Biz Brief: Homestead Exemption Increased for California Debtors

It has been over eleven years, but on September 18, 2020, Governor Newsom approved and adopted Assembly Bill 1885 (“AB 1885”), which dramatically increases the homestead exemption in California to at least $300,000.

Under existing law, which was last amended in in 2009, an individual debtor may exempt $75,000 in his primary residence, and depending on certain characteristics of the persons who are living in the debtor’s home (over 65, disabled, veteran, etc.) it is possible to increase the exemption to a maximum of $175,000.  The new law (AB 1885) does two very significant things – it increases the homestead exemption and it eliminates the various designations between the persons who are residing in the debtor’s home.

The new law, which becomes effect on January 1, 2021, provides that the homestead exemption is the greater of either: (i) $300,000; or (ii) the countywide median sale price for a single-family home in the calendar year prior to the year in which the debtor claims the exemption, up to, and not to exceed, $600,000.

The “public policy” behind the exemption laws is to allow the individual debtor to keep enough of his personal property to avoid becoming a burden on the state.  The below example helps to illustrate why the new law is so significant.

Assume that an individual debtor owns a house in 2020 and that the house has a fair market value of $600,000 (which is the median price of homes in the county where the debtor lives) and that there are no liens against the home.  This debtor has potential equity of $600,000 in his home.  If the debtor files a bankruptcy case in 2020, he could exempt a maximum of $175,000 under the existing law.  That means that a Chapter 7 bankruptcy trustee could theoretically sell the house for $600,000, pay the debtor his homestead of $175,000 and use the remaining $425,000 ($600,000 – $175,000), to pay the debtor’s creditors.  In sharp contrast, if the debtor waits and files his bankruptcy case in 2021, after the new law becomes effective, the trustee would not bother selling the home because 100% of the equity should be exempt.

The change in the exemption law was long overdue as real property values in California continue to increase.  This new change is a step in the right direction to keep up with the reality of increasing home values in this State.