Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

California Homestead Works In Other States, Too

By

California homestead law drives bankruptcy exemptions even for those who no longer live in California.

Strange, when the homestead statute was state law originally written for Californians.

Two things have expanded its reach:  bankruptcy “reform” and the concept of extraterritoriality.

The third driver, of course, is mobility:  we seem much more likely these days to have moved between states.

I was reminded of the long reach of the homestead last week by a call from a couple in Colorado.

They used to live here,  were filing bankruptcy in Colorado, and wondered if they could use the California homestead to protect their Colorado home.

The answer, on their facts, is YES.

So here’s how that works.

California exemptions for former residents

The 2005 amendments to bankruptcy law tried to limit debtors from moving to a state with more generous exemptions before filing bankruptcy.

Several states, most notably Texas and Florida, have an unlimited exemption for the value of your home. Shack or Taj Mahal, if you live there, it’s protected from creditors.

So the Congressional “fix” was to say that if you hadn’t lived for two years in the state where you filed bankruptcy,  you must use the exemptions from the state in which you lived two years ago.  (It has a few more wrinkles, but broadly, that’s the new law.)

The folks on the phone were California residents two years ago.  They “must” use California exemptions to protect their home in Colorado, where they will file.

Instead of the $75,000 homestead in Colorado, they can claim the $100,000 exemption provided in California law at the time.

Neat.

Homestead beyond California

Extraterritorial is a long word for the idea that the state law in question applies to property outside the territory of the state.

The concept gained importance with the 2005 changes to bankruptcy law.  What if the state you lived in two years ago doesn’t allow extraterritoriality?

Some states hold their exemptions have extraterritorial effect;  other deny extraterritoriality.

North Carolina, for example, limits use of its state exemptions to residents of North Carolina.  See the lawyerly piece by my friend Billy Brewer.

By contrast, California’s exemption laws are available for property  outside the state.  The 9th Circuit case of Arrol, decided long before bankruptcy “reform”, allowed the debtor who had just moved back to Minnesota to claim a homestead the Michigan house in which he lived in a bankruptcy filed in California.

More on where you file and what you claim exempt

Bankruptcy law required that he file in California, having just moved back to Michigan less than six months ago.  The appeals court said that California law, where his case was filed, applied to the home he was living in when he filed, even if it was outside the state of California.

California allowed extraterritorial application of its exemptions.

If Arrol had moved from North Carolina to California, he couldn’t use North Carolina exemptions because they don’t apply to non residents.  The laws of North Carolina aren’t extraterritorial.

In that case, the debtor can use the federal bankruptcy exemptions if the exemptions of the required state aren’t available.

Home truths

The moral of this piece is bankruptcy can be complicated for the well-traveled debtor.

Choose an experienced bankruptcy lawyer; share the tale of your travels; and explore your exemption options.

More

California homestead is a superpower

A homestead isn’t what you think

Secret bankruptcy exemptions

How Much Cash Can You Keep In Bankruptcy?

By

coins in a stack

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 scheme 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 exemption (which gets bigger January 1, 2021) 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.  Here’s an online summary of these exemptions.

Cash to start over

The big money for exemptions is found in the grubstake provision:  §703.140(b)(5).

If you haven’t elected to protect equity in real property, you can combine the dollar amount of the homestead  in subsection (1) with the “wild card” amount in subsection (5) for  total of $28,225..

That’s a pretty good nest egg.

Money traceable to exempt source

You may be holding money that comes from an exempt source.  If the money you hold is traceable to its source, it may be exempt in addition to money claimed exempt as a grubstake.

Personal injury  Funds that you can trace to a personal injury recovery can be claimed exempt.  CCP 703.140(b)(11)(D) limits the exempt portion to damages for bodily injury (not property damage).

The money needs to be traceable to its source.  And it has to be still in the form of money.  If you spend the exempt money on a car, the car isn’t exempt as the proceeds of a personal injury recovery.

This exemption currently protects up to $26,800.

Insurance proceeds or wrongful death award  If someone on whom you were dependent dies or was killed, any award you receive as a result is exempt to the extent necessary for your support.

