Owning a Los Angeles home can be satisfying if you can gain equity as you clear your mortgage. However, with the competitive job market and COVID-19 pandemic, you might not afford your home. When foreclosure becomes a possibility, filing for bankruptcy can be an ideal option to keep the home. Please continue reading this blog post to learn more about home exemption and how you may use California homestead in Chapter 13 and Chapter 7 bankruptcy, which permits you to exempt specific amounts of home equity.
Defining Homestead Exemption
Homestead exemption is a legal provision that assists protect a house from creditors after filing for bankruptcy or death of the homeowner's spouse. It also offers surviving spouses ongoing property tax relief on a graduated scale, so a house with low assessed value benefits the most.
The exemption is tailored to offer financial protection and physical shelter, preventing a forced sale of your primary shelter. Nevertheless, it does not stop or deter bank foreclosure if you default on your mortgage. Foreclosure happens when the bank takes possession of your home after failing to make your mortgage payments timely.
Calculating Your Home's Value
Like other California homestead exemptions, the homestead exemption covers only the equity in your home.
Assuming your home's value is two hundred and fifty thousand dollars, and you have a mortgage of two hundred thousand dollars, you have fifty thousand dollars in home equity. While your home is worth more, your asset's value is the amount of your equity as far as this analysis is concerned. Therefore, even when you reside in a high-end area with a low homestead exemption, you might be protected if you have little equity in your home.
California Homestead Exemption Amounts
Some states let people filing for bankruptcy use the federal bankruptcy exemption system instead of their state system. Golden State is not one of them. If you live in the state and qualify for a bankruptcy exemption, you can use either System 1 or System 2.
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System 1
In California 704 homestead exemption, you can exempt a maximum of six hundred thousand dollars of equity in your primary home. It applies to personal or real property you live in during the bankruptcy period, including a condominium, planned development, community apartment, stock cooperative, mobile home, or boat. Additionally, it applies to any proceeds from a forced sale of the house received six (6) months before filing for bankruptcy. -
System 2 (California 703 Homestead Exemption)
It applies to assets that you or your dependent uses as a residence, as well as a burial or cooperative plot.
Additionally, the exemption applies as a wildcard exemption. You could use the unused portion of your homestead exemption on top of the wildcard amount of one thousand five hundred and fifty dollars.
How Long Must You Own the Home to Qualify for the Exemption?
The law has restricted homestead exemption to prevent persons from protecting their homes by moving to and purchasing a home in a state with an unlimited homestead exemption. You should have owned your home for more than one thousand two hundred and fifteen days before filing your bankruptcy case.
Suppose a homeowner cannot satisfy the requirement. In that case, the federal laws cap the homestead exemption at one hundred and seventy thousand three hundred and fifty dollars, irrespective of the state exemption amount. Additionally, the exemption is capped at the amount if you've committed any crime or bankruptcy fraud.
California Doesn't Let Joint Bankruptcy Filers Claim Double Exemptions
Both the federal exemptions and California bankruptcy exemptions have the maximum amount attached to the exemption. That means your home is protected only up to that amount.
Federal exemptions allow double homestead exemption amounts for married persons filing jointly. That means every partner can protect the amount permitted per the exemption. However, that isn't possible in California.
The state doesn't allow you to double your exemption amount, even when you are filing jointly. Every exempt asset should fall within the exemption amount permitted by the California Code of Civil Procedure.
What Do the 2021 Homestead Exemption Changes Mean to Los Angeles Homeowners?
AB1885 law became effective on January 1, 2021, and increased the California homestead exemption. Earlier, the exemption covered a value of:
- Seventy-five thousand dollars per person
- One hundred thousand dollars per married couple
- A maximum of one hundred and seventy-five thousand dollars for persons above sixty-five years or those living with disabilities
Currently, the baseline is three hundred thousand dollars. However, it can go up to six hundred thousand dollars based on the median sale prices of houses within a specific county in the year.
Additionally, the AB1885 law permits inflation. Starting January 1, 2022, the law will be modified annually based on changes in the annual California Consumer Price Index for All Urban Consumers for the previous year.
The exemption offers protection from judgment creditors (lenders who sue in bankruptcy court and acquire a legal judgment to collect all the money owed). The judgment creditor is entitled to take numerous actions to collect their debts, including selling property.
Per the AB1885, judgment creditors cannot touch home equity. The exemption amount depends on the median sale of homes in the county where your asset is located.
The new law also comes with disadvantages, including:
- AB 1885 will not protect you if you use your home as collateral for a loan. Your lender can foreclose the home, and you are not eligible for the homestead exemption.
