The homestead exemption is a legal provision that helps people protect all the equity in their home from creditors as they go through the bankruptcy process or after the death of a homeowner’s spouse. It offers financial and physical shelter protection, which blocks a forced sale of a person’s main residence. If the homeowner defaults on their mortgage, the homestead exemption cannot block a bank foreclosure. A bank foreclosure happens when a bank takes ownership of a home because the homeowner failed to pay their mortgage on time. If you are filing for bankruptcy, it is essential for you to speak to a bankruptcy lawyer to know the cap on the homestead exemption in your state. This blog will help you understand what homestead exemption is, how you can use it, and how to determine your exemption amount if you are filing for bankruptcy in the San Diego area or neighboring cities.

What Does a Homestead Exemption Do?

The primary role of the homestead exemption is to offer family members a home to live in with no fear or anxiety of being freed from the property against their will from the solicitation of their creditors or their needs. The homestead law does not aim at protecting creditors but protecting homes against creditors by saving the home for the family. Although this law protects homes from instinctual creditors, it does not save homes from taxes, deeds of trust, or mortgages.

Properties Protected with Homestead Exemption

Under California system 1, you can use homestead exemption to protect property where you live. This can include a community apartment, stock cooperative, boat, or mobile home. It can also be used to prevent proceeds received from a home that was sold involuntarily six months before bankruptcy.

California system 2 shields property the debtor (or their dependent) use as their primary residence, for instance, a burial plot or cooperative.

How to Determine the Equity Secured by Homestead Exemption in California

To calculate the amount of equity of your home while acquiring a chapter 7 bankruptcy without paying a trustee, you must be aware of the house’s value and then deduct the liens and the property exemption that could apply.

If, for instance, you own a home in California worth $500,000 and the median sale price in the previous year was $500,000, it is almost impossible for a creditor to create a homestead exemption above $500,000 in an involuntary selling of the property. In this case, the court will not let the creditor proceed with the forced sale of the house, which means you will still have your home. It is essential to consult a bankruptcy lawyer to help you obtain the best possible results.

How to Use Exemption Planning Methods to Maximize Homestead Exemption in California

At times, debtors can magnify the homestead amount using exemption planning tools. For instance, you can decide to sell all your property prior to bankruptcy and use the cash to finance your mortgage. This changes non-exempt assets into exempted assets. If the equity exceeds the exception amount, you can use exempt assets in bankruptcy to settle your remaining debts. This method is termed “exemption planning.”

Most courts consider exemption planning to be non-fraudulent. Even if evidence shows that the debtor deliberately changed non-exempted assets into exempted assets just before the bankruptcy, they cannot be convicted for fraud as this is not enough evidence to prove fraud. This means that as a debtor, you can maximize your exemptions just before filing for bankruptcy. There are, however, some restrictions on paying down a mortgage right before filing a bankruptcy petition. After making the payment, it is advisable to wait for 90 days before filing for bankruptcy to eschew the dispute that the mortgage payment is preferential.

Homestead Exemption on Assets Bought 1,215 Days Prior to a Bankruptcy

Your bankruptcy trustee may advocate what is wrong under various circumstances. For instance, sections under 11 U.S.C withdraw some exceptions, pointing out that for you to exempt your assets under the local or state law, you must have acquired the property 1215 days before filing the bankruptcy petition for a property that exceeds the value of $125,000. Note that any interest taken from your previous main residence into your current primary residence at the start of the 1215 days is not included in this amount if your former and present residences are within one state.

Should I Document a Homestead Exemption in California?

There are two types of property protection in California, which are declared homestead protection and automatic homestead protection. It is important to note that the two protections offer different rights to debtors, have separate aims, and are available under different circumstances.

