Effective January 1, 2021, Assembly Bill 1885 amended the homestead exemption under California Code of Civil Procedure 704.730 as follows (emphases added): 

(a) The amount of the homestead exemption is the greater of the following:

(1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).

[or]

(2) Three hundred thousand dollars ($300,000).

(b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

In other words, if you qualify for the California homestead exemption, you may now exempt (protect from liquidation in chapter 7 bankruptcy) home equity (the value after deducting secured debts like mortgages) in a sum equal to the county’s median sales price. 

The median sales measure is qualified by a minimum value of $300,000 (which can be helpful in a county like Imperial) and capped at $600,000. In San Diego County, sources appear to indicate the prior fiscal year’s median sales price exceeded the cap, so San Diegans are limited to the maximum value of $600K. Mind you, there’s no official designated source from which to cite the applicable sales figure. I know what you’re thinking: how could they possibly introduce a bill that relies upon a numerical certainty without determining an applicable computational source? That would be like unveiling a life-saving vaccine without concurrently establishing effective means to distribute it! California legislators can’t conceivably be that feckless, can they? I mean they have fancy job titles, and big salaries and benefits. They must be full of feck!

  But seriously, take it on faith that in San Diego, California, you can exempt up to $600,000 in home equity, as opposed to as meager a number as $75,000 prior to the amendment, a petty sum in terms of Golden State realty. In bankruptcy forums this is big news. A boon for homeowners, it greatly enhances the means at this practitioner’s disposal to optimize clients’ benefits. It’s a blow to trustees and realtors paid commissions from liquidation of debtors’ properties in chapter 7 proceedings. When this puppy passed the assembly and went to Gavin’s pen for final say, there was no sparsity of four-letter f words ushered from mouths of trustees. And no, it wasn’t feck. Don’t be silly. That’s not even a word.[1]

What else do you need to know if you’re a homeowner contemplating bankruptcy? Turns out plenty.  Reading half a bankruptcy blog can lead to misplaced assumptions and you know what happens when you assume? That’s right, you’re most often correct and spared needless research!

On the other hand, if you assume about your home sweet home, it’s best we concede that whole “ass out of u and me” notion. So, next we ask:

Who can claim the increased California Homestead Exemption?

Read More on California Exemptions

First, you need to be able to claim California exemptions. Each state has different exemptions applicable in chapter 7 bankruptcy to protect property from turnover for distribution to creditors. Federal exemptions may also be applicable. Certain states have superior exemption allowances. Hence the bankruptcy code at section 522(b)(3) sets forth a provision to discourage forum shopping (moving out of expedience to another state to exploit its laws). You are bound to the exemptions of the state in which you were domiciled (a term that encompasses residency) during the 730 days (~two years) preceding your bankruptcy filing. If you moved during that prior 2-year time frame, then the applicable state exemptions correspond to the state where you were domiciled the majority of the 180 days that preceded the prior 730 days. Yes, that is purposefully convoluted courtesy of Congress to trip you the feck up. 

Second, the dwelling must be your homestead, as defined in detail at California Code of Civil Procedure section 704.730. It can’t be a rental property. You or your spouse must reside there. It needn’t be real property, though; it could be any type of dwelling or personal property you legitimately call home (mobile home, RV, boat, yurt, where the heart is). 

Third, additional provisions under bankruptcy code section 522, subsections (o) and (p) cap or limit the available homestead exemption. If the interest was acquired within the prior 1,215 days, you’re capped at  $170,350 (instead of up to $600,000). And if at any time over the prior 10 (ten) years, you acquired the protected interest as a means to defraud creditors, then the available exemption is decreased by a commensurate value.

Finally, factors of family size, age, health and income that affected (and complicated) the exemption value under the original statute are no longer relevant.

Houses Gone Wild

Before we go, a caveat to consider is that real property values fluctuate wildly. Remember that tacky video series about intoxicated real properties on spring break flashing their chimneys? Vaguely?

Anyhoo, a trustee may contest your scheduled home value and she may also delay the proceedings to exploit a hot market. Speculation isn’t kind or conducive to efficient administration of the bankruptcy estate, but it happens. In assessing the total equity, we must be conservative in terms of both market value and deducting hypothetical costs of sale. A trustee may negotiate reduced sales costs and also cut deals with certain lien holders to free up additional non-exempt equity. They will feck you if they can. 

If the value nears the maximum available exemption, we may consider a chapter 13 bankruptcy, a payment plan in which a fraction of debt may be repaid over a 36- 60/mo. period, with the balance forgiven. The threshold chapter 13 payment must not fall short of what creditors would hypothetically be paid from liquidation proceeds in chapter 7. That’s called the best interest of creditors test–you can’t shortchange creditors by filing chapter 13 in lieu of 7. However, for chapter 13 purposes, that hypothetical value can be reasonably determined without undue delay or market manipulation.

 

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[1] Okay, it’s a word in Scots, but that doesn’t count: you’re still silly.

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Photo credits: todd kent (large house), Luke Stackpoole (wee house) 

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