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. [In 2021, the CA homestead amount increased.]
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.
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.
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.