The homestead exemption determines how much equity in your home you can protect from your creditors. When you file bankruptcy in California, usually California statutes determine the amount of your homestead exemption. However, in my last blog post I discussed howfederal bankruptcy statutes may limit that amount if you bought your home within the 1,215-day period (3 years and 4 months) before filing bankruptcy. (See New Increase in the Federal Homestead Exemption Limit for Recently-Acquired Homes in California.)
But outside that time limit, California laws determine pretty much everything else about the homestead exemption. In my last blog post I didn’t get into how your California home qualifies as a homestead, and specifically how your home can qualify even if you don’t live in the home. A newly decided appellate court opinion gives us some important new guidance about qualifying for the California homestead exemption without “physical occupancy.”
DON’T YOU USUALLY NEED TO BE LIVING IN YOUR HOME TO CLAIM THE CALIFORNIA HOMESTEAD EXEMPTION?
The California statutes themselves seem at first glance to require actually residing in the home.
The issue is somewhat complicated because you can chose from two separate sets of state exemptions in California y, each with its own homestead exemption amounts. You have to pick one of the two sets, with all the property exemptions that it comes with, including the homestead exemption.
1) The Section 703 homestead exemption is much less generous, currently protecting no more than $26,800 in home equity. (This is the recent inflation-adjusted amount, effective as of April 1, 2016 and for the next 3 years.)
This statute states that it applies to “real property or personal property that the debtor or a dependent of the debtor uses as a residence . . . .” (See Section 703.140(b)(1) of the California Code of Civil Procedure.) This wording seems to indicate that the person must actually reside in the home.
2) The Section 704 homestead exemption is much larger—either $75,000 if you are a single homeowner, $100,000 if you or your spouse are in a “family unit, or $175,000 if you or your spouse are 65 years or older, disabled, or 55 or older and have limited income. (See Section 704.730.)
Because these 704 exempt amounts are so much more than the 703 one, the 704 homestead exemption is usually chosen by anybody who has a significant amount of home equity. And so I focus on this one for the rest of this blog post.
WHAT DOES THE SECTION 704 STATUTE SAY ABOUT WHETHER YOU NEED TO BE LIVING IN YOUR HOME TO CLAIM THAT HOMESTEAD EXEMPTION?
The wording of Section 704 also seems to indicate that you must actually reside in the home.
The exempt “homestead” is defined (at Section 704.710(c)) as
the principal dwelling (1) in which the . . . debtor or the . . . debtor’s spouse resided on the [pertinent] date, and (2) in which the . . . debtor or the . . . debtor’s spouse resided continuously thereafter until the date of the court determination that the dwelling is a homestead.
This makes it sound like you have to both reside in “the principle dwelling . . . on the date” of the bankruptcy filing and also reside there “continuously thereafter” during the period in question.
HAVE COURTS BEEN INTERPRETING THIS HOMESTEAD EXEMPTION STATUTE TO REQUIRE A PERSON TO BE LIVING IN THE HOME TO CLAIM THIS EXEMPTION?
Sometimes. For example, last year in a Chapter 7 “straight bankruptcy” case involving a home in Fullerton, California, the local bankruptcy judge disallowed the debtor’s homestead exemption because he did not live in his home. Judge Catherine Bauer of the Santa Ana Division of the Central District of California “interpreted the California homestead exemption as requiring physical occupancy.” She said “. . . I cannot find that the debtor is entitled to this homestead because at the time of the bankruptcy [filing] he was not living in the property . . . .”
WHAT WERE THE FACTS OF THAT CASE?
The facts of this case come from the appeal of the debtor to the Bankruptcy Appellate Panel (“BAP”) of the Ninth Circuit, in a case called In re Andy Diaz.
Andy Diaz lived in the Fullerton home with his wife and young son. He had two major brain aneurysms, leaving him at first in a coma, then unable to talk or walk, and then in a lengthy recovery process while he was unable to work and received disability benefits. After leaving the hospital he lived with his mother and brother who helped care for him, in a home across the street and very close to his own home. A brother and sister-in-law lived in his home.
