An extremely important piece of legislation passed the California State Legislature and will become law effective: January 1, 2021. This new law will allow individuals who previously could not file for bankruptcy without losing their home, to now be able to file bankruptcy and protect $600,000 of equity in their primary residence, and still wipe out their debts through filing a Chapter 7 Bankruptcy Petition.
AB 1885 increases the California homestead to the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the judgement debtor claims the exemption, not to exceed $600,000.
On August 28, 2020, the California State Legislature passed a bill increasing the amount of equity in an individual’s primary residence that can be protected in Bankruptcy to $600,000.00. The bill is California Senate Bill 832 (CASB832), and is meant to protect California homeowners from creditors forcing the sale of their home in bankruptcy or outside of bankruptcy via judicial foreclosures initiated by unsecured creditors (i.e. debt collectors collecting on credit card or other unsecured debts). This new Homestead Exemption does not protect against voluntary liens foreclosing (i.e. mortgages exercising their right to foreclose if you do not pay your mortgage), but it will serve to protect your home from being sold in a Chapter 7 Bankruptcy if the home has less than $600,000 in equity after paying off all liens and closing costs.
The current homestead exemption (i.e. CCP 704.730) was initially enacted 45 years ago and used to cover the full value of most homes at the time, but the current homestead exemption hasn’t been adjusted since. Today it covers only about 15% of the median value of most homes, thus this new bill is intended to significantly increase the protection of person’s primary residence, and thereby bridge the gap between California home values and the currently extremely small and outdated homestead amount.
The law states, “Existing law provides that a specified portion of equity in a homestead, as defined, is exempt from execution to satisfy a judgment debt and prescribes that the amount of the homestead exemption is either $75,000, $100,000, or $175,000, depending on certain characteristics of the homestead’s residents. This bill would instead make the homestead exemption the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed $600,000. These amounts would adjust annually for inflation.” See California Assembly Bill 1885.
For example, if a California resident owes $200,000+ in credit card debts and another $400,000 from a commercial lease deficiency, yet that individual owns a house in San Diego County worth $900,000.00 with a mortgage principle balance of only $250,000.00, said individual can now file for bankruptcy, wipe out their $600,000 in debts, yet not lose their home in bankruptcy.
For example, prior to the passage of this new homestead bill, such a person’s home would have been sold by the Chapter 7 Trustee if they filed for bankruptcy, as the current homestead law only protects $75,000 in equity for a single homeowner, $100,000 for a married couple and/or individual with a minor dependent in the home, or $175,000 for an individual over the age of 65 years. However, under the new homestead exemption bill, after deducting 6%+ costs of sale for the sale of said hypothetical $900,000 home referenced above (i.e. realtor fees, title, escrow, taxes, etc. = approx. $54,000+), and after paying off the $250,000 mortgage, the remaining $596,000.00 in net equity would be exempt under the newly expanded California homestead law AB 1885, thus the Chapter 7 Trustee would not sell said home.
Therefore, if you own a home with equity and our suffering from mounting credit card debts, payday loans, high interest business loans, and/or lease deficiencies due to closing a business as a result of COVID-19, and/or suffering from a deficiency balance on a repossession or other older tax debts, then call the Bankruptcy Law Center today to set up a free consultation to explore your options. This new law has made it possible for many individuals to file for Chapter 7 and still keep their homes, when prior to this new homestead law they did not have such an option. Thus, if you were considering Chapter 7 Bankruptcy, yet chose not to explore said option due to your home’s equity, it is important that you consult a Bankruptcy Law expert to reassess your options in light of this new law. Call the Bankruptcy Law Center at: 1-800-551-7922, or go to www.BankruptcyAttorneys.Org.