How to Protect your Home Under California’s New Homestead Bankruptcy Exemptions

Every homeowner in California who struggles with debt has the same concern: protecting their home while getting relief from other debt like credit cards, medical bills, or personal loans. Under a new bill signed into law by Governor Gavin Newsom on September 18, 2020, Californian homeowners will be able to protect significantly more of the equity in their home when the file a bankruptcy case. 

Assembly Bill 1885 (AB 1885) will increase the amount of the homestead exemption to $600,000 for many Californians. The amount of equity homeowners can protect will be based on the median sales price of a single-family home in their county in the previous year, but no lower than $300,000 and no higher than $600,000. The vast majority of Californians live in counties with median sales prices over $600,000, so they will be able to claim the largest exemption if they seek relief from their creditors in bankruptcy. The current law only allows homeowners to protect $75,000 to $175,000 of their home equity depending on their age or disability and their marital status. AB 1885 also adjusts the baseline exemptions on an annual basis based on inflation, so the exemptions will continue to increase if home prices continue to rise.

This new law is a game changer for homeowners who are struggling with debt but who have equity in their homes. Previously, a homeowner would often be forced to file a chapter 13 and repay a substantial portion of their debt back through a court ordered plan or risk losing their home in a chapter 7 liquidation. Other homeowners might have looked to a cash-out refinance or a second mortgage or home equity line of credit (HELOC) to consolidate high interest credit cards by taking the equity out of their homes. Either way consumers who were buried under debt were essentially forced to pay for it or to risking losing their most valuable asset, their home. Now California homeowners have many more options for dealing with their credit cards and other unsecured debts. This is especially true for California’s seniors who often have equity in their homes, but are on fixed incomes and can’t afford an additional payment.

The new law, which goes into effect on January 1, 2021, will allow many more Californian’s to seek bankruptcy protection without risking the equity in their homes. In many cases, they will be able to do so in a chapter 7 bankruptcy while paying nothing or close to nothing toward their other debt. Impacted Californians who are behind on their mortgage, owe back taxes, or stuck in high-interest car loans will also be able to restructure their debts in a chapter 13 without having to pay all or a substantial amount of their credit card debt as well. 

If you’re struggling to pay your bills and also own your home, schedule a FREE consultation with one of Gale, Angelo, Johnson & Patrick’s experienced bankruptcy attorneys today to see how you might benefit under the new law.