In California, homeowners are about to get the biggest increase in homestead exemption increase in history.
AB1885 and its Senate sister SB832 have passed as of Friday, September 4, 2020. Governor Gavin Newsom will likely sign it into law. What does it mean for homeowners who file bankruptcy? Let’s explore a bit
The $64,000 question is: When will the law take effect?
Maybe right away. Maybe January 1, 2021. It depends on whether the governor characterizes it as an “emergency.” If he does, it goes into effect the date the Secretary of State files the amended statute. If he doesn’t, by default it goes into effect with all other non-emergency laws passed this year on January 1, 2021.
What Does it Mean for Homeowners?
It means they’ll be able to protect a lot more of their home equity from creditors in bankruptcy. That’s what a homestead exemption does, among other things. And AB1885 [https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB1885] increases it from $75,000 to at least $300,000 and as high as $600,000!
What makes the difference in amounts? How is it calculated?
The floor is $300,000. The ceiling is the median value of homes in the county for the calendar year just ended, but limited to $600,000. Homeowners’ values in many California counties won’t hit that upper limit but some will, San Francisco notably among them.
There are exceptions to the exemption’s protections. Here is a short list of the most important ones.
Voluntary liens like mortgages and HOA liens and some involuntary liens – think tax liens – are excepted. (Tax liens can in certain cases be expunged, but pursuant to different statutes.)
How Does This Increase in Homestead Exemption Affect Bankruptcy Planning?
At a minimum, anyone who is considering bankruptcy and has home equity in his / her / their primary residence that is more than the $75,000-$175,000 allowed under current law should wait until the new exemptions are effective before filing bankruptcy. That effective date may be very soon. But it will be no later than January 1, 2021.
How Might This Increase in Homestead Exemption Affect Existing Bankruptcy Cases?
Many Chapter 13 cases were filed not because the debtors had so much free cash flow they could afford the monthly payment. They were instead filed because the debtors had non-exempt assets, usually home equity. Chapter 13 allowed them to amortize their non-exempt equity through the plan, basically buying it back.
But If Exemptions Are Determined (and they are) As Of The Date Of Filing, Can This New Law Still Help?
It’s true the increased exemption won’t help the existing cases. But it’s not hard to imagine cases where the debtors’ income has dropped, they can’t make their plan payment but they STILL have non-exempt equity. So…
Voluntary Dismissal of the Existing Case and Filing a New Chapter 7 May Be An Option
I expect we will see some pushback from Trustees on this strategy. But from a purely technical, procedural perspective, this could be an effective cure. Debtors stuck in a Chapter 13, having a Chapter 13 dismissal either already a done deal or on the horizon may find new prospect of bankruptcy relief in this amended law.
Call Paul Staley for a free consultation to find out how you can make the most of your options. (619)235-4095.