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LEGAL ALERT- Increased Homestead Exemption Decreases Equity Potentially Recoverable by Judgment and Bankruptcy Creditors

By January 21, 2021January 25th, 2021No Comments
legal alert

California Assembly Bill 1885 (“AB 1885”), effective January 1, 2021, amended Code of Civil Procedure Section 704.730 to increase the amount of equity in a debtor’s primary residence that can be protected in bankruptcy to $600,000 in most cases.   AB 1885 increases the California homestead exemption to the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the debtor claims the exemption, not to exceed $600,000.  The pre-AB 1885 homestead exemption was initially enacted 45 years ago and provided “that a specified portion of equity in a homestead, as defined, is exempt from execution to satisfy a judgment debt and prescribes that the amount of the homestead exemption is either $75,000, $100,000, or $175,000, depending on certain characteristics of the homestead’s residents.

While those amounts may have protected debtors from losing their home in bankruptcy at one time, given the significant increase in California home values over the years that is no longer the case.  In fact, it is estimated that the pre-AB 1858 homestead exemption protected only about 15% of the median value of most homes. As a result, a significant number of debtor’s could be forced to sell their homes in Chapter 7 bankruptcy proceedings to satisfy creditors.

AB 1858 shields significantly more of a homeowner’s equity to bankruptcy creditors and makes it possible for many more individuals to file for Chapter 7 and still keep their homes. For example, thanks to AB 1858, an individual debtor/homeowner with $600,000 in equity in his or her home can now file for bankruptcy, wipe out $600,000 in debts, yet not lose their home in bankruptcy.  It is possible that prior to AB 1858 had the same debtor filed for Chapter 7 bankruptcy he or she could have been required to sell their home to satisfy their bankruptcy creditors.  Thus, AB 1858 is a boon to many debtors and a curse to their creditors.

What impact will AB 1858 have financial institutions and sureties—businesses that traditionally extend credit with an evaluation on the available equity in debtor’s home?

From an underwriting perspective, credit lenders should no longer rely heavily on a homeowner’s equity in most underwriting situations.  Other assets should be considered and prioritized.

Likewise, from a creditor recovery standpoint, clients should more critically evaluate the homeowner’s residence in any collateral, reimbursement, or indemnity scenario.  The days of relying on the personal residence to secure repayment of a debt may be over—unless the debtor has significant equity above and beyond the homestead amounts.

The California Legislature has expressed a strong legislative intent in keeping creditors in their homes.  It will certainly be more difficult now for creditors to access homeowner equity to satisfy debts.  Creditors must become more creative in how they recover amounts owed.

For more information on this please contact Senior Counsel Mark D. Johnson, mdjohnson@lanak-hanna.com.

The information contained in this Newsletter has been prepared by Lanak & Hanna, P.C. for educational and informational purposes only. It does not constitute legal advice, nor does it substitute for legal advice.

 

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