It gets a little messier, since a judge may have to decide what’s “necessary” for your support.  But for an elderly or disabled individual, that amount could be considerable.

Public benefits    Social Security, unemployment, workers compensation, and veterans benefits are protected from creditors.  Though the words of the statute protect your “right to receive” these benefits, case law in the 9th Circuit protects any sums paid out that are traceable to the exempt source.

Retirement or profit sharing payments  Payments on account of old age, length of service or disability under a contract are exempt, again, to the extent necessary for your support.  The precise amount you can protect is unstated but the protection is whatever is “necessary” for support.

IRA’s

The only good thing to come out of bankruptcy “reform” in 2005, in my opinion, was a universal bankruptcy exemption for IRA’s.  The cap started at 1 million dollars, and is adjusted every three years.

If you are lucky or hard working enough to have a substantial IRA, neither your creditors nor a bankruptcy trustee can reach it by reason of 11 USC 522(n).

Trusts

Trusts that have a specific provision that makes them non transferable are not even property of the bankruptcy estate.  The provision is sometimes called an anti-alienation provision or a spendthrift provision.

It’s this kind of provision that takes most pension plans and 401(k) arrangements out of the reach of creditors.

A trust you create for your own benefit or a revocable living trust doesn’t fall within this provision.  But a spendthrift trust created by a parent or grandparent with you as the beneficiary might qualify.

When something isn’t “property of the estate”, an exemption isn’t necessary to protect it in bankruptcy.

Once you move beyond the grubstake, or wild card exemption we looked at first, application of the exemption laws gets a little more complex.   If one of these other exemptions for cash might apply to you, get help from an experienced bankruptcy attorney.

The single biggest mistake that people representing themselves in a bankruptcy case make involves botching claims of exemption.

More

New California exemption for cash

Interviewing a bankruptcy lawyer

Secret exemptions

What you keep in Chapter 13

California bankruptcy law

Image courtesy of Flickr and Bookis

California’s New Exemptions For Money In The Bank

By

california exemptions


California has finally created a state law exemption for cash in the bank.

Californians filing bankruptcy no longer face loss of all the funds in their bank accounts when they choose California’s generous homestead, thanks to changes in exemption law.

Two exemption statutes , new in 2020 , provide protection for cash in the bank from levy under state law or turnover to a bankruptcy trustee.

The absence of protection for cash other than current wages was a gaping hole in California’s standard exemptions. State exemptions protected significant equity in a home, but next to nothing for the cash necessary to make the next mortgage payment.

That has changed, with the creation of Code of Civil Procedure 704.220 and 704.225, both newly effective in 2020.

Money for basic needs

CCP 704.220 creates an exemption in sum of money equal to a month’s living expenses calculated under a state welfare formula. Currently, that amount is $1788.

The statute reads:

(a) Money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four for Region 1, established by Section 11452 of the Welfare and Institutions Code and as annually adjusted by the State Department of Social Services pursuant to Section 11453 of the Welfare and Institutions Code, is exempt without making a claim. ….

The exemption has exceptions. In state law, it doesn’t apply to a levy to collect the following:

  • wages owed to another
  • child support or spousal support
  • debts to the state for taxes, unemployment, etc.

We’ll have to see how those exceptions apply in bankruptcy.

Amounts needed for support

The second of the new exemptions , CCP 704.225, appears on its face far broader.

CCP 704.225 Money in a judgment debtor’s deposit account that is not otherwise exempt under this chapter is exempt to the extent necessary for the support of the judgment debtor and the spouse and dependents of the judgment debtor.

This exemption promises the possibility of protecting a sum considerably larger than the formula used to calculate CCP 704.220. But it also opens up opportunities for litigation over support for how long, and at what level of comfort.

Both protect deposit accounts

So, what’s a “deposit account”? This becomes one of the all-too-common treasure hunts through the law, each statute referring you on to another.

CCP 481.081 says “Deposit account” means “deposit account” as defined in paragraph (29) of subdivision (a) of Section 9102 of the Commercial Code.

And the Commercial Code , in subsection 29, provides:

“Deposit account” means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.”

