California’s relatively low homestead exemption has long been an obstacle for Los Angeles residents seeking to resolve debt in bankruptcy. Homestead exemptions are intended to protect the family residence from creditors, even in bankruptcy. But, the amount of value that’s protected differs significantly from state to state. In several states, the homestead exemption is unlimited as long as the property meets certain criteria.
The California Homestead Exemption
Until recently, the California homestead exemption was capped at $75,000 for single people. Married couples got a little extra protection, but not the doubling that’s allowed in some states: their exemption was capped at $100,000. Senior citizens and people with disabilities could exempt up to $175,000.
Those protections didn’t go far in Los Angeles, where the median home value is about $650,000. That’s especially true because Los Angeles property values have increased rapidly–in 2010, the median sale price was just $330,500. In one way, of course, that rapid increase in value is great news for Los Angeles homeowners. But, it can also be a trap. Equity increases quickly as home values climb: statewide, it jumped by an average of about $12,000 in the second quarter of 2020 alone.
That means even homeowners who were relatively cash poor and had made little progress paying down their mortgages saw a significant increase in equity. For many, that inflated equity meant they couldn’t file for Chapter 7 bankruptcy without losing their homes.
Fortunately, the state legislature recognized that the homestead exemption was out of date and harming California homeowners.
The Homestead Exemption Increases as of January 1, 2021.
On September 18, 2020, California Governor Gavin Newsom signed AB 1885, increasing the California homestead exemption. The law takes effect on January 1, 2021. While we’re still a few months away from it being effective, now is the time to start planning to take advantage of the higher homestead amount.
Here’s how the new exemption works:
First, the homestead exemption is increased to at least $300,000 for everyone. But, it may be even higher, especially for those in areas like Los Angeles with high home values. That’s because the new exemption is the GREATER of $300,000 or the countywide median sale price of a single family home in the previous calendar year (up to a cap of $600,000).
The official figure may differ slightly, but the 2019 median sale price for a single family home in Los Angeles County was about $635,000. In other words, Los Angeles residents will likely be able to exempt up to $600,000 in equity in their homes. That means most Los Angeles homes will be fully protected from creditors in a Chapter 7 bankruptcy case.
The Homestead Exemption Will Update Automatically
One problem with the previous California homestead exemption was that it was set at a fixed dollar amount and not revisited for years. The new California law ensures that won’t happen again. Starting in January of 2022, the fixed dollar amounts will be adjusted annually for inflation.
What the Law Change Means for California Homeowners
Under the old law, California homeowners overwhelmed by debt such as large medical bills, high balances on high-interest credit cards and other unsecured debt often found they couldn’t file for Chapter 7 bankruptcy without surrendering their homes. Of course, most people want to keep their family homes, and many considering bankruptcy couldn’t afford a change in residence if they wanted to. That limitation stopped too many people from getting the fresh start they needed.
Some Los Angeles residents who were locked out of Chapter 7 bankruptcy by their home equity had the option of filing for Chapter 13 bankruptcy. But, Chapter 13 is a different type of solution that generally serves people with different circumstances. Furthermore, it is not available to everyone who might otherwise file under Chapter 7, because a Chapter 13 filer must have sufficient regular income to make payments toward their past due balances while keeping new payments current.
The attorneys at Borowitz & Clark have helped people in and around Los Angeles resolve debt for decades, and understand the obstacle the low homestead exemption created for many people working to build better financial futures. We are delighted that this change in the law opens up new options for so many Los Angeles homeowners.
If you’ve been holding off exploring your debt resolution options because you were concerned about keeping your property or have previously been told that you couldn’t file for Chapter 7 bankruptcy and at the same time keep your home, it’s time to learn more. You can schedule a free consultation with one of our experienced bankruptcy attorneys right now. Just call 877-439-9717 or fill out the contact form on this page to get started.