During times of economic hardship, homeowners and other small property owners can rely on homestead protection laws to avoid losing their homes. People can declare part of their property a “homestead,” which keeps it safe from creditors. Under California homestead laws, property owners can rely on one of two bankruptcy exemption systems.
Filing for Bankruptcy in California
The two most common types of bankruptcy in California are Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, qualifying debt is wiped out in four to six months without the need to repay creditors. Typically, someone who doesn't have a great deal of income left at the end of each month and only nominal assets would choose to file for Chapter 7 bankruptcy. Someone who earns a significant income or who wants to protect valuable property may prefer to file for Chapter 13 bankruptcy.
When someone files for Chapter 7 or Chapter 13 bankruptcy in California, she is allowed to take advantage of one of two different sets of exemptions to protect her property. In Chapter 7 bankruptcy, the trustee sells nonexempt property and uses the funds to pay unsecured debts like utility bills, credit cards and personal loans. In Chapter 13 bankruptcy, the trustee doesn’t sell nonexempt property. The debtor keeps it and pays its value to her unsecured creditors in a three- to five-year repayment plan.
Federal vs. State Bankruptcy Systems
California doesn’t allow a person who files for bankruptcy to use the federal bankruptcy system. Instead, two state systems are available. System 1 is generally best suited to debtors who have substantial equity in their property, while System 2 is more beneficial for debtors who have valuable property other than just the equity in their home. A debtor cannot rely on both systems; she must choose one or the other.
California Bankruptcy Exemption System 1
Under System 1, the homestead exemption applies to property in which the debtor resides, including a boat, mobile home, condominium, stock cooperative or planned development. The maximum amount of a property value that can be declared as a protected homestead depends on the person’s circumstances. If the person or her spouse is over 65 or disabled and unable to engage in substantial employment, the maximum homestead value is $175,000. The same amount applies to a person age 55 or older with a maximum gross income of $25,000.
If the debtor or her spouse lives in the house with at least one family member who has no interest in the homestead, the maximum homestead value is $100,000. For all other debtors, the maximum homestead value is $75,000. Under System 1, the homestead exemption also covers proceeds from a mandatory sale of the property that were collected at least six months before bankruptcy.
California Bankruptcy Exemption System 2
Under System 2, up to $29,275 of the equity in a property that is used as a residence can be free from bankruptcy proceedings. This includes a cooperative or a burial plot for the debtor or her child or other dependent. Under System 2, the debtor can use any remaining amount of the homestead exemption in addition to the wildcard amount of $1,550. This amount is used to protect property the debtor needs for work and to maintain a home, such as a modest car, clothing, household belongings, and a small number of tools for her business or profession.
Unlike some states, California doesn’t allow married couples who are filing for bankruptcy to double the homestead exemption amount.
Updates to Exemption Amounts
The California exemption amounts are revised by the California Judicial Council every three years, but as of December 2019, the current amounts (established on April 1, 2019) aren’t echoed by the statute. The System 1 homestead amount was not changed. However, the System 2 homestead amount increased from $26,800 to the amount of $29,275.
To claim the full value of the homestead exemption in California, the debtor must have owned the property for at least 1,215 days before the bankruptcy filing. His homestead exemption might be limited by federal law if he doesn’t meet this requirement.
California Homestead Exemption Form
The bankruptcy homestead exemption applies automatically in California, meaning a debtor doesn’t have to complete any sort of homestead exemption form to claim the exemption in bankruptcy. However, she still needs to claim the homestead exemption when completing her bankruptcy paperwork.
It is sensible to file a homestead declaration to safeguard a homestead exemption from judicial liens; this also keeps the proceeds of a mandatory sale of property safe for six months.