Getting the Most Out of California’s Homestead Exemption in Bankruptcy
Homeowners who fall on hard financial times often rule out bankruptcy because they fear it means they might lose their home. But in reality, many owners are able to use California’s homestead exemption to file for Chapter 7, receive a discharge and keep their home. For 2022, the exemption is $300,000 or the median sale price of single-family homes in your county during the previous year, up to $600,000.
If you’re in this situation, the homestead exemption gives you priority rights to the equity in your home, which is the amount by which the home’s market value exceeds any mortgage debt. If the equity is less than the exemption amount, your creditors cannot force a sale of your home to satisfy the outstanding debt.
To find out if you can keep your home, you must find its market value, then subtract any liens, then subtract the homestead exemption. For example, imagine your home’s value is $900,000. You owe $500,000 on a mortgage. Your equity is $400,000. Your home is in Los Angeles County, where the median sales price last year was about $830,000, which means you can use the maximum allowable exemption of $600,000. Since your equity of $400,000 is less than the exemption amount, creditors cannot force the sale of your home.
A little prior planning can help you make even better use of the homestead exemption. Courts have ruled that it is permissible to sell non-exempt assets, such as cars or personal items, prior to filing for bankruptcy and to put the money toward your mortgage, thereby increasing the amount of equity. However, you must make the extra mortgage payment(s) at least 90 days before filing or you risk these payments being deemed fraudulent transfers.
The homestead exemption amounts are adjusted annually. You should also be aware that the exemption has certain limitations. For one, you can only apply it to your primary residence, not to a vacation home or other property. For another, to get the full exemption amount, you must have lived in the home for at least 1,215 days before filing bankruptcy. If you have lived there for a shorter time, the maximum exemption drops to just $170,350.
Overall, California’s homestead exemption means that homeowners usually can obtain a bankruptcy discharge without having to sell their homes. However, in today’s environment of rising home prices, you should not presume that the exemption will fully protect your home without first speaking to a bankruptcy attorney experienced with exemptions.
At the Law Offices of Michael Jay Berger in Beverly Hills, our team has decades of experience helping people in southern California use bankruptcy exemptions to retain valuable property. We will analyze your situation and determine how the homestead exemption would work in your case. To arrange a free initial consultation with one of our lawyers, please call 310-271-6223 or contact us online.