The California Legislature enacted a dramatic increase to the state’s homestead law at the very end of the legislative session in August. It becomes effective January 1, 2021.
The dollar amount of the homestead increased to a minimum of $300,000 and a maximum of $600,000. Gone is the link between marital status or dependents. Every homeowner is entitled to the homestead amount.
Recognizing that home values vary widely in the state, the new law establishes a homestead greater than $300,000 where the median price of a home in the county exceeds that floor. Regardless of the median price of homes, no one gets a homestead in excess of $600,000.
Finally, the dollar amount of the homestead will be adjusted by inflation, going forward.
The new statute reads:
704.730. (a) The amount of the homestead exemption isthe greater of the following:
(1) 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 six hundred thousand dollars ($600,000).
2) Three hundred thousand dollars ($300,000).
b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.
The biggest unknown is what information source will serve as the reference point for the median price of a home in each county.
Much of the discussion among legislators and advocates has looked at the California Association of Realtors data base, but the legislation does not specify a source.
What we know about the new homestead is that it protects family homes from forced sale in and out of bankruptcy.
In state courts, the homestead acts as a check on the ability of a creditor to force the sale of a home to collect a judgment. That works by requiring that any forced sale pay the homeowner the homestead amount before taking any sales proceeds for himself.
In bankruptcy, the homeowner can claim the homestead and the same restrictions on sale apply to a Chapter 7 trustee. So now, a far larger swathe of homes are protected from sale by the larger homestead floor.
The homestead also plays a part in Chapter 13. While there are no forced sales of homes in 13, the amount of non exempt equity often determines how large the monthly Chapter 13 payments must be. That’s because one of the “rules” in Chapter 13 is that if the debtor gets to keep his assets, creditors must get as much as they would have if the debtor had filed Chapter 7. We’ve nicknamed the “best interests of creditors” test for plan confirmation.
I’ve often seen homeowners who can’t get relief in bankruptcy without putting their home at risk of forced sale or at risk of a Chapter 13 plan payment that is simply too large to manage.
The original purpose of the homestead was to protect an amount of money that is required to keep a roof over a family’s head.
Prior to this change, the increase in the cost of homes left the homestead outdated. The homestead before this bill only protected about 15% of the value of the typical California home.
We’re now far closer to achieving that goal and preserving home ownership for everyone.