By Ryan C. Wood
California is finally about to increase the homestead exemption pursuant California Civil Procedure 704. This is the exemption under California State law that protects equity in a primary residence when filing for bankruptcy. It is almost a certainty that on or before September 30, 2020, Governor Newsome will sign into law this change.
THIS IS WONDERFUL NEWS GIVEN THE HOMESTEAD EXEMPTION HAS NOT INCREASED WITH THE COST OF LIVING OR INFLATION FOR MANY YEARS. IT WILL ALSO HELP TO PROVIDE RELIEF FOR FAMILIES HIT HARD BY COVID-19 WHILE ALLOWING THEM TO KEEP THEIR HOME.
It apparently is not an “if” but “when” will AB 1885 become law. AB 1885 will substantially increase the California Homestead exemption pursuant to CCP 704 to the greater of $300,000 or median sales price in the county where the single-family home is located in the prior year, though this cannot exceed $600,000. Since median sale price in most Bay Area counties is over $1,000,000 Bay Area homeowners will get the full $600,000 exemption to protect equity. This is great news for bankruptcy attorneys. We will be able to use the law, the Bankruptcy Code, to obtain permanent relief for more homeowners with a lot of equity in their homes.
What This Means For Homeowners in California?
It opens the door for so many people in the Bay Area that are cash poor but house rich to seek relief from their creditors under the Bankruptcy Code and not lose their home. In the Bay Area the median house price in many counties, if not all of them, is above $1.2 million. That means Bay Area homeowners will be permitted to exempt or protect up to $600,000 in equity in their home while still discharging 100% of their credit card debts or other general unsecured claims like medical debts or personal loans.
For Example
A homeowner in San Mateo County owns a home that is worth $1.4 million with a first mortgage that is owed $750,000. The homeowner is struggling with various real world bills such as credit card payments, a vehicle loan and other normal living expenses. They are current with their mortgage payments, property tax and property insurance though so there are no issue with the house. Unfortunately due to COVID-19 or some other circumstance outside of their control their income decreased and things are too tight to continue each month. Given the homestead exemption in their county, San Mateo County, is $600,000, the could file chapter 7 or chapter 13 bankruptcy and their house is entirely safe. $1.4 million – $750,000 = $$650,000. Then you have to deduct the cost of sale of the house too, approximately $70,000, leaving $580,000 to the seller if they chose to sell/liquidate the house. Again, we will now have a homestead exemption of $600,000 to protect the $580,000 so there is no issue under this example. You can plug in your numbers to see how things might look like for you. Also taxes on the gain should be also taken into account.
Issues to Consider Under CCP 704 In California
The single most troubling part of the California Homestead exemption to protect equity in a primary residence or dwelling is the reinvestment provision of CCP 704.720(b). CCP 704.720(b) requires any exempted amount obtained from the sale of the property must be $been all kinds of litigation regarding this issue and if you want to hang your hat on reading between the lines or gambling with as much as $600,000 in equity in your home after you sell be my guest. I will not be part of that scenario. As an experienced bankruptcy attorney I counsel clients to go down the road we know there is a bridge over the river that is solid so we can safely get across. That does not mean there will not be bumps in the road. Just that I rarely have clients that can afford to pay me to strengthen a flimsy bridge or build a bridge entirely so they can cross safely (argue for a different interpretation of the law or create new law). We generally want to go down the road that is safe even if that road is longer, bumpier and there may be some other parts of that road that are unpleasant. It just will not be the road to losing $600,000 in equity in a sold house. To read more about this issue go to:
https://www.courtlistener.com/pdf/2016/08/08/in_re_jesus_bencomo.pdf
Another Example
You have $90,000 in various general unsecured such as credit cards, personal loans and medical debts. Your gross monthly income is around $16,000 between yourself and your spouse. You also have two children under the age of 18 for a total household of 4 people in San Mateo County. Your house is worth $1.4 million and you owe $1,160,000 on the first and only mortgage. Your monthly mortgage payment plus property tax and insurance is about $6,200 a month or 38% of your gross income. The median income for a household of 4 people in the State of California is currently a gross of $101,315 for the year. Your gross income is over the median income $90,685 a year. That is okay; you just need to pass the means test to qualify for a Chapter 7 bankruptcy and discharge the $90,000 or in Chapter 13 determine if there is any obligation to general unsecured creditors, the $90,000, in the Chapter 13 Statement of Monthly Disposable Income. After taking into account taxes, monthly mortgage payment it is highly likely someone with these general set of facts can discharge the entire $90,000 in general unsecured debt, keep their home and life will go on unchanged. This is the law and filing for bankruptcy is just following the law to legally discharge debts and lead a happier life.