- The exemption applies in forced sale cases only. That means bankruptcy will not protect your home from a judgment creditor if you decide to sell it.
- The law doesn't protect from federal action.
- Creditors might find that giving credit in the state is riskier and choose to stay out of California or charge a higher interest rate.
Currently, California homestead exemption is automatic, and you do not have to bring your homestead declaration. Nevertheless, if you file the declaration, the home's equity is not lost following the home sale (regardless of whether it is voluntary or involuntary). In addition to that, if you file a declaration, proceeds from the home sale are shielded for six (6) months.
If you have equity in your home, you must file a declaration, especially when facing financial challenges.
How Homestead Bankruptcy Exemptions Work in Chapter 7 Bankruptcy
Under federal law, if a trustee liquidates the home, they should pay you twenty-five thousand one hundred and fifty dollars for the homestead exemption. The trustee will pay you the exemptions following the sale costs that include the outstanding mortgage amount and all closing costs.
If the sale proceeds are less than the permissible homestead exemption, the trustee shouldn't liquidate the home. The trustee liquidates the property to obtain money for your bankruptcy estate and can use the amount to pay your creditors.
If the trustee doesn't expect to obtain any funds, the liquidation won't benefit your creditors. It is because the trustee:
- should pay for the property sale, and
- will offer you the amount equivalent to the homestead exemption before paying the creditors.
When Can the Trustee Liquidate Your Property?
There isn't an exact answer to the question.
The bankruptcy trustee is tasked with representing the unsecured creditors' interests. An unsecured creditor doesn't hold a lien on collateral like a title loan or mortgage. They can't seize your property until they acquire a personal judgment against you for your debt or pursue a debt collection lawsuit.
The trustee analyzes the home to determine whether to liquidate certain items and use the money to pay the unsecured creditors. Therefore, they can liquidate the home if they can receive adequate funds to distribute among your creditors.
How Homestead Exemption in Bankruptcy Works in Chapter 13
In Chapter 13 bankruptcy, the trustee will not liquidate the home if its equity is above the bankruptcy exemption. Nevertheless, the trustee might need you to pay more money to the unsecured creditors via a repayment plan.
The repayment plan should pay unsecured creditors as much as they'd have received if you file a Chapter 7 case. Suppose the unsecured creditors are receiving less through your repayment plan. In that case, your bankruptcy trustee might require you to increase your payment until your creditors receive what they would in Chapter 7 bankruptcy liquidation.
Why You Need a Skilled Bankruptcy Lawyer
Filing bankruptcy comes with many misconceptions that most consumers tend to forget its purpose:
- Offers protection from creditors
- Relieves from some if not all debt responsibilities
And that's what your seasoned bankruptcy attorney does: protect your home from all debt collectors and find a method to relieve you of all financial obligations.
While it is okay to bring the case on your own, according to statistics, you are more likely to get more favorable results if you engage a lawyer irrespective of the bankruptcy chapter you choose.
According to Ed Flynn of the American Bankruptcy Institute, 91.5 percent out of the four hundred and eighty-six thousand three hundred and forty-seven Chapter 7 bankruptcy cases brought in 2017 had legal representation. The bankruptcy attorneys had about 96.2 percent of the cases discharged.
Like many legal matters, bankruptcy is an overwhelming process that requires a lawyer for guidance and advice. A proficient attorney should offer you peace of mind by offering:
- Initial free consultation and case review
- Guidance on the available options, including the bankruptcy chapter to bring
- Completed paperwork essential for case filing
- Representation should your bankruptcy case proceed to bankruptcy court
The process starts with an initial consultation with your attorney. If you're married, you ought to attend the meeting with your spouse so that you can answer all questions accurately and honestly. The lawyer can highlight all the available options, such as the likelihood of filing bankruptcy without your partner.
Guessing on your debt amounts and who your creditors are isn't a brilliant idea. Your lawyer will require paperwork that supports your answer on your property and debts. If you want a precise and honest case assessment, do not hold anything back. The advice your lawyer offers can only be viable as long as you give accurate information.
If you decide to file bankruptcy, your lawyer should next file the required paperwork with a bankruptcy court. Remember, your legal professional is tasked with protecting your assets, including your home.
The next step depends on your preferred bankruptcy chapter. When you file Chapter 7, you will appear before a trustee for your petition review. The meetings are effortless when you have a lawyer since they will submit your complete and thorough schedule alongside supporting paperwork to the bankruptcy trustee.
