Business Law Journal

What is the Homestead Exemption?

Homestead exemptions are designed to protect individuals and families who are facing potential bankruptcy maintain possession of their primary residence.  The exemption prevents a creditor or bankruptcy trustee from forcing the sale of a home to liquidate a debt.  It is important to note, however, that under the amendment the exemption provides protection up to a maximum amount.  If there is more equity in the home than the maximum amount, a creditor can still force the sale.  In that case, the debtor will collect from the sale money up to the maximum statutory amount and the creditor will collect the surplus.  

Why Was the Homestead Exemption Amended? 

Before January 1, 2021, homestead exemptions in California were $75,000 for a single homeowner, $100,000 for a married couple, and $175,000 for families who met specific requirements.  

Assembly Bill 1885 amended the exemption to offer far more protection.  The statute states: “The amount of the homestead exemption is the greater of the following: (1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000). (2) Three hundred thousand dollars ($300,000). (b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.”  Cal. Civ. Proc. Code § 704.730.

The amendment reflects the Legislature’s goal of protecting debtors from losing their homes and that in California home prices have risen substantially in recent years so the prior protections often were inadequate to prevent a forced sale of the debtor’s residence.  Under the prior regime, debtors were still at high risk of losing their homes because the residence’s equity value often exceeded the lower thresholds.  Under the amended statute, Californians are now qualified automatically for the statutory homestead exemption and the increased exemption amount is based on where the property is located, without regard to the debtor’s age, marital status, and other factors 

Additionally, the amended statute self-adjusts for inflation.  This eliminates the difficulty of having to amend the law again in the future to reflect often rapid and substantial increases in California home prices. 

When Is the California Homestead Exemption Not Applicable?

The homestead exemption does not apply when the debtor is facing actions by the federal government, such as an IRS tax lien or other government agencies’ forced sale of the property.  Additionally, the homestead exemption does not apply where the debtor voluntarily sells their residence, i.e., the homestead exemption only applies to forced sales.  Finally, if the residence was used to provide collateral through a mortgage, deed of trust, or other lien or encumbrance on the property other than an enforcement lien, the homestead exemption also does not apply. See Cal. Civ. Proc. Code § 703.010.

Conclusion

Before the amendment, California had one of the more limited homestead exemption protections among the states.  Because home prices have appreciated substantially in California, creditors were able to force a debtor to liquidate the residence to collect the surplus equity.  The amended homestead exemption requires that litigants and their attorneys take into account the increased protection for debtors where the defendant may be personally liable for a monetary judgment.  If you have questions about the homestead exemption, or are involved in litigation where personal assets are at risk, please contact the authors of this article.

This AALRR post is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

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