Written By: Michael J. Mendez
The California Constitution provides that “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).
Bankruptcy, along with having to fight against the forced sale of a home, is a nightmare scenario for most families, and one that occurs far too often. However, there exists a mechanism within the California Code of Civil Procedure by which you can protect your equity in your home, or at least a portion of it, from being seized by your creditors. By having your property declared as your homestead, you can protect funds earned by selling your home from creditors, and have that protection carry over to the next home that you purchase with those funds.
What is a homestead?
A homestead is the principal dwelling in which the judgment debtor (or the judgment debtor’s spouse) resided on the date the judgment creditor’s lien attached to the dwelling, and in which the judgment debtor (or the judgment debtor’s spouse) resided continuously thereafter until the date of the court determination that the dwelling is a homestead. (CCP § 704.710(c)).
To better understand that definition, we can break it apart. First, it is the “principal” dwelling, which means that it is the place that the debtor primarily lives. As a person cannot primarily live in two places, a person can only have one homestead.
Second, a “dwelling” may be a house and the land it is on, but it can also be a mobile home, condominium, planned development, stock cooperative, community apartment project, or even a boat or other waterborne vessel. The crucial aspect of the dwelling for the purposes of classifying it as a homestead is that it is used as a residence, and that the debtor primarily resides there.
California courts have held that a lack of physical occupancy does not prevent a person from establishing actual residency and claiming the homestead, so long as the person intends to return. In re Diaz, 547 BR 329, 335 (9th Circuit BAP, 2016). While the debtor does not need to reside in the property on the date that the judgment creditor’s lien attaches (in bankruptcy, the petition date), the debtor must be able to show evidence that they intend to live at the property in order to claim the exemption. California law also does not limit the homestead exemption to dwellings within the State of California. In re Arrol, 207 BR 662, 665 (Bankr. N.D. Cal. 1997).
Types of homestead exemption
There are two kinds of homestead exemption – one that triggers automatically upon a forced sale of the property, and one that must be “declared” by recording the property as a homestead with the county recorder.
In order to take advantage of the first kind of exemption, which applies automatically, the debtor must continually reside in the property from the date the creditor’s lien attaches until the court determines that the dwelling is a homestead, or lose the exemption. This exemption applies when a person’s homestead is damaged, destroyed, taken by eminent domain, or sold involuntarily in satisfaction of a debt. (C.C.P. § 704.720(b)). The burden of proving that the exemption should automatically apply in this manner falls to the debtor. This kind of homestead exemption does not need to be filed to go into effect, but it only protects against forced sales. More specifically, it prevents the judgment creditor from forcing a sale of the homestead unless there is sufficient equity to pay the debtor the amount of the exemption. The debtor is entitled to be paid ahead of the judgment creditor. (C.C.P. § 704.850(a)).
The second exemption, which needs to be recorded in order to take effect, applies to both forced and voluntary sales of the property. The debtor must have been residing in the property on the date that the exemption is declared (recorded), but the burden of proof to demonstrate that a declared exemption is invalid switches onto the creditor. Further, the exempt proceeds from a voluntary sale are protected as long as another home is purchased with those proceeds within six months. That newly-purchased property is automatically considered the debtor’s homestead.
How much is the homestead exemption worth?
CCP § 704.730 provides that the amount of the homestead exemption is the greater of the following: 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 $600,000), or $300,000.
Thus, the lowest amount of equity that a homestead exemption will protect is $300,000. However, beginning in 2022, the amounts specified for homestead exemptions will adjust for inflation, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year. With inflation as it stands as of this writing in 2023, the minimum coverage rises from $300,000 to $339,189, and the maximum coverage rises from $600,000 to $678,378.
By way of example, let’s assume that Marcus doesn’t have a declared homestead exemption on his property in Los Angeles, and he is subject to a forced sale. Even without having filed the exemption, assuming that he has resided there for the required duration, the law will automatically protect $600,000 of his equity when he goes to sell the property. His $400,000 mortgage is paid off using the sale proceeds and there is $200,000 left in equity. Marcus’s creditor is owed $130,000. The creditor gets paid $130,000 from the proceeds, leaving Marcus with $70,000.
Now let’s assume that Marcus has a properly filed homestead exemption on his property, and he is subject to a forced sale. He will be able to protect $600,000 of his equity. When he goes to sell the property, his $400,000 mortgage is paid off using the sale proceeds and there is $200,000 left in equity, which is given to Marcus. His creditor who is owed $130,000 does not touch the equity because Marcus had a declared homestead.
The homestead exemption protects homes from involuntary creditors like judgment creditors. It does not protect homes from voluntary creditors like mortgage, deeds of trust, or taxes. If you have a mortgage on your property, the lender retains the right to foreclose on the property and the borrower will not qualify for the homestead exemption.
How we can help
This article is not intended to serve as legal advice – a lawyer should review your situation in order to properly address the complexities involved. Proper estate planning is crucial, and sometimes that can include the declaration of a homestead exemption. Contact our office to speak with one of our experienced attorneys today. Both Michael Mendez and Mark Campbell are well-versed in this area.