Things can become tricky when you file a Chapter 13 bankruptcy case. You will meet with your trustee and also present a repayment plan that the court will approve. It is where many struggle without legal representation.
Without an understanding of bankruptcy law, it can be challenging to undergo the process alone. The attorney can guide you to answer the judge's questions and use their expertise to assist you in managing the required preparations. It can aid you in avoiding expensive mistakes.
Frequently Asked Questions
Discussed below are some of the commonly asked questions about the homestead exemption in bankruptcy.
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How Does Declared Homestead Differ From Automatic Homestead?
In Los Angeles, it is not a must that you bring your homestead declaration. The automatic homestead safeguards the home against a forced sale if your proceeds would not be adequate to pay your homestead to your creditor. If there is a judgment lien on the assets, your creditor will get paid from your house sale proceeds before you obtain your home.
Homestead amounts are the same for declared and automatic homesteads.
On the other hand, declared homestead shields exempt equity when the homeowner sells their home voluntarily. The proceeds are protected for six (6) months, and the homeowner may reinvest the money in another home (if the amounts cover the sale price, among other costs). Therefore, bringing a declaration is essential if you've equity in the house and face financial challenges.
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How Does Homestead Exemption in California Bankruptcy Compare to Federal laws?
Homestead exemption forms part of California law and doesn't limit how much the Internal Revenue Service or any other federal authorities can collect. While the IRS has its set of exemptions for delinquent taxpayers, they do very little in protecting homes. However, it is uncommon for the agency to force your home's sale; a lien on the property will prevent refinancing or selling it.
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Can You Claim a Homestead Exemption in Bankruptcy If You Do Not Reside at Your Home?
You can sometimes claim California homestead exemptions even if you do not live at a given home. Under the bankruptcy laws, the factors the judge considers when deciding residency for a home include:
- The asset's physical occupancy
- Purpose with which your home is occupied
California Code of Civil Procedure 704.710 (c) was amended in 1983 to delete the requirements of actual residency when automatic homestead exemptions are made. Continuous residence doesn't mean that you can't leave your home to go to work, grocery store, on vacation, or reside away from your house for a while.
Although you can claim exemption despite the absence of residency when filing your bankruptcy petition, it is advisable to live at your home before filing your bankruptcy case and document it to avoid issues.
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Can You Claim a California Homestead Exemption If Only Your Former Domestic Partner Lives at the Home?
California Code of Civil Procedure 704.720(d) creates residual potential benefits of a homestead exemption for persons in the same position as the debtor; those who might be divorced or legally separated or former partners who reside in the home.
Under the section, if a judgment debtor doesn't live in the home, but their ex-spouse does or exercise control over the home's possession, then the judgment debtor has a right to the exemption until:
- Lawfully enforceable agreement distributing the community assets between the spouses,
- Entry of judgment, or
- A later date that the court order specifies
Additionally, the Ninth Circuit law permits both former and current spouses to bring bankruptcy cases to claim homestead exemption, even following their spouse filing a lower exemption claim.
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Can a Trustee Cease Your Homestead Exemption Due to Bad Faith Conduct?
Bankruptcy courts in California cannot take away homestead exemption from Chapter 7 filers and homeowners due to bad faith conduct.
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Can You Create a Lien on Your Home?
You cannot create a lien on your home before filing a bankruptcy case, hoping to lower equity below your homestead amount. It is because you can't have a trust deed on your home.
Acting so might be deemed as a fraudulent transfer.
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What is the Role of a Bankruptcy Trustee?
When you file your bankruptcy case, the court will appoint a trustee to administer the case. Your bankruptcy trustee will review the paperwork filed and 521 documents, including bank statements, tax returns, and paycheck stubs.
Every bankruptcy filer should attend a 341 meeting of creditors. During the meeting, the trustee will:
- Place the filer under oath
- Verify the filer's identification and their petition's accuracy
- Inquire about unusual information found in the bankruptcy paperwork
- Permit lenders present to ask questions about the case
Find a Experienced Los Angeles Bankruptcy Attorney Near Me
You can get valuable relief when filing for bankruptcy as a California resident as far as protecting your home equity. Homestead exemptions save you a lot of money in property taxes and investment in your property. The exemption can be beneficial in both Chapter 13 and Chapter 7 bankruptcies. The legal team at Los Angeles Bankruptcy Attorney can help you understand the pros and cons of both chapters to make an informed decision. Call us today at 424-285-5525. It is free to discuss the available options and learn the homestead exemption in the bankruptcy process.
