California Increases Homestead Exemption In New Legislation

california-increases-homestead-exemption-in-new-legislation

Suburban house on a sunny day

What would be a $2 million home in Mountain View, California


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On September 15, 2020, California Governor Gavin Newsom signed into law Assembly Bill 1885 (AB1885) which increases the creditor homestead exemption for personal residences in the Golden State. The new homestead will have a baseline of $300,000 but can be as high as $600,000 based on the median sale price of homes within a particular county in a particular year. These new homestead amounts will also be indexed against inflation in the future, so they will automatically increase without the Assembly having to revisit them ever so often.

The text of AB1885 provides in full:

——-

Section 704.730 of the Code of Civil Procedure is amended to read:

704.730.

    (a) The amount of the homestead exemption is the greater of the following:

         (1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).

         (2) Three hundred thousand dollars ($300,000).

    (b)The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

——-

These changes go into effect as of January 1, 2021, and they replace California’s terribly antiquated former homestead exemptions which provided a confusion range from only $50,000 for a single debtor to up to $175,000 for a married elderly couple. Considering the high prices for California homes — in most coastal counties you couldn’t buy the parcel for a mailbox for $50,000 — the prior homestead exemptions meant that many Californians were displaced from their homes because of indebtedness, which then often rendered them homeless and thus an additional burden on the state’s limited public resources.

At the same time, the $600,000 cap provides a nice balance to keep a deadbeat from buying a $5 million home in Beverly Hills or Palo Alto and then thumbing her nose at creditors. In other words, California is saying to debtors: “You can have a decent place to live somewhere in the county (or maybe at least a neighboring county), but you can’t live in splendor or use your house as Fort Knox to cheat creditors.”

Importantly, the new California law does not change any of the statutory exceptions to homestead, such as for consensual security interests (mortgages and HELOCs, etc.) or for state taxes (federal taxes are never bound by state exemptions anyway). Those things were not protected before AB1885 and will not be protected after.

Where this probably will help the most is with financially-distressed individual debtors who have a modest amount of equity built up in their homes but are burdened by consumer debt (credit cards and car loans), who previously could not take Chapter 13 bankruptcy without fear of losing their home to foreclosure. This new provision should allow them to reorganize without too much pain.

Frankly, this change is long overdue as the previous California exemptions have been too low to give any significant relief to debtors for about the last two decades. It was also correct for the California Assembly to index these amounts against inflation going forward so that they do not have to periodically re-visit these amounts through new legislation or risk them falling out of date as they did before.

So, to the California Assembly, I say “Well done.”

CITE AS:

Cal. Assembly Bill 1885 (2020). Click below to see the bill:

LegiScanCalifornia AB1885 | 2019-2020 | Regular Session

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