You can take it to the bank

So, in creating a California cash exemption, the legislature has finally recognized, and acted on the idea, that it takes both a roof over your head and some money in the bank to have genuine protection from creditors.

More

California homestead gets a major update to reflect the real cost of housing.

California Gets New Homestead

By

California homestead

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.

Homestead unknowns

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.

Homestead certainties

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.

Homestead updated

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.

More on homesteads

How the homestead works

Which chapter is best for me

Why I love Chapter 13

New California Bankruptcy Exemptions

By

california exemptions

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2019.

New: exemptions for money in the bank added in 20202

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

Here’s the new  list of increasedCalifornia bankruptcy exemptions:

Principal residence$29,275
Vehicles$5,860
Household goods per item$725
Jewelry$1,750
Grubstake$1,550
Business assets$8,725
Loan value of life insurance$15,650
Personal injury claims$29,275
Other misc. exemptions703.140

Californians, because they are required to choose one state exemption system or the other rather than the federal bankruptcy exemptions, can also use the federal list of non bankruptcy exemptions.

Bankruptcy wild card exemption

wild card exemption

The trickiest part of the California bankruptcy exemptions is what’s called the “wild card”. (It’s also called the “grubstake”.)    When 703.140(b)(1) and (b)(5) are added together, the debtor can protect $30,825 of equity in any asset or combination of assets.  That’s the wild card.

The wild card amount can be parceled out to protect some cash in a bank account;  some equity in a vehicle that exceeds the car exemption; stock; a  business or whatever else you have.

The point is that the exemption isn’t restricted to a certain kind of property. It can be used to protect anything.

How exemptions work

Exemptions protect the specified amount of equity in an asset.

If it’s a house, the exemption protects a certain amount of value in the property that exceeds the liens on the property.  It doesn’t matter if the value of the house is $200,000 or $1,200,000.  The exemption protects the specified amount of equity in the house.

Homestead amount slated for large increase in fall of 2020.

If there is equity in a house over and above the total of liens and the homestead, a Chapter 7 trustee can sell the house and give the debtor the homestead exemption in cash.

That doesn’t happen very often.  Because, there has to be enough equity to pay the exemption, the costs of sale, any capital gains taxes and the trustee’s commission before the sale benefits creditors.

More about secret exemptions

If neither California exemption system adequately protects your  assets, consider Chapter 13.

More

Exemptions in Chapter 13

Debts of spouses

k2d2vaca.

Double Dipping On Retirement Savings

By

double dip retirement

Any time you can double your savings and protect your money from creditors is a good time of the year.

The period between New Years and Tax Day is my favorite time of the year, just for that reason.

You can make contributions to your IRA last year AND contribute to this year’s IRA allowance.

You get a scoop of last year’s tax benefits, topped with a scoop of this year’s tax break.

You don’t have to be filing bankruptcy for this to be important.   But, this trick is a favorite of mine when I have my bankruptcy-lawyer hat on.

IRAs in bankruptcy

My goal is to maximize the value a bankruptcy client can keep through the case.

Everyone in bankruptcy can protect over a million dollars in IRA  savings.  Not that I’ve seen an IRA anywhere near that number.  But Congress says IRA savings are a good thing, and beyond the reach of your creditors.

And I’ve never faced challenge from a bankruptcy trustee when a client contributed the maximum allowed by tax law to a retirement account, even if they sold other assets to make the contribution.

IRAs for all

Tax advantaged retirement plans are grounded in federal tax law and are available to the solvent as well as the insolvent.  

IRA’s are asset protection on the cheap

Too many Americans seem to want to live in a little bubble that tells us that old age will work out OK, (somehow) whether we take responsibility for making it happen or not.

That’s magical thinking at its worst.

Unless you expect to inherit a fortune, you need to take steps now so that you are financially independent then.

Tax break opportunity is fleeting

Old age is inevitable and the tax code has an annual limit for how much you can contribute to a retirement vehicle to grow tax free.  If you don’t make a contribution equal to the limit for last year, that unused tax break is lost forever.

Between now and April 15th, take two scoops of retirement savings.  Or seed your retirement account with any tax refund from this  year.

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

Categories