Is Your Home Exempt In Bankruptcy in California?

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The law recently changed on January 1, 2021. Prior to that, there was a three-tiered exemption structure for exempting the principal residence of a debtor.

California currently has two exemption tables, one for homeowners with equity, and the other for everybody else. The new law affects the homeowner’s table. The exemption on a person’s principal residence, which cannot be used on other real estate, only on your principal residence, is a minimum of $300,000 in equity, up to a maximum of $600,000, as determined by the median price for a house in your particular county.

I’m in Los Angeles County, and I serve primarily Los Angeles, Orange, and, to a lesser extent, Riverside Counties. Both Orange County and Los Angeles County have median house prices of over $600,000, meaning that the exemption is $600,000. There are a couple of caveats here. First, what you’re exempting is not the value of the house, but the value of the portion of the house you actually own — the equity. We start with the market value of the house and then subtract the amount you still owe; the equity is what’s leftover. That’s what you have to exempt. Unless your house is paid off, the equity is likely going to be under $600,000.

The second caveat takes us to the Bankruptcy Code, which is a federal statute. California has opted out of the exemptions in Section 522 of the Bankruptcy Code, but there is a provision in Section 522(p) that contains an important limitation: If you have not had the house for at least 1,215 days, then you don’t get your state’s exemption. Instead, you get a maximum of $170,350 exemption of the equity in your house. That’s three 365-day years, plus four 30-day months. If you’ve lived in the house for less time than that and you have more than $170,350 in equity, we’ll probably want to postpone filing your bankruptcy papers until you get past that 1,215-day mark. Then, we can exempt the entire equity unless your equity exceeds $600,000.

This new homestead increase is not a retroactive provision. Therefore, if you filed a bankruptcy case before January 1, 2021, you’re under the old three-tiered scheme, which was much more parsimonious than the very generous exemption structure that we have now. Occasionally, I’ll have somebody pose the question, “I filed in December. Now that the exemption has gone up, do I get to use the higher exemption?” And the answer is no. In fact, there is a Ninth Circuit case law holding that the exemption is fixed on the petition date, meaning the date you file your bankruptcy petition. You don’t get to update the exemption after you file the bankruptcy papers. As a result, the filing needs to be done carefully. Timing, as in so many things in life, is absolutely essential in filing a bankruptcy case.

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.