California’s homestead exemption is the Super Hero of the exemption world.

While other exemptions protect things worth a thousand dollars here and a couple of thousand there, the homestead protects $75,000 for a single person and $100,000 for a couple.

For the elderly or disabled, the homestead balloons to $175,000.

The homestead may be powerful and famous but often not well understood.

Here are six things you probably didn’t know about the homestead.

Homestead superior to a judgment creditor

Homesteads protect homeowners from a particular kind of creditor- the judgment creditor.  A judgment results from a lawsuit and the determination that you owe the plaintiff who brought the action a certain amount of money.  All about California judgments.

The judgment entitles the judgment creditor to use certain legal powers of the state to collect that money.  That right to collect is limited by the judgment debtor’s homestead rights.

The homestead exemption was designed to assure judgment debtors of a place to live, even if they owed money to creditors.

Homestead protection not absolute

The California homestead does not guarantee you that a creditor can’t force a sale of your home to pay a debt.

Instead, it guarantees that you get the dollar value of your homestead from the forced sale of your home before the creditor forcing the sale gets any money

A creditor who seeks to levy on a homestead has to convince the sheriff or a judge that any sheriff’s sale will return enough money to pay the homeowner the homestead.

The cost of making sure that the homeowner gets their homestead first restrains judgment creditors from looking to home equity as a source of payment.  It’s just too expensive and uncertain in most cases.

Homestead no protection from foreclosure

California law allows you to pledge your homestead as collateral for a loan.

So, when you encumber your home as part of the purchase transaction, or tap the equity through a HELOC or refinance, you give the lender the right to foreclose on your home without regard to your homestead.

The law says a foreclosure that doesn’t pay you your homestead is OK, because the transaction that put your homestead at risk was voluntary.

Homesteads come in two styles

Own your home and you automatically have a homestead exemption.  You don’t have to do anything to get certain protection of your equity from judicial creditors.  CCP 704.710.

The automatic homestead has the same monetary measurements as its beefier, more powerful sibling, the declared homestead. The automatic homestead only protects the home against a forced sale that wouldn’t yield enough proceeds to pay the homestead before paying the creditor.

If you choose to sell your home and a creditor has recorded a judgment lien that attaches to your property, the judgment creditor gets paid from the sale before you get your homestead.

The declared homestead operates differently:  the homestead amounts are the same, but the declared homestead protects exempt equity if you voluntarily sell your home.  CCP 704.910.

The exempt proceeds remain protected for six months from the voluntary sale of the home.   That six month period is intended to provide a window in which you can reinvest the homestead in a replacement home.

Either spouse can claim the entire exemption

When a married couple is entitled to a homestead, but the debt is an obligation of only one spouse, the debtor spouse can assert the entire homestead available to a married couple.

One of my cases established this proposition in a bankruptcy case.  When only one spouse filed bankruptcy and only his half of a tenancy in common came into the bankruptcy estate, he could still claim the entire exemption available to a married man.  McFall.

California homestead powerless against the feds

Since the homestead is found in state law, it does not limit the collection powers of the IRS or other federal agencies.  The Supremacy Clause of the Constitution says federal law trumps state law.

The IRS has its own, much smaller set of exemptions for delinquent tax payers.  Those exemptions aren’t much force protecting a California home.

In the real world, however,  the IRS seldom tries to force the sale of homes.  Like most other creditors with a lien on real property, the IRS simply waits til the homeowner wants to sell or refinance.  Either sale or refinance generally require that tax liens be paid before the transaction closes.

Now, you know about California homestead exemptions

More important California law:

How long before foreclosing lender takes my house?

California protections after foreclosure

California bankruptcy law

Image courtesy of Laobc. 

 

The horror stories about do-it-yourself estate planning are both plentiful and tragic.

Between the fear of probate and the fear of legal fees, inventive people invent inexpensive strategies for passing property to the next generation.

Adding someone to the deed is the most common one I see.

It works like this: in order to see that her house passes to her kids at her death, Mom puts the “kids” on the deed to her house today.

She thinks that will assure that, at her passing, real property law will automatically make the kids the owners.  No probate, no fuss, no delay.

What Mom doesn’t fully understand is that her deed to the kids gives them an interest in the house, TODAY.

So, if there is a economic melt-down the the kids’ financial lives, the kid’s creditors can lien and levy their interest in Mom’s house.

Far from creating stability and simplicity, the add-them-to-the-deed trick can create chaos.  And land Mom in bankruptcy court, fighting a bankruptcy trustee.

California, bless its heart, has enacted a solution:  a deed effective only on death.

Transfer on Death Deed

Created by Probate Code 5642, a Transfer on Death deed gives the “kids”, in my example, an interest in the house effective only at Mom’s death.

The deed is revocable as long as Mom is competent.  It can be used only for a home or a multi-family unit of 4 units or less.

It doesn’t protect the kids’ interest in the house from Mom’s debts, but a recent amendment protects the transfer from Medi-Cal Recovery claims.

The deed must be recorded within 60 days of execution.  Unlike other deeds, it doesn’t need to be delivered to the beneficiaries to be effective.

Why Deed on Death works

What’s magic about the Deed On Death is that the next generation has no interest in the property until Mom’s death.

There is nothing for the kid’s creditors until Mom’s passing.

So, if the kids end up in bankruptcy, they don’t drag Mom along and find the trustee selling Mom’s share of the house.

Stay out of bankruptcy and we may never meet.

There’s a form for that

The statute provides a form which must be used and has a FAQ page.

You can get more information online from the Sacramento Public  Library (yeah, libraries!) or from CANHR.

Let’s keep DIY estate planning disasters out of California bankruptcy courts.

More

The huge cost of avoiding probate

Joint bank accounts in bankruptcy

The problem your bankruptcy lawyer can’t fix

 

 

 

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2016.

Every three years, the dollar amounts are adjusted for changes in the cost of living.

Californians don’t get to protect possessions under the Bankruptcy Code’s exemptions.  Instead, a California resident who files bankruptcy must use California exemption law. That’s the case even though bankruptcy is governed by federal law.

Don’t shed a tear for the bankruptcy exemptions:  the state exemptions are arguably better.

You have a choice of two exemption systems.  One choice is the standard California state law exemptions found in Code of Civil Procedure 704.  These are the exemptions  applicable in state law collections as well as bankruptcy.

The second choice, appealing to those without significant equity in their home, is the California bankruptcy exemptions found at CCP 703.140(b).

What do debtors get to keep

[Read more…]