How Does Homestead Exemption Work In California?
The idea of homestead exemption is that California legislature did not want people to be kicked out on the streets if they were subject to a judgment after a civil lawsuit. The state doesn’t want an army of people who have nothing other than the clothes on their backs roaming the streets because they’ve been displaced from their houses after losing a civil action. Judgment debtors have at least some protection — not just on their house — in other exemption categories as well.
Your household goods and furnishings are exempted without dollar limit. This includes your clothes so that you can’t be stripped bare and put on the streets (though that might sound entertaining to some). You’re left with something to get started again. The creditor can still, of course, record a judgment lien against the property, but the homestead exemption is designed to protect your place of residence, so you have somewhere to live.
If you have a great deal of equity in the property beyond the homestead exemption, a creditor could conceivably initiate a judicial foreclosure sale and get the house sold so it can get paid. There is a hierarchy of debt, meaning some types of debt could step in front of your exemption. Property taxes, for example, will step in front of your exemption, as will certain other taxes.
It can be interesting if the property is sold in a bankruptcy case. Let’s say a Chapter 7 Trustee seizes a house that has some nonexempt equity. If there’s too much equity to completely protect, then the Trustee will sell the property, pay the cost of selling the property, write you a check for your exemption amount, and use the proceeds to pay creditors, and provide a dividend to the Trustee. You have six months in which to reinvest that money that you got from the Trustee, measured from the day you receive the money. During that six-month period, the money is exempt as your homestead, even though you can’t make a little house out of piles of dollar bills. If you do not reinvest it in a new domicile within six months, it loses its exempt character, and the Trustee can demand that you disgorge that money so it can be used to pay creditors.
Similarly, outside of bankruptcy you’re supposed to get your homestead if there is an involuntary sale. However, you have to reinvest it again within that six-month window or it loses its exempt character as your homestead. One of the benefits of having the homestead bumped up to $600,000 is that you can get a pretty decent place to live in (though it won’t be a palace in Beverley Hills) for that amount — which wasn’t the case before the law changed in January of 2021. Under the old system, the very maximum you could possibly get if you were over 65, disabled, or over 55 with a household income of less than $25,000 a year was $175,000. While you can buy a house outright for $175,000 in some parts of the country, that’s not the case in Southern California.
If you’ve just come out of bankruptcy, your credit score will probably increase as a result of the bankruptcy, but your ability to get a home loan will not be there for a couple of years. A $175,000 down payment might not be enough in Southern California for creditors to consider you having some skin in the game. That problem was solved in January when the homestead went up to $600,000.
What Is The Current Homestead Exemption In California?
As of January 1, 2021, the floor of the homestead in California is $300,000 on the equity that you have in your principal residence, and goes up to a maximum of $600,000. The dollar amount that you get is the median price for houses in your county up to a maximum of $600,000, unless you haven’t lived in the house for at least 1,215 days (three years and four months). If that’s the case, then the homestead exemption is $175,350.
Again, let me emphasize that you are exempting the equity in the property, not the value of the property. To calculate equity, we take the market value of the property, subtract the amount that you still owe on mortgages and other liens; and what’s leftover is the equity, or the amount you can protect using that homestead exemption.
Do I Automatically Get To Keep Exempt Property?
The whole point of exemption is to protect your assets from the depredations of creditors and bankruptcy Trustees in, say, a Chapter 7 bankruptcy. (In a Chapter 13, Trustees generally aren’t in the business of seizing assets because you’re making payments into a plan, while Chapter 11 doesn’t even have a Trustee unless something’s gone terribly wrong.) Anything that’s exempt is yours to keep. It is protected. That’s why we have exemption tables in the first place.
For more information on Homestead Exemption in California, a free 20 minute consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.
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