Category Archives: New California Bankruptcy Exemptions

Keep Your House, Protect Up To $600,000 In Equity, Discharge All Debts When Filing Bankruptcy in California

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.

California Bankruptcy Exemptions Increase as of January 2013

By Ryan C. Wood

As we are now beginning the new year you should be aware of the new laws that may affect you. If you are thinking of meeting with bankruptcy lawyers in California and filing for bankruptcy in 2013 one thing you should know is that some bankruptcy exemptions are higher in California as a result of California Assembly Bill AB-929.  Inevitably the exemptions will increase again after the writing of this article.  This bill was approved by the governor and filed with the Secretary of State on September 27, 2012. This means that more of your property can be protected when you file for bankruptcy. California has two exemption statutes. The first exemption statute has a generous wild card exemption, Section 703.140 of the Code of Civil Procedure, and the second exemption statute has a generous homestead exemption, Section 704.730 of the Code of Civil Procedure. Your bankruptcy attorney cannot use both in a bankruptcy petition. California has opted out of using the federal exemption statutes so those are unavailable for people filing for bankruptcy in California.

Here are some of the changes in the exemption statutes as of January 1, 2013:

Section 703.140 of the Code of Civil Procedure:

• $24,060 in homestead or burial plot ($22,075 previously)
• $25,340 wildcard exemption. This consists of $1,280 plus any unused portion of the $24,060 homestead or burial plot exemption. ($23,250 previously)
• $4,800 in one or more motor vehicles ($3,525 for ONE motor vehicle previously)
• $600 in any single household item ($550 previously)
• $7,175 professional books or tools of trade ($2,200 previously)
• $12,860 dividend or interest under unmatured life insurance contract ($11,800 previously)
• $24,060 personal injury payments ($22,075 previously but this did not include pain and suffering compensation)

Section 704.730 of the Code of Civil Procedure:

Homestead exemptions provided to a homeowner would be one of the following:
1) $75,000 unless you are a person described in (2) or (3) below.
2) $100,000 if you are a member of a family unit where one or more members of the family do not have an interest in the homestead or whose only interest is a community property interest
3) $175,000 ($150,000 previously) if you are:
a. 65 years of age or older
b. physically or mentally disabled and as a result cannot work
c. 55 years or older with gross annual income of not more than $25,000 (single) or $35,000 (married) and there is an attempted involuntary sale ($15,000 if single and $20,000 if married previously)

Additionally, on April 1, 2013, (and every three years thereafter) the Judicial Council is required to submit adjusted homestead exemptions based on the change in the annual California Consumer Price Index to the Legislature. The increases will not be in effect until they are approved by the Legislature. This will tie the homestead exemptions to inflation and the rising cost of home ownership.