In good news for California residents needing relief from crushing debt, Governor Newsom recently signed a new law which gives California debtors significant relief in bankruptcy proceedings. The new law, designated as "AB 1885," increases the state's homestead exemption for personal bankruptcies. AB 1885 was signed on September 15, 2020 and goes into effect on January 1, 2021. See Forbes news report here. AB 1885 completely replaces the old statutory schema at Cal. Civ. Proc., §704.730.
Under AB 1885, citizens of Irvine and other cities in the Golden State will be able to exempt equity in a personal residence starting from a floor of $300,000 and rising to a maximum of $600,000, whichever is greater. The amount depends on the "median sale price" of single family homes in the county where the debtor lives. For now, the legal definition of "median sale price" is undefined, but according to a search on Zillow.com, the current median home value in Irvine for single family homes and condominiums is $908,826. Redline.com has a comparable number and lists $869,000 as the median sale price for Irvine single-family homes.
AB 1885 provides an enormous increase over the previous homestead exemption which ranged from a low of $50,000 to a maximum of $175,000. Just as importantly, AB 1885 simplifies how the homestead exemption applies. The previous statutory provisions -- still applicable until the end of 2020 -- were complicated and depended upon various criteria. As just one example, under the old schema, the exemption was $75,000 if the debtor was single, under 65, and not disabled. But, if the debtor was 65 or older and disabled, then the homestead exemption was $175,000. There were many other complex permutations.
As noted, AB 1885 is good news for debtors who may need the debt relief that is afforded by the US Bankruptcy Code. In general, when a debtor files for bankruptcy under Chapter 7, for example, the debtor's possessions and personal residence are available to be sold and the money resulting from the sale is available to be paid to the debtor's creditors. As an example, if the debtor owned a home worth $600,000 with no note/mortgage, then the house could be sold and approximately $600,000 would be available to pay creditors. If the house had a $400,000 note/mortgage, then there would be approximately $200,000 to pay creditors.
However, every state, including California, allows exemptions for certain possessions. Whatever is exempt cannot be sold or taken by the bankruptcy court to pay creditors. The California homestead exemption applies to the debtor’s equity in his or her home. To continue our example, assuming that the $600,000 home is located in Irvine, AB 1885's new homestead exemption would allow the owner to exempt $600,000 of the home’s value from being sold/used to pay creditors in a bankruptcy. Therefore, in our example, the entire equity in the house would be exempt in a bankruptcy proceeding even if the house were free and clear of a note/mortgage.
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