New Protections for California Homeowners in Debt

If you’re house-rich but cash-poor or carrying a lot of non-mortgage debt, a recent change in California law dramatically increases protection for your home. Back in the fall, we wrote about the coming change in the California homestead exemption and how it would impact access to bankruptcy for many Los Angeles homeowners. Now the law is in effect, and the news is good for any high-equity homeowner struggling with debt, whether you’re considering bankruptcy or another debt resolution solution.

What is the California Homestead Exemption? 

The homestead exemption is a legal protection for the property where the homeowner lives. It doesn’t apply to other types of real property, such as vacation homes or rental property. This exemption prevents creditors from attaching the home to satisfy a judgment, and also protects a certain amount of value in the home if the homeowner files Chapter 7 bankruptcy. It’s important to note, though, that the homestead exemption doesn’t apply when the home serves as security for a loan. In other words, the homestead exemption won’t stop a mortgage foreclosure.

The amount of the homestead exemption varies significantly from state to state. A few states have no homestead exemption. Others protect very small amounts, such as $5,000 or $15,000. At the other end of the spectrum, a handful of states have an unlimited homestead exemption, meaning that the full equity in the residence is protected, no matter how high that number is. 

The Homestead Exemption in California

The new California homestead exemption is a bit more complicated than most states’ exemptions. Rather than a specific dollar amount, the homeowner can exempt the greater of $300,000 or the county-wide median sale price for a single-family home in the prior calendar year. However, the exemption is capped at $600,000. In other words, the exemption available to a California homeowner will be at least $300,000, but may be up to twice that depending on home values in the area. 

The Time is Right for an Increased Homestead Exemption

The increase in the California homestead exemption is long overdue. The previous homestead exemption of $75,000 for a single person and $100,000 for a married couple didn’t go far toward protecting homes in Los Angeles County, where the median home value is over $700,000. Home equity has long been an obstacle for homeowners whose financial circumstances took a negative turn, because it cut off the option of Chapter 7 bankruptcy after a serious financial reversal such as job loss or extended illness. 

Still, the increase is of special value in 2021, for a couple of reasons. First, home equity is on the rise, in a way that could have easily tipped the scales against homeowners under the old exemption system. In the third quarter of 2020 alone, average home equity in California increased by $34,000. That’s on the heels of a $12,000 increase in the previous quarter. 

But, the increase in home equity isn’t the only reason the increased homestead exemption is especially important now. 

Pandemic-Related Unemployment

Across 2020, the California unemployment rate went from 3.9% to 8.8%. And, the 8.8% rate in December was a significant improvement over the 16.4% rate that hit the state in the spring. That means many people who ended 2020 employed experienced interruptions in income earlier in the year.

Los Angeles County is faring even worse than the state as a whole, wrapping up the year with a 10.7 unemployment rate. In short, a lot of people in Los Angeles and throughout the state have lost their jobs or had their income disrupted over the past year. 

Small Business Failures and Bankruptcy

Commercial bankruptcies increased significantly during 2020, largely due to the Covid-19 pandemic, related shutdowns, and greater consumer precautions. During the same period, consumer bankruptcies dropped. In part, that may be due to Covid-19 relief, such as direct stimulus checks and enhanced unemployment benefits. But, there’s no question that many consumers and small business owners are struggling. 

Possible other reasons for the decline in consumer filings include court closures, uncertainty about the future, and lack of funds to pursue bankruptcy. 

Another obstacle for small business owners is potential personal liability for business debts, and what that may mean for their assets–including their homes. While corporate shareholders and members of an LLC or LLP generally aren’t personally liable for business debts, sole proprietors and general partners are. That means a small business owner who attempted to borrow his or her way to pandemic survival and failed may be deep in unmanageable debt. But, they don’t have the same options a corporate debtor does. They can’t simply dissolve the business, and Chapter 11 reorganization often won’t work. 

In a collection action against a sole proprietor or general partner, non-exempt personal assets are fair game. The same is true for a corporate officer or LLC member who personally guaranteed a loan. 

The significant increase in the homestead exemption will allow many struggling small business owners to protect their homes from creditors, and to take advantage of the fresh start bankruptcy could offer after the pandemic without putting their homes at risk.

Struggling with Debt? Learn More about Your Options

Your best source of information about your options for resolving debt, including how the new California homestead exemption might impact your situation, is an experienced Los Angeles bankruptcy attorney. The attorneys at Borowitz & Clark offer free consultations to people seeking debt solutions. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this page.

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