How Does California’s Homestead Exemption Work in Chapter 7?

California debtors who own their primary residence and are considering filing for Chapter 7 bankruptcy protection can take advantage of California’s homestead exemption to shield at least part of the equity in their home from creditors.

However, the exemption has limitations and restrictions. Any debtor considering filing for Chapter 7 should consult an experienced bankruptcy attorney to discuss this exemption and others available under state and federal law.

The California homestead exemption protects these amounts of equity:

• $75,000 for an individual
• $175,000 for a married couple with a combined annual income of $20,000 or less
• $100,000 if you live with a family member holding no interest in the home
• $175,000 if you are over 65 or are physically or mentally disabled
• $175,000 if you are over 55 and have an income below $15,000

In the case of a married couple, either spouse can claim the entire exemption amount even if only one of them is filing for bankruptcy.

There are in fact two types of homestead exemption:

• Automatic exemption — This protects a home from a forced sale by creditors if the sales price would be insufficient to pay the exemption amount. However, if you voluntarily sell the property, a lien recorded by a judgment creditor has priority over the automatic exemption.
• Declared exemption — This covers the equity in your home even if you voluntarily sell the property. The exemption remains in effect for six months after the sale. A declaration also protects the exemption amount from a judgment creditor’s lien.

Using the declared exemption is advisable since it allows you time to use the exemption amount to purchase a replacement property.

The homestead exemption is not absolute. It does not preclude foreclosures on the debtor’s home by mortgage holders. The reasoning behind this aspect of the California law is that the homeowner voluntarily subjected their property to the mortgage lien and so assumed the risk.

Additionally, the homeowner exemption will not shield homeowner-debtors from alimony or child support judgments or mechanics’ liens on property. Likewise, the exemption has no effect on liens of federal agencies or on IRS collection actions.

Debtors who have their homes sold in a Chapter 7 by a bankruptcy trustee and receive payment of their homestead exemption must reinvest the homestead exemption proceeds in a new residence within six months of their receipt of the funds.  Failure to do so will lead to the bankruptcy trustee seeking to recover the funds for the benefit of the bankruptcy estate.

Every person that files bankruptcy in California must understand the value of his or her home, the liens against it, and the amount of his or her homestead exemption.  No one wants their home sold in bankruptcy.

At the Law Offices of Michael Jay Berger, we advise clients on achieving the maximum benefit from legal exemptions in Chapter 7 proceedings. We help you to protect your home.  Our Beverly Hills lawyers have decades of experience handling the full range of bankruptcy proceedings. Schedule a free initial consultation with one of our attorneys by calling 310-271-6223 or contacting us online.