New Law Increases California Homestead Exemption up to $600,000
There is good news for California homeowners who are considering filing for bankruptcy protection. A new state law raises the homestead exemption — the amount of home equity that can be shielded from creditors in a Chapter 7 or Chapter 13 — to a minimum of $300,000 and a maximum of $600,000.
The increase was enacted in recognition of the inadequacy of existing exemption amounts in relation to California home values. The exemption has been capped at $75,000 for a single person, $100,000 for a married couple and $175,000 for an elderly couple and in other special situations. The new homestead exemption, which goes into effect January 1, 2021, will be based on the median sales price of homes in the county where a debtor lives in a given year. It will also be indexed for inflation.
Despite this positive development, homeowners considering filing for bankruptcy should consult with an experienced California bankruptcy attorney about how to best protect their home.
In a Chapter 7 bankruptcy, if the home equity value is greater than the allowable exemption, the bankruptcy trustee sells the home and pays the debtor the exemption from the sales proceeds. The debtor then must use those funds to purchase a new home within six months. If he or she doesn’t, the trustee can “claw back” those funds and return them to the bankruptcy estate to pay creditors.
In a Chapter 13, also known as a wage earner’s bankruptcy, the home is not sold but its value is considered in determining the debtor’s three- to five-year repayment plan. The homestead exemption is applied to reduce the amount of the monthly payments the debtor must make.
The change in the amount of the homestead exemption does not alter its existing exceptions under California law, namely:
- It is not applicable to the portion of home value secured by mortgages or home equity lines of credit (HELOCs). The reasoning is that the debtor voluntarily offered the home as collateral for the mortgage or HELOC and cannot use the exemption to shield him or her from that decision.
- It does not protect any of the home value that is subject to mechanics’ liens, alimony or child support judgements.
- It has no impact on state or federal tax judgments or liens held by government agencies.
California restricts debtors to using the state homestead exemption, not the exemption provided by federal law.
When you are considering bankruptcy in California, you need an attorney who knows the law, knows the system and knows your particular circumstances. Located in downtown Beverly Hills, my firm provides a wide range of services for individuals and families suffering from the weight of excessive debt. Call the Law Offices of Michael Jay Berger at 310-271-6223 or contact me online to schedule a free consultation.