California to Increase Homestead Exemption in New Legislation
The new legislation, Assembly Bill 1885, was formally approved by California Governor Gavin Newsom and filed with the secretary of state on September 18, 2020. It increases the exemption to protect a greater amount of equity in your home should you file for Chapter 7 or Chapter 13 bankruptcy. In California, where a state bankruptcy exemption system is used, exemption amounts are updated every three years by the California Judicial Council. The new law provides for more significant changes in the California homestead exemption.
What Is a Homestead Exemption?
A homestead exemption protects home equity from a homeowner’s creditors, up to a certain dollar amount. Collectors cannot acquire any funds within this amount to settle past-due debt. This applies if you file for bankruptcy or you experience financial difficulties after a divorce or your spouse passes away. You can also get a California homestead exemption on property taxes, in which you’re taxed on the value of your home minus the exemption amount.
How Does the Homestead Exemption Work?
By law, a certain amount of your assets is protected. The homestead exemption protects the home of a debtor and its equity from being seized by creditors. Otherwise, a creditor can file a lawsuit, obtain a judgement against you, and take actions to collect on judgements, such as garnishing paychecks/bank accounts or forcing the sale of property.
The homestead exemption kicks in when a particular creditor attempts to sell your home to pay a judgment against you. If you file for bankruptcy (personal or business), it also protects all or a portion of your home equity from creditors in general. Again, it only offers protection up to a certain dollar amount. If the legally available exemption is a greater amount than that of your home equity, your home is fully protected from creditors. A lender then cannot force the sale of your property.
Increase in the California Homestead Exemption
The California homestead exemption in 2020 was $75,000 for a single homeowner, with a maximum of $175,000 for homeowners who met specific family, income, and age requirements. The new law eliminates many qualifying conditions and provides a homestead exemption to anyone with a principal residence. As of January 1, 2021, the California homestead exemption amount will be at least $300,000 if the median sale price for homes in your county were less than that during the prior year. However, it can be as high as $600,000 if the median sale price in your county was more than that amount.
How Does This Increase Apply to My County?
The exemption amount can fall between $300,000 and $600,000; the actual amount will equal the prior year’s median home sale price amount if it is within this range. Some real world examples include the median price in Los Angeles County, which as of September 2020, stood at $677,000 (this would qualify a homeowner for a homestead exemption of $600,000). In Riverside County, the median price was $487,000, so the homestead exemption would be $487,000.
Pertinent amounts to use won’t be available until the end of the prior calendar year. Accepted sources for this information haven’t yet been determined, but a reliable source of statistics is the California Association of Realtors.
Automatic Homestead vs. Declared Homestead
In California, you don’t necessarily have to file a homestead declaration. An automatic homestead protects your home against a forced sale if the proceeds wouldn’t be enough to pay the homestead before the creditor. If there’s a judgement lien on your property, the creditor gets paid from a home sale before you get the homestead.
Homestead amounts are the same for automatic and declared homesteads. The difference is that a declared homestead only protects exempt equity when a home is sold voluntarily. Proceeds are protected for six months during which you can reinvest the homestead in a new home (if that amount covers the sale price and other costs).
Filing a declaration is a good idea if you have equity in your home and experience financial trouble. Your homestead won’t be lost after a property sale and the proceeds will be protected for a full six months.
The California homestead exemption also has two different systems. System 1 applies to any property where you reside and to proceeds from forced sales of property received six months before filing for bankruptcy. System 2 applies to property a debtor uses as a residence (the resident can be independent of the debtor as well) and allows for unused portions of the exemption plus a wildcard amount to be used.
How Does This Compare to Federal Law?
The homestead is part of state law. It does not set limits on what the IRS or other federal agencies can collect. The IRS has its own set of exemptions for delinquent taxpayers, although these don’t do much in protecting a home. Nonetheless, it is rare for the IRS to force the sale of a home; more likely, a lien on real property will be a barrier to selling or refinancing it. You don’t have a choice in which law applies to your situation; according to the U.S. Constitution’s Supremacy Clause, federal law takes precedence over state law.
What Can I Do About This New Legislation?
Since AB 1885 has no immediate-effectiveness conditions, it won’t be effective until January 1. And, as noted earlier, 2020 median home sale prices for California counties aren’t available yet. However, you should not wait to file for bankruptcy. The large volume of filings expected early next year means there could be further delays if you don’t act soon.
At OakTree Law, our Los Angeles bankruptcy attorneys are up-to-date on the California homestead exemption increase law. We can determine how it may apply to your financial situation and the exact amount your home qualifies for. Immediate assistance might avoid foreclosure, wage garnishment, and other collections actions not to mention the stress that being in debt can cause. To speak to a lawyer with your best interests in mind, request a free evaluation or call us directly at 562-219-2979.