Mr. Diaz and his wife got divorced. In late 2013 he filed a Chapter 7 bankruptcy case, with his now ex-wife as his largest creditor. He claimed the $175,000 homestead exemption as a disabled single person under Section 704.730(a)(3)(B) of the California Code of Civil Procedure.
The Chapter 7 trustee challenged Andy Diaz’s claim for the homestead exemption. Conflicting evidence was received by the bankruptcy judge from Mr. Diaz, his brother and sister-in-law on one hand, and from his ex-wife and her mother on the other. On Mr. Diaz’s behalf were declarations that he was now again living full-time at the property in question, which never stopped being the address on his driver’s license and for all mailing purposes, and he’s “made great strides in his recovery as evidenced by letters from his doctors.” On his ex-wife’s behalf were declarations that Mr. Diaz had only spent a few nights at the home as an occasional visitor, all his mail is sent to his mother’s house, and he could not care for himself even 3 and a half years after the aneurysms.
There is no dispute that Mr. Diaz did not live in the home at the time of his bankruptcy filing. However there did not appear to be any clear evidence about whether he had intended his absence to be temporary.
ON WHAT FACTORS DID THE BANKRUPTCY JUDGE BASE HER DENIAL OF THE HOMESTEAD EXEMPTION?
Judge Bauer directly stated that Andy Diaz was not “entitled to this homestead because at the time of the bankruptcy three and a half years ago he was not living in the property.” She also said that
there has been a substantial period of time that has gone by before he was able to move back into the house. And as I said, I’m also a little suspicious, I’ve got to tell you, that Mr. Diaz probably was not capable of making the decision to file bankruptcy and that the benefit totally went to his relatives who stayed in that house. And now – you know, now $175,000 homestead exemption seems like an incredibly large exemption for someone who hasn’t lived in the house for a number of years.
ARE THOSE LEGALLY VALID FACTORS?
No, not according to the Bankruptcy Appellate Panel (“BAP”) of three judges who unanimously overruled Judge Bauer in the In re Andy Garcia opinion. They said:
The [bankruptcy] court’s decision was also apparently based in part on the amount of the exemption, the finding that [Andy Diaz’s brother and sister-in-law] Arthur and Priscilla Diaz benefitted from the bankruptcy and would benefit from the homestead exemption, and the finding that a substantial amount of time had gone by before Diaz resumed occupancy.
The BAP ruled that these “are not relevant factors to the analysis.”
SO WHAT ARE THE LEGALLY VALID FACTORS TO APPLY UNDER CALIFORNIA LAW?
The BAP said that “[u]nder California law, the relevant factors for determining if a debtor resides in a property are the physical fact of the occupancy of the property and the debtor’s intention to live there.”
California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return. [California Supreme Court and Court of Appeals opinions cited from 1858, 1860, 1938, and 1965.]
Conversely, physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency. . . . .
Physical occupancy on the petition date is therefore neither a necessary nor sufficient condition of residency. However, whether the debtor physically occupies the property or not, the debtor must have an intention to reside there.
So based on this, what it takes in California to maintain your homestead exemption when you are not physically occupying the home is simply to have the genuine intention to reside there. For bankruptcy purposes that intention to reside at the homestead is as of the bankruptcy case filing date.
HOW DID THE BAP RESOLVE THE APPEAL?
The appellate court did two things.
First, it overruled Judge Bauer’s upholding of the Chapter 7 trustee’s objection to the homestead objection. The BAP said that “[t]he bankruptcy court incorrectly interpreted the California homestead exemption statute.” “There is no evidence that the court considered Diaz’s intent to reside in the property on the filing date or evaluated the evidence supporting his intent.”
Second, the BAP determined that the parties got sidetracked on “Diaz’s ability to physically occupy the Property without assistance.” They did not provide evidence on the crucial “issue of Diaz’s intent to make the Property his residence.” So the BAP “remanded” the case, sent it back to the bankruptcy judge so that the parties could provide the required evidence about Diaz’s intent. The judge would then need to “apply the correct law to the facts.”