WHAT ARE PROPERTY “EXEMPTION” LAWS IN BANKRUPTCY?
When you file a bankruptcy case, your property and possessions are protected through a set of “exemptions” under California law. “Exemptions” are categories of your assets, usually with maximum dollar limits, which you legally able to keep for yourself, out of the reach of your creditors. Because of these exemptions most people who file bankruptcy do not lose what they own.
The “homestead exemption” protects certain amounts of equity in your home, depending on your circumstances.
SO HOW MUCH HOME EQUITY IS EXEMPT UNDER CALIFORNIA LAW?
The California exemption laws are unusual in that there are two separate sets of state exemptions to choose from. You have to use one or the other set; you can’t pick and choose among them. They are called the “703” and “704” exemptions based on the section of the California Code of Civil Procedure in which they are found.
Both the 703 and 704 set of exemptions include its own homestead exemption. But the 704 one is much more generous. So the 704 set exemptions are usually chosen by anybody who has a significant amount of home equity.
SO HOW MUCH EQUITY IS EXEMPT UNDER THE LOWER 703 HOMESTEAD EXEMPTION?
Starting with the 703 one, the current homestead exemption (found at Section 703.140(b)(1) of the California Code of Civil Procedure) is $26,800. This is the recent inflation-adjusted amount, effective as of April 1, 2016 for the next 3 years.
HOW ABOUT THE HIGHER 704 HOMESTEAD EXEMPTION?
the 704 exemption (Section 704.730) IS a lot larger—either $75,000, $100,000, or $175,000—but also much more complicated:
- If you are a single homeowner, you can exempt up to $75,000 of the equity in your home (but see below for larger amounts if you fit within certain categories).
- If you or your spouse is in a “family unit” living in the home, you can exempt up to $100,000. (See Section 704.710(b).) A “family unit” includes:
- You and your spouse residing together in the home
- You and a minor child or grandchild who you care for in the home, including a minor child or grandchild of your deceased or former spouse
- You and a minor brother or sister, or a spouse’s minor brother or sister
- You and the minor child of a deceased brother or sister, or that of your spouse
- You and a parent or grandparent, or you and your spouse’s parent or grandparent, whether your spouse is alive or deceased
- You and any of these relatives even if they are not minors but are “unable to take care of and support” themselves
- if you or your spouse living with you fit any of the following conditions you can exempt up to $175,000:
- 65 years or older
- physically or mentally disabled and “unable to engage in substantial gainful employment”
- 55 or older and single, with a gross annual income under $25,000
- 55 or older and married, with a gross annual income under $35,000
IF BANKRUPTCY IS A FEDERAL PROCEDURE, WHY DO CALIFORNIA LAWS EVEN MATTER?
The U.S. Constitution gives the United States Congress the power to “establish . . . uniform laws on the subject of bankruptcies throughout the United States.” See Article I, Section 8, Clause 3. And under the Supremacy Clause the “Constitution, and the laws of the United States which shall be made in pursuance thereof . . . shall be the supreme law of the land.”
So you might sensibly think that since you’re filing a federal bankruptcy case you’d use the federal set of exemptions nicely laid out in the Bankruptcy Code.
However, Congress put a provision into the U.S. Bankruptcy Code saying that each state could require its residents to use that STATE’S set of exemptions instead of the federal ones. California has so decided, stating that the use of the federal exemptions is “not authorized in this state.”
IS CALIFORNIA’S HOMESTEAD EXEMPTION LAW RELATIVELY GENEROUS OR NOT?
The homestead exemption amounts vary hugely state to state.
At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.
At the opposite end, Montana’ exemption for individual homeowners is $250,000, Minnesota’s is $360,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000. And then the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.
Considering that California home values tend to be on the high end, our homestead exemption amounts are not generous at all.
Last year a bill was introduced in the California Legislature by State Senator Bob Wieckowski, a bankruptcy attorney, to increase the exemption amounts from $75,000/$100,000/$175,000 to $100,000/$150,000/$300,000. Even though the bill passed in the Senate, it was voted down by the Assembly and did not become law.
DOES IT MATTER HOW LONG I’VE BEEN LIVING IN CALIFORNIA TO USE ITS EXEMPTIONS?
Yes, it does.
First, you generally have to live in California for 91 days before being able to file bankruptcy here. (See my recent blog post titled Where Should My Bankruptcy Case Be Filed? for more about this.
But second, even though you can file bankruptcy here, you can’t use the California property exemptions in your bankruptcy case until you’ve been “domiciled” here for 730 days, or two years. See Section 522(b)(3) of the Bankruptcy Code. I discussed this in another recent blog post, this one titled When Can I Use California’s Property Exemptions If I’ve Moved Here?
SO AS LONG AS I’VE LIVED IN CALIFORNIA FOR TWO YEARS I CAN USE ITS HOMESTEAD EXEMPTION LAWS, RIGHT?
There’s one more twist, one that applies in California currently only to the $175,000 exemption amount.
Remember how I said above that Congress has allowed each state to decide whether its residents can use a federal set of exemptions or must use that state’s set of exemptions? That provision of the Bankruptcy Code has been on the books since the late 1970’s. But more recently Congress limited the amount of the homestead exemption in the context of relatively recent home purchases.
Relatively recent, as in, if you bought your home within 1,215 days (3-years-and-4-months) before filing bankruptcy, your homestead exemption is limited to a maximum of $160,375.
You can see that this limitation doesn’t affect you if you qualify only for either the $75,000 or $100,000 homestead exemption, or choose to use the lower 703 exemption of $26,800), because these amounts are way below the $160,375 limit.
Rather, the effect of this federal limit is to reduce the $175,000 homestead exemption to $160,375 under the timing condition just stated.
DOES THIS LIMIT OF $160,375 APPLY TO ALL HOME PURCHASES WITHIN 1,215 DAYS OF FILING?
First, this dollar limit does not apply to the principal residence of a “family farmer.”
Second, this federal limitation does not apply if you bought your current California home using equity from an earlier home bought in California more than 1,215 days before you file bankruptcy. It only applies to homes bought in one state through the use of equity in a home sold in another state.
SO WHAT’S THE REASON FOR THIS FEDERAL HOMESTEAD EXEMPTION LIMIT?
I referred earlier to the very wide range in homestead exemption amounts from state to state. The purpose of this $160,375 limit is to prevent people from moving from a small homestead exemption state and buying a home in a state with a relatively large state homestead exemption in order to shield their assets from their creditors.
WHAT ABOUT THE INCREASE IN THIS FEDERAL HOMESTEAD EXEMPTION LIMIT THAT YOU REFER IN THE TITLE TO THIS BLOG POST?
During the three years before April 1, 2016 this federal cap on homestead exemptions was $155,675. The amount was increasing to $160,375 on that date.
Every three years many of the dollar amounts in the U.S. Bankruptcy Code are adjusted for inflation. This last increase reflected a 3.016 percent increase from 3 years ago (rounded to the nearest $25), reflecting the relatively low inflation rate during this period.
The new larger amount doesn’t apply to ongoing bankruptcy cases but only to new ones filed on or after April 1, 2016.