Newly Increased California Homestead Exemption Law Protects the Equity in a Home
Newly Increased California Homestead Exemption Law
Protects the Equity in a Home
What is a Homestead? California allows homeowners the ability to declare property their “homestead” if it is their primary residence. This declaration establishes that a certain amount of equity you have accrued in your home is considered off-limits (exempt) to creditors.
Current California Homestead If you are single, you may legally exempt up to $75,000 of the equity accrued in your home. This amount increases to $100,000 if you live with another family member and is $175,000, if you are 65 or older, disabled or earn less than $15,000 per year.
AB1885 – The New California Homestead Effective January 1, 2021, the California homestead exemption increases to the greater of $300,000 or median sales price in the county where your single-family home is located in the prior year, though this cannot exceed $600,000. This is designed to keep most people in their homes and protect it from creditors.
This new law will allow individuals to keep their houses and exempt them from creditors, including bankruptcy trustees. Anyone who previously could not file for bankruptcy without losing their home, will be able to file bankruptcy and protect up to $600,000 of equity in their primary residence, and still wipe out their debts through filing a Chapter 7 Bankruptcy Petition.
For example, take Joe, a California resident, who owes $100,000 in medical bills, $150,000 in credit card debts, and owns a house in Los Angeles County worth $900,000, with a mortgage principle balance of $250,000 (i.e. $650,000 in equity). The median sales price in Los Angeles County is estimated at $674,103. Joe can now file for bankruptcy, wipe out his $250,000 in debts, yet not lose his home.
Under the current homestead exemptions, Joe’s home would have been available to creditors to foreclose on or sold by the Chapter 7 Trustee if he filed for bankruptcy, as the current homestead law only provides Joe with a $75,000 (single individual) exemption. The calculation looks like this:
$900,000 value
- 72,000 (8% costs of sale (i.e. realtor fees, title, escrow, taxes)
- 250,000 mortgage
- 578,000 equity
- 75,000 homestead exemption
- $503,000 funds to pay creditors
However, under the new homestead exemption bill, it looks like this:
$900,000 value
- 72,000 (8% costs of sale (i.e. realtor fees, title, escrow, taxes)
- $250,000 mortgage
- 578,000 equity
- 674,103 homestead exemption
- ZERO FUNDS TO PAY CREDITORS
Thus, the Chapter 7 Trustee would not sell Joe’s home.
If you lost your job and suffering from increasing credit card and medical debt, lease deficiencies due to closing a business as a result of COVID-19, or are otherwise worried about saving the equity in your home, you now have options to keep your home under the new homestead law.
If you are a creditor and seek to collect a debt, the equity in the debtor’s house may be off limits to you.
Thank you to Lesley Davis, senior counsel at the firm for preparing this update.
For more information feel free to contact Dawn: dcoulson@eppscoulson.com.
EPPS & COULSON, LLP
Attorneys admitted to practice in
California, New York, Colorado, Texas, Oregon and Hawaii
Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. While intended as information and educational, it is considered advertising under applicable laws of some states, and as such, Epps & Coulson, LLP encourages you to call us to discuss these matters as they apply to you or your business.