How the Increased California Homestead Exemption Helps Protect Your Home in Bankruptcy
California’s law on debt collection protects homeowners by preventing creditors from reaching a portion of the equity in the debtor’s primary home. The homestead exemption, as it is known, has helped people avoid losing their homes in Chapter 7 bankruptcy. But as real estate prices climbed over the years, the exemption amount stayed low — so low that many bankruptcy filers had hundreds of thousands of dollars in equity that could not be protected. Finally, in 2021, the California legislature raised the exemption amount in an attempt to remedy this issue.
Under the old homestead exemption, Chapter 7 filers could protect $75,000 if they were single, $100,000 if married or $175,000 is they were disabled or over age 65. With property values reaching record highs in recent years, many homeowners had far more equity than that. If a person with, say, $500,000 in equity filed Chapter 7, there was a real risk of losing their home.
The 2021 revision allows Chapter 7 filers to exempt either $300,000 or an amount equal to the median sales price of single-family homes in that county, whichever is higher. The maximum exemption is $600,000. Beginning in 2022, the exemption amount will be adjusted annually based upon changes in the California Consumer Price Index. The new exemption also does away with the old practice of basing the amount on the filer’s age and marital status.
The homestead exemption is not automatically applied and there are some potential pitfalls and limitations. You should keep in mind that the exemption only applies to your primary residence. You will not be able to use it to protect the equity in a vacation home, investment property or second home. Further, the exemption amount could be reduced to just $170,350 if you have lived in your home for less than 1,215 days prior to filing for bankruptcy.
In an environment of rising inflation and housing prices, the enhanced homestead exemption is reassuring news for California homeowners. Those with high-value homes who are in high-asset brackets may now find it more advantageous to seek bankruptcy relief if they are facing overwhelming debt. For example, a person with recurring business costs that they cannot pay because of COVID-19 may now be able to file bankruptcy while retaining the equity in their home.
The experienced California bankruptcy lawyers at the Law Offices of Michael Jay Berger in Beverly Hills can analyze your situation and help you understand the homestead exemption and plan your bankruptcy accordingly. Please call 310-271-6223 or contact us online for a free consultation.