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What Is Homestead Exemption?
Homestead exemptions can protect home equity, up to a certain dollar amount, from a homeowner's creditors, up to a certain dollar amount. Collectors cannot acquire any funds within the homestead exemption amount to pay for debt. Homestead exemption applies if you file for bankruptcy or have problems paying bills after your spouse passes away. Homestead exemptions vary throughout the country, with some states protecting as little as $5,000.
The California homestead exemption received a long-overdue update that went into effect on Jan. 1, 2021.
California Homestead Exemption 2021
The new law allows for the homestead exemption to be adjusted annually for inflation beginning Jan. 1, 2022. The law now enables many individuals to file for Chapter 7 and still keep their homes whereas prior to this new homestead law they had much less protection.
California Homestead Exemption Updated in 2020
The new legislation, AB 1885 signed by Gov. Gavin Newsom on Sept. 18, 2020, dramatically increases the exemption to a minimum of $300,000 and up to $600,000 depending on the county. The exemption is now based on the countywide median sale price for a single-family home in the prior calendar year. The exemption amount in Los Angeles and Orange Counties is currently $600,000. In Riverside County, the homestead exemption is $400,500.
Prior to the Homestead Exemption Update
The previous homestead exemption was based on a 45-year-old law that covered the full value of most homes at the time. Today, that exemption only covers about 15% of the median value of most homes.
The old homestead exemption by today’s standards was quite low: $75,000 for an unmarried individual, $100,000 for a married couple, or $175,000 for the disabled or those over age 65.
California Homestead Exemption and Bankruptcy
Using the revised exemption for 2021, a debtor may have $600,000 of equity in their Los Angeles or Orange County home and still file a Chapter 7 bankruptcy with their home being protected. The homestead exemption in Riverside County is $400,500.
How the Homestead Exemption Works
The amount of your home equity is considered an asset. If you file a Chapter 7 bankruptcy, how much equity you can protect with an exemption will be one of the factors used to determine whether you will be able to keep your home. If the homestead's equity (value of the property minus the amount still owed on it) exceeds the limit of the exemption, creditors may force the debtors to sell.
For example, if you own a home in Orange County worth $500,000 and you have $100,000 in equity (below the $600,000 exemption limit), then your equity is protected, and the bankruptcy trustee cannot force you to sell the home to satisfy the debt. If your equity in the previous example is $450,000 (above the exemption limit), the trustee could take the house and sell it to pay off your debts. From the proceeds of the sale, you will receive the maximum exemption in Orange County, $600,000.
In a Chapter 13 bankruptcy, you won't lose your home, but you'll have to pay creditors an amount equal to the value of the property not protected by the exemption or your disposable income, whichever is more.
Homestead exemption does not protect you against foreclosure. This exemption also won’t protect you from federal actions, such as efforts by the IRS to collect back taxes.
How Long do I Have to Live in California to Use Bankruptcy Exemptions?
You must have lived in California for at least 2 years (730 days) when you file bankruptcy to be able to use California’s exemptions. Otherwise, you will follow federal bankruptcy exemptions.
If you meet the residency requirements, you’ll have to choose between the exemptions outlined in section 703 (system 2) and section 704 (system 1). The updated homestead exemption law affects those filing under section 704 (system 1). Anyone not owning a home or having very little equity may choose to file under system 2, which focuses more on protecting personal property like vehicles, clothing, and furnishings.
Automatic Homestead Exemption
You don't have to file a homestead declaration to claim the homestead exemption in bankruptcy. In California, the bankruptcy homestead exemption is automatic. An undeclared Homestead won’t protect you if you choose to voluntarily sell your house. This automatic declaration only protects the home from forced sale during bankruptcy. It doesn’t protect the equity if you choose to sell your house. If you make a formal declaration, you will get 6 months of protection to voluntarily sell your home without losing your protected equity.
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At The Law Offices of Joseph M. Tosti, APC, our attorney has more than three decades of experience in a variety of bankruptcy, foreclosure, and other cases of financial hardship. When you are a client, he will pursue the best possible result for you.
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