Declared Homestead Protection

This protection can shield the equity of your home as a homeowner. This was explained by the Ninth Circuit Bankruptcy Appellate Panel as follows. If you choose to go to the recorder’s office in your county, you are eligible for additional protections like:

  • Voluntary sale — Once you sell the proclaimed homestead voluntarily, the proceeds from the sale are exempted for a period of 6 months. This shields you from creditors who may show up immediately after the homestead is changed to cash. You have up to 6 months to reinvest the cash before the lender accesses it.
  • Lien attachment — Suppose you are eligible for automatic homestead protection; filing a homestead declaration hinders liens from getting hold of your home equity shielded by the exemption. However, this does not create a hindrance to an involuntary sale independently. It protects the exempted equity from the judgment liens.

Automatic Homestead Exemption

When your homestead is sold involuntarily, taken by eminent domain, destroyed, or damaged, you are entitled to the automatic homestead exemption in California. Under bankruptcy law, creating a bankruptcy estate on filing the petition is handled the same as an involuntary sale. Hence, this provision is appropriate in bankruptcy cases. This is the common exemption that shields your homestead from creditors who may want to force you to sell your property not unless the equity of your home is enough to pay you the exemption amount. You are entitled to be paid before the trustee or creditor. The difference is that this provision is automatic, meaning it does not require an affirmative act to make it effective; it occurs automatically to the applicable dwelling.

How to Claim a Homestead Exemption in Chapter 7

According to chapter 7, the bankruptcy creditors should appoint a trustee to liquidate the debtor’s assets on their behalf. The primary exemption of this process is that the trustee must only liquidate assets that add value to the creditors and the bankruptcy estate. If the trustee cannot give the creditors any value after giving the homeowner their exemption, the trustee is not allowed to sell the home because it would have no value. In Chapter 7, the trustee is also expected to pay the title fee, escrow charges, and broker’s fees.

If you are threatened that your home will be sold, it is essential to seek help from a bankruptcy attorney who will negotiate with the creditor on your behalf to avoid the sale of your home. In chapter 7, this settlement means that you will pay the creditor while dropping the opportunity to get greater payment.

Note that most repayment responsibilities like government fines, taxes, student loans, child support, and court penalties will stop during bankruptcy and resume once your automatic stay is terminated and your bankruptcy case is closed. However, the amount you will pay on these nondischargeable debts will depend on whether you have a property not protected by a bankruptcy exemption.

According to the new homestead law in California, many debtors will exit chapter 7 without paying the trustee anything. This is referred to as a “no asset” case as the equity cannot fund the homestead exemption.

Chapter 7 Bankruptcy Discharge

The court will wipe out/discharge all your debts at the end of the bankruptcy process apart from:

  • Debts declared non-dischargeable by the court due to your objection. (if for instance, you incurred debts through malicious acts or fraud)
  • Debts that survived bankruptcy automatically. (For instance student loans, and child support)

How to Benefit from Chapter 11 and Chapter 13 Bankruptcy

There are ways you can benefit from a homestead exemption in chapters 11 and chapter 13. These reorganizations give debtors time to clear their debts; for instance, chapter 13 offers a 60-month plan from the debtor’s disposable income. The court uses specific formulas to calculate disposable income.

Chapter 11 and chapter 13 use a special rule that for debtors to qualify, they have to score high in the “best interest of creditors test.” In this test, the homeowner is supposed to give the creditors the same amount they would have received if they liquefied the assets in chapter 7. If the homeowner has a disposable income and more assets, they cannot choose a reorganization that permits them to pay the creditors less than what they would get if their assets were liquidated.

Understanding the Bankruptcy Trustee’s Role

A bankruptcy trustee is chosen by the court after you file a bankruptcy petition. Their role is to administer the petition; they will analyze the paperwork and the 521 documents, which are extra documents forwarded to the trustee after filing for bankruptcy. These documents include income tax returns, bank statements, paycheck stubs, and any other relevant document requested by your trustee.

