Huge Increase in California Homestead Exemption
The homestead exemption protects a specific dollar amount of a homeowner’s home equity from his or her creditors. In California, the California homestead exemption amount of protection is substantially increasing as of January 1, 2021. This increase in protection makes it much more likely that homeowners in financial difficulty can keep their homes.
HOW DOES THE HOMESTEAD EXEMPTION WORK?
If you owe a debt the creditor can usually sue you, get a judgment against you, and then act to collect the judgment. Ways of collecting on a judgment include garnishing your paycheck and bank accounts. Creditors can also attempt to seize or force the sale of your other assets to pay the judgment. This could include the forced seizure or sale of your vehicle or even your home.
However, every state has laws protecting a certain amount of your assets. These protective laws are called exemptions. The homestead exemption protects debtors’ homes and the equity in their homes.
The homestead exemption comes into play in two situations. First, as just mentioned, it protects your home equity from a particular creditor which gets a judgment against you and then tries to have your home sold to pay its judgment. Second, the homestead exemption similarly protects part or all your home equity from your creditors overall when you file personal or business bankruptcy.
In both situations each dollar of legally available homestead exemption protects a dollar of home value or equity. And if the legally available homestead exemption amount is larger than the amount of equity you have in your home, your home is completely protected from your general creditors. (Creditors which are legally secured by your home such as your mortgage holder and other lienholders, have special rights against the home, which is a separate discussion.)
Here is an example of how the homestead exemption works. If your home is worth $500,000 and has a $450,000 mortgage, you have equity of $50,000. Assume for a moment that your homestead exemption is $75,000. Since the homestead exemption amount of $75,000 is larger than your $50,000 in home equity, all the equity is protected. A judgment creditor could not force the sale of your home to pay its judgment. And if you filed a bankruptcy case your home equity would be protected from your general creditors.
SO WHAT’S THE HUGE CALIFORNIA HOMESTEAD EXEMPTION INCREASE?
Currently (through December 31, 2020), the California homestead exemption amount is $75,000 if you’re a single homeowner, $100,000 if you live with a family member, and $175,000 if you meet certain family, age, income, and other qualifications. Calif. Code of Civil Procedure Section [“CCP”] 703.730.
On September 18, 2020 Governor Gavin Newsom signed into law Assembly Bill 1885. It replaced virtually the entire prior homestead exemption law. (Here are the deletions and additions to Calif. CCP 707.730.) Besides greatly increasing the exemption amounts, the new law is much shorter and, in some ways, simpler. All the above-noted qualifying conditions were eliminated. Now everyone with a principal residence gets a homestead exemption that is the greater of the following two amounts:
“(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).
(2) Three hundred thousand dollars ($300,000).”
The new Calif. CCP 704.730(a)(1)-(2).
So, your new homestead exemption will be one of three amounts. It will be at least $300,000 throughout California. That is if your home is in a county where the prior year’s median sale price for a single-family home was $300,000 or less. The homestead exemption will be $600,000 if your home is in a county where that year’s median sale price was $600,000 or more. Or the exemption amount will be the county’s prior year median sale price amount in counties where the median price was between $300,000 and $600,000.
This increase from the present $75,000 to $175,000 homestead exemption to $300,000 to $600,000 is indeed huge.
HOW DOES THIS INCREASE APPLY TO MY COUNTY?
It is not immediately clear what will be the accepted source for the prior year’s “countywide median sale price.” This is not specified in the new law. In any event the pertinent amount for use in 2021 will not be available until after the end of 2020—because it’s based on “the calendar year prior.”
One sensible possible source is the California Association of Realtors’ statistics on “Median Prices of Existing Single Family Homes.” This information as presently available goes only through September 15, 2020, so again will need to be updated after the end of the year. But it can give you a good idea of the upcoming exemption amounts for your county.
Based on this imperfect source, here are the current approximate median prices and the resulting approximate projected 2021 homestead exemption amounts for the following counties:
Los Angeles County: current median price of $677,000/projected homestead exemption of $600,000
Orange County: $930,000/$600,000
Riverside County: $487,000/$487,000
San Bernardino County: $350,000/$350,000
Ventura County: $742,000/$600,000
San Diego County: $733,000/$600,000
Note that all the above counties, except the two inland ones, will almost certainly have homestead exemptions of $600,000 in 2021.
If your county isn’t listed above use the above link to get your current (through September 15, 2020) “Median Prices of Existing Single Family Homes.” If your county’s median sale price is $300,000 or less, then your homestead exemption in 2021 is projected to be $300,000. If your county’s 2020 “median sale price” is $600,000 or more, your exemption is projected to be $600,000. If that “median sale price” is anywhere in between, that amount will be close to your homestead exemption amount in 2021.
IS THERE ANYTHING ELSE IN THE NEW LAW?
Just one thing: starting in 2022 there is an annual adjustment for inflation. It’s “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.” Calif. CCP Section 704.730(b). This will not kick in until 2022, then every year thereafter.
DOESN’T CALIFORNIA HAVE A SECOND HOMESTEAD EXEMPTION?
Yes, it is true that California has two homestead exemption laws. Everything above is about the homestead exemption found in Section 704 of the California Code of Civil Procedure. There is an entire separate set of exemptions in Section 703, with its own distinct homestead exemption.
A homeowner filing bankruptcy gets to choose which set of exemptions, and thus which homestead exemption, to use. But you must choose one or the other set; you can’t pick and choose among the different exemptions in these two sets of exemptions. See CCP Section 703.140(a)(1)-(3) stating that “the exemptions provided [in Section 703] may be elected in lieu of all other exemptions [essentially those provided in Section 704] . . . but not both.”
The simple fact is that, even before the upcoming major increase in the Section 704 homestead exemption, its amount was much larger than the Section 703 homestead exemption. The 703 homestead exemption law protects
The debtor’s aggregate interest, not to exceed twenty-four thousand sixty dollars ($24,060) in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence.
Calif. CCP Section 703.140(b)(1). This amount has been increased through cost of living adjustments (see CCP Section 703.150) to $29,275 (effective since April 1, 2019).
But it is still a fraction of the Section 704 homestead exemption amounts discussed earlier. That is why the Section 703 set of exemptions is almost always chosen by people filing bankruptcy who are either not homeowners or have no equity in their homes. This will be even more true when the Section 704 exemption greatly increases in 2021.
WHY ISN’T THE NEW HOMESTEAD EXEMPTION LAW EFFECTIVE NOW?
There was a bit of confusion about this. This law came from a budget bill, Assembly Bill 1885, which went through the budget committee process. Budget bills are usually effective immediately upon the Governor’s signing, which occurred on September 18, 2020.
But for a bill to be effective immediately it must meet certain qualifications. For example, the law must appropriate funds, provide for a tax levy, or to contain an urgency clause. AB 1885 meets no immediate-effectiveness conditions. Such laws are effective on January 1 following the year of enactment. (See definition of “effective date” in the California Legislature’s Glossary of Legislative Terms.) So, the increase in the homestead exemption will be effective on January 1, 2021.
WHAT TO DO ABOUT THIS NOW?
There will be a large volume of bankruptcy filings after the turn of the year. Bankruptcy lawyers may well be overwhelmed with clients then. Common sense says you should not wait. Meet with a bankruptcy lawyer now to determine whether and which type of bankruptcy is right for you, and, if appropriate, to position yourself for the best timing of your bankruptcy filing.