AB 1885 Signed by Governor Newsom on September 18, 2020
New California Homestead Exemption Amount (2020)
Signed by Governor Gavin Newsom on September 18, 2020, the new homestead exemption in California under AB 1885 will become effective January 1, 2021. This was noted by Gov. Newsom in an unrelated press release, which provides that: “The Governor also announced today that he has signed the following bills:…AB 1885 by the Committee on Budget – Debtor exemptions: homestead exemption.” If you’re still not convinced, click here to see the article of California State Senator Wieckowski lauding the Governor’s signature of AB 1885.
Or, check the California Legislative Information Bill History.
The new bill protects numerous homeowners by increasing the California homestead to an amount that would keep most homes from creditors. It’s no surprise that this issue is coming up given the financial issues surrounding eviction moratoriums, COVID-19, and elections in the news.
With this backdrop and the support of bankruptcy attorneys, the California legislature passed AB 1885 (and the senate equivalent SB 832) on September 2nd, 2020. Now that AB 1885 has become law, it increases the California homestead to the greater of $300,000 or median sales price in the county where the single-family home is located in the prior year, though this cannot exceed $600,000.
To help homeowners in California understand what this means, the following are projections for a few of California’s major metropolitan areas.
- Los Angeles County: $600,000 (Estimated $664,500 Median)
- Riverside County: $400,500
- San Bernardino County: $370,215
- Orange County: $600,000 (Estimated $765,497 Median)
- San Diego County: $600,000 (Estimated $628,500 Median)
- San Francisco County: $600,000 (Estimated $1,444,000 Median)
To understand what this means, the homestead exemption protects a part of the equity of a homeowner’s home in the event the debtor files a consumer or business bankruptcy, or if a creditor requests that the house be sold to pay a judgment.
This means that, if the bankruptcy trustee wants to sell your home, they would normally figure out whether it will derive any value for the bankruptcy estate after payment of the mortgage, taxes, homeowner’s association dues, and, of course, payment to the debtor for their homestead exemption. Since many homeowners do not have equity in their house that exceeds the median sales price in their county, capped at $600,000, chances are that their home will not be sold in a Chapter 7 bankruptcy.
This is considerably more generous for debtors than existing law, which provides only a $75,000, $100,000 (married couples) or $175,000 (disabled or over 65) homestead exemption, depending on age, disability and marital status. Suffice to say that these homestead exemptions do little for many homeowners in more affluent areas, or those who have paid down their mortgage after many years. Of course, creditor attorneys are displeased by this change, which would solely benefit debtors at the expense of creditors.
This bill was sponsored by State Senator Bob Wieckowski, a practicing bankruptcy attorney who was an active proponent of the legislation.
This represents a sea change in bankruptcy law in California in favor of debtors, leaving creditors and trustees holding the bag. Thanks to Bankruptcy Lawyer Jenny Doling for championing this law.
Orange County Register and Press-Enterprise Quote Scott Talkov of Talkov Law
Riverside-based bankruptcy attorney Scott Talkov sees the increased homestead exemption as a handout to debtors and homeowners, and a huge loss to creditors.“Debtors can now sell all of their assets right before bankruptcy, pay down their mortgage so long as the equity does not exceed the exempt amount, and file bankruptcy on the remaining debts,” he said. “This strategy is known as exemption planning, whereby debtors convert otherwise non-exempt assets into exempt assets. This will become even more widespread as home equity becomes the government-protected piggy bank that creditors cannot touch.”
What is a Homestead Exemption?
The California Constitution instructs the Legislature to pass legislation to protect a portion of homesteads from a forced sales by judgment creditors. “The Legislature shall protect, by law, from forced sale a certain portion of the homestead and other property of all heads of families.” Cal. Const. Art. XX, § 1.5.
As courts have explained: “’The object of all homestead legislation is to provide a place for the family and its surviving members, where they may reside and enjoy the comforts of a home, freed from any anxiety that it may be taken from them against their will, either by reason of their own necessity or improvidence, or from the importunity of their creditors.” Thorsby v. Babcock (1950) 36 Cal. 2d 202, 204. “[T]he homestead law is not designed to protect creditors, but protects the home against creditors . . . thereby preserving the home for the family.” Amin v. Khazindar (2003) 112 Cal.App.4th 582, 588.
New Code of Civil Procedure Section 704.730 as Amended by AB 1885
LEGISLATIVE COUNSEL’S DIGESTAB 1885, Committee on Budget. Debtor exemptions: homestead exemption.Existing law provides that a specified portion of equity in a homestead, as defined, is exempt from execution tosatisfy 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.This bill would instead make the homestead exemption the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed $600,000. These amounts would adjust annually for inflation.The people of the State of California do enact as follows:SECTION 1. Section 704.730 of the Code of Civil Procedure is amended to read:(a) The amount of the homestead exemption is the greater of the following:(1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).(2) Three hundred thousand dollars ($300,000).(b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.