It’s not the foreclosing creditor that really threaten California homeowners.

It’s the forces that follow foreclosure.

The junior lender and the tax man can deliver  truly punishing blows to a family losing a home.

Cut-off Junior Lienholders

Californians enjoy the protection of the one action rule governing foreclosures.

A creditor who conducts a non judicial foreclosure of its security interest cannot collect anything more than the property it forecloses on.

Foreclosure is, as lawyers say, an election of remedies. When the lender chooses to foreclose, it gives up the right to pursue the borrower for anything more.

But, the typical foreclosure sale destroys all liens on the property that are junior (inferior) to the foreclosing creditor.

The HELOC lender, the second deed of trust, the SBA loan are rendered unsecured by the sale. Even though they no longer have a lien on the foreclosed property, those cut off lienholders CAN sue you for what’s owed on the debt.

The exception is the California purchase money rule:   [Read more…]

When the sheriff arrives at your employer,

or your bank,

or your business

with a levy for your money, you  need good information fast.

You need to know NOW, and FOR CERTAIN, what part of your assets are protected by an exemption under California law.

You keep exempt assets

Exemptions define the property that you can keep even when you owe money or have a judgment against you.

What a judgment against you really means

Exemptions keep debtors from being stripped of everything they own.

Exemptions are measured in dollars:   $X of equity in a car, for example, is exempt.

To be meaningful, those dollar amounts change over time and with new legislation.

Yet my Google search this morning returned in first place the exemption amounts for 2005. 

In fact, all but one of the first page results returned by Google on a search for “California exemptions” was outdated.

California exemptions

The 2016 edition of California exemptions, available in bankruptcy and in state law collections, are found, largely, in the California Code of Civil Procedure, starting with Section 704.

But most of the online versions of the CCP are several years behind the times.  Look in the statutes and you are likely to get stale information.

The Judicial Council form is the only reliable online source of the dollar amounts in effect today.

Surprisingly, the state form also lists the exemptions available in a bankruptcy case filed in California.  Those exemptions start in the Code of Civil Procedure at Section 703.140.

In a bankruptcy case, the debtor, the person who owes debts, can choose between the two different exemption sets.

You have to choose one, or the other.  You can’t take one from this column, and another from the other list.

In bankruptcy, the debtor also gets the benefit of exemptions in federal law other than the exemptions in the Bankruptcy Code.

Outside of bankruptcy, only the CCP 704 series of exemptions are available.

Claiming exemptions

In a California collection action Form EJ-156 must be delivered to a judgment debtor any time there is action to enforce a judgment. With the list and amount of assets that can be protected by an exemption comes a form for claiming an exemption.

Exemptions are not self-executing.  You have to claim the exemption to get its benefit.

Complete the form (the link above takes you to a fillable pdf form) and return it to the levying officer.  It does not get filed with the court.

The levying officer’s contact information is on the writ of execution.

If the judgment creditor opposes the claim of exemption, a hearing before the court will be scheduled.

Researching law on the internet

My experience in looking for the current dollar amounts of exemptions should highlight the complexity and the danger of relying on DIY research on the law.

The first list of exemptions I found via Google was 10 years out of date.

And more than any other aspect of bankruptcy law, people who represent themselves in bankruptcy screw up the claims of exemption.

The Real Price of Filing Bankruptcy Without A Lawyer

Even the petition preparers, who take your money to “fill out the forms”,  often botch claims of exemption.

Proceed by yourself with caution and with attention to the “use by” date on the law.

More

The secret exemptions

What’s included in bankruptcy

Is it too late to file bankruptcy

Wage garnishment survival guide

Image courtesy of Clement127.

Facing foreclosure is bad enough; worrying about your exposure afterwards is worse.

Breathe deeply.

California laws shield homeowners from further collection by a lender who has foreclosed.

Understanding Foreclosure Sales

To understand California’s protections for homeowners, you have to understand how a typical foreclosure sale works.

The deed of trust, given to the lender when a loan is made, grants the lender a lien on the home.  If the borrower doesn’t pay as promised, the lender can exercise the power of sale in the deed of trust to conduct a public auction of the home that is security for the loan.

The lender can decide where to start the bidding at the foreclosure sale.  While the lender can bid the entire amount that the lender is then owed, the lender can bid less when the property is worth less than the total debt.

So whether because the debt has grown large because it’s been in default for a long time, or whether the value of the house has dropped,  the winning bid at a foreclosure sale may well be less than the total debt.

What happens to the difference between what the sale price at auction and the amount owed to the foreclosing creditor?

Antideficiency Law

Nothing happens to the deficiency if California Code of Civil Procedure 580(b) applies.  This Depression-era statute says that if the loan at issue was made to buy the house and the borrower lived in the house, then the lender gets only whatever the foreclosure sale brought.

No deficiency judgment is available to the lender.

A non judicial foreclosure is not available to the lender on a purchase money loan for the borrower’s home.

That protection has been extended to refinances of the purchase money loan, to the extent of the amount of original loan.

c) No deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction (collectively, a “credit transaction”) which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except to the extent that in a credit transaction, the lender or creditor advances new principal (hereafter “new advance”) which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction.

So, if the lender made the loan for you to buy a property that you used as your principal residence, or the lender refinanced the loan used to buy your home, you have no risk of suit by the lender.  Any shortfall between the value of the property and the amount of the debt is uncollectable.

But California law provides a second protection against mortgage deficiencies available to almost everyone.

Non Judicial Foreclosure Is Only Remedy

The broader protection from deficiencies is California’s one-action rule.

It holds that a lender with a lien created by a deed of trust gets only one bite of the apple.  If the lender chooses to foreclose under the power of sale in the deed of trust, that’s all the recovery it gets.

The statute reads

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” Cal. Code Civ. Proc. § 726(a)

The foreclosure sale is the lender’s one action, and the borrower has no further exposure to the foreclosing creditor.

If there are junior liens that go unpaid as a result of the foreclosure, those creditors may have a right to sue for their debt, if they are not barred by the antideficiency statute we talked about above.

Virtually every foreclosure sale of a home or small multi family property goes by non-judicial foreclosure.

So, if you are worried about more grief from the mortgage company following a foreclosure, scratch that worry off your list.

More

Your rights while in foreclosure

You won’t believe how long this foreclosure took

After the foreclosure: cash for keys

Images:  Shields courtesy of The Happy Rower and Flickr.

Apple courtesy of Wikimedia.

How much money can you keep when you file bankruptcy?

It’s not as though you won’t have living expenses after you file bankruptcy.

You need to know how you’ll manage and what you’ll have to manage with.

Funding that fresh start is what exemptions are all about.

We are talking here about California because exemptions, the laws that govern what you can keep for your fresh start., are unique to each state.

Exemptions are the one part of bankruptcy that is explicitly different from state to state.  So, recognize that the rules we’re talking about here apply in California.

California exemption systems

California has two distinct exemption schemes that you can choose from.  And you have to choose one or the other.

You can’t take one exemption from one set and another exemption from the other set.

The exemptions originally enacted in California were big on protecting homes, so we have generous homestead exemptions under generally applicable state law.  That system is found in California Code of Civil Procedure 704 and the statutes that follow it.

All about the California homestead

California also has a second system of exemptions available only for its residents who file bankruptcy.  These are found in CCP 703.140.

We’re going to look closely at the California bankruptcy exemptions (CCP 703.140)  on the question of how much cash you can protect, because the 704 exemptions aren’t very generous once you move beyond protecting equity in a house and retirement payments.  Here’s an online summary of these exemptions. [Read more…]