After filing for bankruptcy, you are expected to attend 341 creditors meeting at least once. At the meeting, your trustee may:

  • Ask about any strange details spotted on the paperwork you submitted
  • Verify the validity of your petition as well as your identification
  • Put you under oath
  • Give other creditors a chance to ask questions regarding your petition
  • Inquire general questions asked of every party in attendance

Under chapter 7, your trustee is responsible for selling nonexempt properties and issuing returns to your creditors. In chapter 13, the trustee cannot sell your home. Instead, they will review the accuracy of your 4-5 year repayment plan and if you are making payment for the nonexempt property. If it does not meet the standard, the trustee will request the court to reject your petition by filing an objection and arguing the same during the confirmation hearing. But, if it meets the requirements, they will second the confirmation and give the creditors the monthly plan payments.

How to Remove a Judgement that Compromises your Homestead Protection

Bankruptcy can only dismiss the liability of debt from a debtor, but it doesn’t dismiss the culpability of their property. If, for instance, a debtor uses a car to file for bankruptcy, and the worth of the car is lesser than the credit, it will be cleared from liability of any loan payments. But if the borrower fails to make the payment after the bankruptcy, the car may be reclaimed by the lender.

In this case, most homeowners in bankruptcy have judgment liens registered in the state where their property is situated. The bankruptcy law signifies that the judgment liens “compromise” their property by staying as liens on the home.

The debtor also has the right to make a pitch to prevent the lien from compromising their property. However, these conditions must apply:

  • The debtor should file an exemption claim in the property
  • The lien should be judicial
  • The debtor should have a clear interest in the homestead
  • The borrower should know that after the mortgages, the equity of their home will not be as much as the property exemption

This trick is accessible to most debtors now because California has risen for the homestead exemption amount.

Homestead Exemption FAQS

If you have any questions on homestead exemption, you may want to check out some of the frequently asked questions below.

Can a person that is not included on the Title Claim a Homestead Exemption?

The court has outlined different sets of asset interests that are obtainable for a homestead exemption. There are legal interests that may qualify for property protection. Existing as the legal homeowner on the title for most property owners and residing in their property as their primary home on the day of filing for bankruptcy will automatically suffice.

Can I Claim a Homestead of a Property that My Former Spouse Lives in?

If you have divorced or separated from your spouse and are trying to claim a homestead for the property you moved from, you are still entitled to an exemption until there is a legally enforceable agreement between the debtor and their former spouse dividing the property.

The statutory scheme does not make allowances for spouses who live separately. A person is said to be a spouse (even when living separately) until a court declares a legal separation. If the debtor is living separately or their former partner has control of the property or continues to reside in the property, the debtor is still entitled to an exemption.

Can I Claim an Exemption in a Homestead I don’t Reside at?

Even if you do not reside in a property, you may still be entitled to homestead protection. There are factors that California law uses to determine a person’s residency for purposes of a homestead include:

  • The intention of the home occupance
  • The physical occupancy of the property

Even if a debtor is absent from a property at the time of filing a petition, they can still claim an exemption for the property. According to the law, permanent occupancy does not require the homeowner not to leave their home or live in a separate home temporarily.

Although you do not have to be residing at the home when filing for bankruptcy, it is advisable to reside at the property before bankruptcy to avoid legal issues with homestead protection.

Am I Supposed to Reinvest the Proceeds in a New House?

Note that your shares are not entirely exempt. You have six months to reinvest the proceeds in a new property, after which you may lose your exempt status. The six months period begins after the judgment that the debtor receives.

Can I make a Lien on My Property?

No, as a homeowner, you cannot create a lien for your own home before bankruptcy. This will not help lower your home equity under the homestead quantity. It can be termed as a preference or a defrauding transfer except if a proclivity defense can apply. In other terms, it is impossible to have a trust deed on your own home as the owner.

Find a Bankruptcy Attorney Near Me

Seeking immediate legal assistance can help you avoid wage garnishment, foreclosure, and the stress of being in debt for long. A skilled bankruptcy attorney can help you determine how homestead exemption may apply in your case and the amount your property qualifies for. Our lawyers at San Diego Bankruptcy Attorney are up to date with the latest changes in California law, and they have vast experience in bankruptcy law. If you have any questions on homestead exemption, contact us today at 619-488-6168.