California has a higher homestead exemption, thanks to a bill signed last year by the Governor. It affords more financial protection for homeowners against unsecured creditors. Given the high cost of California homes and the continuing rise in real estate values, the increase is long overdue.
What is a Homestead Exemption?
A homestead exemption shields a homeowner’s equity from the loss of his or her home, usually due to a spouse’s death, a serious illness, or the homeowner’s bankruptcy. It offers legal protection from unsecured lenders and creditors who may sue because of an unpaid debt and try to collect it by forcing a sale of the property. It also provides protection if the homeowner files for bankruptcy.
These judgment creditors have the right to take action to collect the debt, including selling assets like vehicles and real estate. If your home equity falls under exemption levels, and your creditors force a sale to collect debts, you would keep your equity up to the homestead amount.
There are exceptions to homestead provisions, so your protection’s not completely bullet-proof. They include:
- Consensual security interests (mortgages or home equity lines of credit)
- State or federal taxes
- Proceeds of voluntary home sales could be subject to debt collection (homestead exemption only applies to forced sales, unless you file a homestead exemption declaration with your county clerk)
How Does the New Law Impact California’s Homestead Exemption?
The law increases the creditor homestead exemption for personal residences, reports Forbes. It will have a baseline of $300,000, but that could rise to as high as $600,000 given the median sale price of homes within a county in a given year. These new amounts will be indexed against inflation in the future. They will go up automatically without the state government getting involved.
These changes replace an antiquated homestead exemption, which provided a confusing range of $50,000 for a single debtor to up to $175,000 for a married elderly couple. Given the state’s high real estate values, these figures offered little protection to homeowners and made it difficult for them to find new housing.
Who Benefits From Increasing the Homestead Exemption?
These new limits should help individual debtors with equity in their homes but who have a high debt load (credit cards, medical debt, car and student loans). They may have wanted to avoid Chapter 13 reorganization bankruptcy which may lead to a foreclosure. The changes make it easier to financially reorganize without threatening the equity in their homes.
Chapter 7 liquidation bankruptcy may discharge credit card debts while borrowers can continue to make mortgage payments because they might retain their homes. If the homestead exemption is high enough, there’s no point in a bankruptcy trustee selling it. There may be so little value left in the home it might be less than the cost of selling it, so there’s nothing after the sale to give to creditors.
The new law is not good news for creditors. Homeowners who have built up hundreds of thousands of dollars in equity could potentially file for bankruptcy and keep their homes. This may impact all homeowners who could end up paying for this changed equation as lenders may no longer loan in the state, reduce the number of loans they make, or charge higher interest rates.
We’re Here to Help
If you have any questions about the homestead exemption and your ability to cope with financial hardships, call my office at (949) 244-4207 or fill out our contact form today. We can talk about your situation, how these exemptions might work, and your best options to reach your goals.
