With the stroke of a pen, California’s homestead exemption — the amount of equity in one’s primary residence that can be protected from creditors — increased from $75,000, $100,000, or $175,000 (depending on the circumstances) to 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,” up to $600,000. Put simply, the exemption increases from up to $175,000 to $600,000, depending on the county. This represents a sea change and will help thousands of homeowners in need of bankruptcy relief avoid having their homes sold by a trustee and used to pay creditors. Governor Gavin Newsom signed Assembly Bill 1885 into law on September 15, 2020.
Countywide statistics on sales can be found on www.zillow.com. Counties with median sale prices over $600,000 include Los Angeles County, San Diego County, San Francisco County, Orange County, Contra Costa County, and Alameda County.
In a Chapter 7 liquidation, a trustee will be appointed and sell any assets with equity exceeding statewide exemptions. Most peoples’ main asset is their house. Prior to the law, if you had debts totaling $100,000 but equity of $500,000 the trustee would sell your house and pay your creditors. This would leave you $400,000 (minus bankruptcy fees and costs) to find new housing. Given California’s real estate market, this would be a tough task. (Why would you file for bankruptcy in this situation? Maybe your wages were being garnished or you were being sued or facing foreclosure.) If you want to keep your home, a better option would be a Chapter 13 reorganization. You would be required, however, to commit to a 3-5 year plan under the supervision of a Chapter 13 trustee and the Bankruptcy Court. About half of Chapter 13 plans are not successfully completed.
Using the above example, the new law allows you to discharge, i.e., cancel, the $100,000 in debt and still keep your house in a Chapter 7 bankruptcy. Since your equity was below $600,000, it can’t be touched by a trustee. If you do not qualify for a Chapter 7 or a Chapter 13 better suits your needs (e.g., 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 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 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 or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.