At Modesto Bankruptcy Attorneys, we often deal with an all to familiar scenario that goes something like this: The Client owns a home, which is either paid off in full or subject to an existing mortgage, and they have a significant amount of equity built up into their property. At the same time, they have accrued substantial debt (i.e., Credit cards, medical bills etc.) that they want to discharge through bankruptcy.
When we assess their case for a Chapter 7 or Chapter 13 bankruptcy, the existence of significant equity in their property would lead to many Client’s choosing to not pursue bankruptcy, as they risk their house being sold under a Chapter 7 bankruptcy or an extremely high monthly payment under a Chapter 13 bankruptcy. Although the bankruptcy code provides for a Homestead Exemption to protect some of the equity in your property, it has been criticized for being far too low based on the California real estate market, where recent increasing in real estate values have led to significant increase in equity for existing homeowners. However, on September 15, 2020, Governor Newsom signed and enacted Senate Bill 1885, which substantially increased the Homestead Exemption, now making it much easier to protect equity in your home and still file for Bankruptcy.
The History of the Homestead Exemption
Before looking at the new changes to the Homestead Exemption from Senate Bill 1885, it is important to first understand what the Homestead Exemption is and why it is important. First, the Homestead Exemption is an amount that an individual or married couple can exempt and protect from their bankruptcy matter, allowing them to keep their home or decrease their monthly bankruptcy payment. Under a Chapter 7 Bankruptcy, which is a complete liquidation plan, the Bankruptcy Trustee can sell any of your non-exempt or unprotected assets to pay off your creditors. This means that if you have equity in your property that is over the Homestead Exemption amount, you may lose your home to pay off your creditors. In a Chapter 13 Bankruptcy, which is a payment plan (meaning you keep your home), the amount of equity above the Homestead Exemption will be factored into the calculation to determine your monthly payment under your Chapter 13 Payment Plan. The greater the non-exempt equity, the higher the monthly payment. Although you are not losing your house under Chapter 13, you may end up with an extremely high monthly payment over a 3-year or 5-year timeline.
Prior to the passing of Senate Bill 1885, the Homestead Exemption amount varied based on marital status and age. Under the previous Homestead Exemption, the amount exempted against creditors in a bankruptcy action was as follows: $75,000 for an individual, $100,000 for a married couple, or up to $175,000 for a debtor who is disabled or over the age of 65. If a debtor was able to fall under the applicable exemption amount, then there was no issue with pursuing their bankruptcy matter. However, the problem began when it became more common for individuals to have significantly more equity in their home than the above exemption amounts. This could be from a combination of paying down a loan balance over many years of ownership and an increasing real estate market in California. Especially for those who purchased their homes during the last real estate crash, they now find themselves with significant built-up equity in their home.
To better understand how the Homestead Exemption works, let’s take the following illustration. A client purchased a home for $100,000 cash, and the home is now worth $300,000. The Client now has $300,000 in equity in their home. Under the previous Homestead Exemption, the Client would be faced with either of these two situations: (1) Under a Chapter 7 Bankruptcy, the Bankruptcy Trustee would be able to sell the home and use all the non-exempted amount to pay back creditors. Of the $300,000 equity, an individual would only be able to exempt $75,000 ($225,000 available to pay back creditors), a married couple would only be able to exempt $100,000 ($200,00 available to pay back creditors), or a disabled individual or person over 65 would only be able to exempt a maximum of $175,000 ($125,000 available to pay back creditors). (2) Under a Chapter 13 Bankruptcy, the non-exempt equity would be added to your other non-exempt assets to determine your monthly repayment plan, often creating a monthly payment that was far to great for the Client to afford.
The Benefits of the Increased Homestead Exemption of Senate Bill 1885
As previously discussed, the longstanding Homestead Exemption did not provide sufficient protection against equity when dealing with California’s real estate values. Further, due to the Pandemic, the housing market saw an almost immediate rise in home values, which in turn created significant equity for those who already owned homes. Although increased equity is a good thing, for those who were needing to declare bankruptcy, many found that the increased values of their homes now made it nearly impossible to keep their home and file for bankruptcy protection.
Thankfully, Senate Bill 1885 enacted the following changes that became effective in January of 2021: The new Homestead Exemption was increased to a minimum if $300,000, regardless of marital status, age, or disability. This simplified the exemption, as there was no longer a need to determine a client’s eligibility amounts based on their age or being single or not. What is even more significant is that the $300,000 exemption limit is a minimum. Senate Bill 1885 introduced $300,000 as the minimum floor, and the exemption can be as high as $600,000! The actual amount that one can exempt would be determined by the median sale price of homes within the debtor’s county. This would allow for those who live in areas with substantially higher home values to be able to exempt up to the maximum of $600,000. However, regardless of the median home sale’s value, a debtor can always exempt up to $300,000, even if the median value in their county is less than that amount. Furthermore, the exemption amount is indexed to adjust annually for inflation.
Now, lets take the prior example from above to illustrate how the new Homestead Exemption limits of Senate Bill 1885 can help more debtors when filing bankruptcy. Taking the previous example of the home with $300,000 in equity, the individual debtor was only able to exempt $75,000 ($225,000 available to pay back creditors), a married couple was only be able to exempt $100,000 ($200,00 available to pay back creditors), or a disabled individual or person over 65 would only was able to exempt a maximum of $175,000 ($125,000 available to pay back creditors). Under the new change, the individual would be able to exempt the full $300,000 in equity ($0 available to pay back creditors), the married could would be able to exempt the full $300,000 in equity ($0 available to pay back creditors), and lastly, the disabled individual or debtor over the age of $65 would also be able to exempt the full $300,000 ($0 available to pay back creditors). Under this new method, all three scenarios would result in the same exemption amount and result. If filing for Chapter 7, the full equity would be exempted and would not be countable and subject to sale by the trustee. If filing for Chapter 13, the full $300,000 exemption would not be countable toward determining the debtor’s monthly payment, thus reducing the overall monthly payment over their 3 or 5 year Chapter 13 Plan. Further, if a debtor has over $300,000 in equity and they live in a county with higher real estate values, they can exempt up to $600,000, if applicable.
The new changes to the Homestead Exemption were long overdue, and as practitioners, we are grateful that Senate Bill 1885 has been introduced and gone into effect. Since its enactment, our experienced Attorneys at Modesto Bankruptcy Attorneys have been able to help a greater number of clients get a fresh start to their financial futures by discharging their debts, all while at the same time ensuring that they are able to keep their home in the process.
The increased Homestead Exemption is a powerful tool for those who have found themselves in a situation where they have significant equity in their property, either due to owning and paying down their mortgage or paying it off over many years of hard work, and/or those who now find their increased equity in their homes due to the rapid increased in the real estate market due to the Pandemic
If you previously looked into filing for bankruptcy and were turned away due to the prior exemption limits, or simply would like further information regarding your specific scenario, our experienced Attorney’s at Modesto Bankruptcy Attorneys are happy to help. Please click here or call us at (209) 314-3010 to schedule your free consultation and speak with one of our Bankruptcy Exemption Attorneys to see how we can help get your financial life back on track.
