California homeowners seeking to resolve debt in bankruptcy will benefit from a new law taking effect on January 1, 2021. Homestead exemptions are intended to protect the family residence from creditors, even in bankruptcy. But, California’s rising home values create an inflated equity which for some homeowners meant they couldn’t file for Chapter 7 bankruptcy without losing their homes or that they were at risk of filing a Chapter 13 with plan payment that were simply too large to manage.
This changed when on September 18, 2020, California Governor Gavin Newsom signed AB 1885, increasing the California homestead exemption to better reflect today’s rising housing costs. The new law protects between $300,000 to $600,000 of equity in a person’s property.
A Dramatic Increase
Prior to this change, the California homestead exemption was capped at $75,000 for single people. Married couples got a little extra protection as their exemption was capped at $100,000. Senior citizens and people with disabilities could exempt up to $175,000.
The new homestead exemption increased to at least $300,000 for everyone, and may be even higher for people in areas such as Los Angeles with high home values. That’s because the new exemption is the greater of $300,000 or the countywide median sale price of a single family home in the previous calendar year (up to $600,000).
The 2019 median sale price for a single family home in Southern California was over $600,000. Counties with median sale prices over $600,000 as of October 2020 include Los Angeles County, San Diego County, San Francisco County, Orange County, Contra Costa County, and Alameda County to name a few. In other words, most California residents will likely be able to exempt up to $600,000 in equity in their homes. That means most Los Angeles homes will be fully protected from creditors in a Chapter 7 bankruptcy case and having a lot of equity in your home will not result in significantly increased plan payments in a Chapter 13 bankruptcy.
What the Law Change Means for California Homeowners
Having too much equity in your home is a problem if you owe a lot to creditors. “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.
In a Chapter 7 bankruptcy case, a bankruptcy trustee will be appointed who will sell any assets with equity exceeding statewide exemptions in order to pay creditors. Most peoples’ main asset is their house. Prior to the new law, if you had debts totaling $300,000 but equity of $500,000 the bankruptcy trustee would sell your house and pay your creditors. This would leave you $200,000 (minus bankruptcy fees and costs) to find new housing. Given California’s real estate market, this would be a tough task.
If you want to keep your home, a better option would be a Chapter 13 bankruptcy. You would be required, however, to commit to pay your creditors at least $300,000 over the course of a 3 to 5 year plan under the supervision of a Chapter 13 trustee and the Bankruptcy Court. The payments to creditors in a Chapter 13 bankruptcy are made on a monthly basis. Which means with a 3 year plan your monthly payments to creditors would be approximately $8,333.33 ($300,000 divided by 36 months), and in a 5 year plan your monthly payments to creditors would be approximately $5,000.00 ($300,000 divided by 60 months). These payments would be in addition to your monthly expenses.
Under the old law, California homeowners overwhelmed by debt such as large medical bills, high balances on high-interest credit cards and other unsecured debt often found they couldn’t file for Chapter 7 bankruptcy without surrendering their homes. Moreover, the option of filing for Chapter 13 bankruptcy was only available if they had sufficient regular income to make large plan payments calculated based on their nonexempt equity. Therefore the low homestead exemption prevented many homeowners who were unable to pay their debts from solving their financial difficulties by filing bankruptcy.
The increased homestead exemption opens up new options for so many California homeowners who can now file Chapter 7 without worrying about surrendering their homes, or can file a Chapter 13 with affordable plan payments calculated based on their actual income. Using the above example, the new law allows you to discharge, meaning cancel, the $300,000 in debt and still keep your house in a Chapter 7 bankruptcy. Since your equity was below $600,000, your house cannot be sold by a bankruptcy trustee. If you do not qualify for a Chapter 7 or a Chapter 13 better suits your needs (e.g., you are behind on your mortgage and facing foreclosure or recent tax debts), you could still likely discharge the majority of your debts – subject to other limitations — under a plan of reorganization because your equity would still be protected from creditors.
Given that many Californians are in financial distress despite having significant equity, the new law – which takes effect January 1, 2021 – offers much needed relief. If you’ve been holding off exploring your debt resolutions options, now is the time to take advantage of the higher homestead amount. If you have questions regarding this or other legal matters, you should consult an experienced attorney who can evaluate your particular situation and provide individualized guidance.
This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California and would like to speak with Kristine Takvoryan regarding your situation, please give us a call at 818-484-8161.