption drops to $189,050.
In a Chapter 7 bankruptcy, the state homestead exemption is applied automatically. That is, the debtor does not need to file any special document or declaration of claim. The exemption takes effect with submission of the financial schedules required in the bankruptcy case.
The homestead exemption also applies if the homestead property is the subject of a forced sale during bankruptcy proceedings. However, there is an important condition. A California statute requires the debtor to reinvest the sale proceeds in a new home within six months of receiving them, or else the exemption is lost. The reason for this condition is that the exemption’s purpose is to prevent people from losing their homes, so the sale proceeds must be used consistent with that rationale.
The Law Offices of Michael Jay Berger is one of Southern California’s busiest bankruptcy law firms, with 12 locations in the region. If you are in financial distress and wish to discuss debt relief options, contact us online or call 310-271-6223 to schedule a free initial consultation.