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How Does California’s Homestead Exemption Affect Chapter 7 Bankruptcy Filers?

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What is California’s Homestead Exemption?

The homestead exemption in California is a legal provision that protects a part of a debtor’s equity of their primary residence from being seized or sold to pay debts in a bankruptcy case. It allows debtors to retain a portion of the value of their home. The exemption also protects debtors from voluntary and involuntary liens such as taxes.

Before the Assembly Bill made this exemption, only $75,0000 was exempted for unmarried individuals, $100,000 for married couples, and $175,000 for individuals 65 or older or disabled. The new regulations expand these exemption limits to at least $300,000 up to $600,000. Chapter 7 bankruptcy lawyers in California provide an overview of the homestead exemption rule.

What Informs the Increase in the Homestead Exemption?

The increase is founded on recognizing the inadequacy of the existing exemption limits in relation to the value of California homes. The values are based on the median sales proceeds of homes within the county where the debtor lives. They also account for inflation in a given year.

Even with this positive development, it’s advisable to consult California lawyers specializing in Chapter 7 bankruptcy to understand how the exemption affects your case. They can advise you on how to protect your home when filing Chapter 7 Bankruptcy.

Types of Homestead Exemption

Homestead exemption is available in two types: automatic and declared homestead exemption. The exemption automatically applies to your home, but only if a forced sale is necessary. If this happens, you must continue residing in the property throughout the process, without which you will lose the exemption. The burden of proving why the exemption should apply would lie with you.

Declared homestead exemptions apply to both forced and voluntary sales of the property. Exempt proceeds from a voluntary sale are protected if you purchase another home within six months of the sale. You must have been living on the property on the date the exemption is declared. Experienced California Chapter 7 Bankruptcy lawyers can provide more insights.

How Does the Exemption Work in Chapter 7 Bankruptcy?

Upon filing a Chapter 7 Bankruptcy petition, the US bankruptcy trustee is authorized to sell a specific portion of your assets to pay creditors. The homestead exemption shields your primary residence’s equity up to a specified amount. Equity is the current value of your home based on the prevailing market conditions minus the balance of the outstanding mortgages.

For example, if you own a home worth $285,000 with an outstanding mortgage balance of $120,000, the equity is $165,000. Your home falls under the $300,000 minimum median value, so the homestead exemption rule fully protects the equity. The US trustee cannot seize your house and sell it off to pay creditors.

However, if the home value was higher and the equity exceeded $300,000, the trustee could sell the home to use the excess to pay creditors. However, you would retain up to $300,000 in the net sale proceeds on the condition that you must have lived in the home for at least 1,215 days before filing bankruptcy. Without meeting this condition, the exemption is reduced to $189,050.

Do I Need to File a Request for the Homestead Exemption?

The homestead exemption rule applies automatically; you don’t need to file any declaration form or special document. It takes effect when you submit the financial schedules as required in bankruptcy cases and applies if your home is subject to a forced sale during the proceedings.

Special Conditions to the Homestead Exemption

Working with skilled California Chapter 7 Bankruptcy lawyers ensures you understand everything concerning the homestead exception to protect your rights and home. Several special conditions apply to the rule, which your lawyers will inform you before filing for bankruptcy.

One condition is that an undeclared homestead won’t protect you if you voluntarily sell your home. The automatic declaration only protects your home from a forced sale. Upon making a formal declaration, you will enjoy six months of protection to sell your house voluntarily and won’t lose your protected equity.

Secondly, the homestead exemption only applies to your principal residence, not an additional home or commercial property. The exemption doesn’t prohibit selling these properties to pay off creditors in a bankruptcy case.

Thirdly, a California statute requires you to reinvest the sales proceeds you receive under the exemption within six months of receiving them. The exemption should prevent you from losing your primary residence, so you must use the proceeds consistent with that rationale. Otherwise, you risk losing the exemption.

Exemptions to the Homestead Exemption

Under California law, the homestead exemption rule doesn’t apply in the following cases:

  • It doesn’t apply to the portion of the home secured by home equity lines or mortgages, so it doesn’t protect your home from foreclosure by mortgage lenders.
  • It doesn’t cover the home value subject to child support judgments, alimony, or mechanic’s liens.
  • It doesn’t affect state or federal tax judgments or liens to government agencies.

An Experienced Bankruptcy Attorney Providing Legal Guidance on Homestead Exemption

Filing for bankruptcy is often the last resort for debtors who cannot fulfill their debt obligation. However, if you’re considering taking this approach to resolving your financial situation, consider enlisting the services of skilled bankruptcy lawyers in California. They can guide you through the process and everything you need to know about the homestead exemption.

Resolve Law Firm, APC, hosts an experienced Chapter 13 Bankruptcy lawyer who can help you file bankruptcy while avoiding costly mistakes that could make the process more complex. Our team can provide representation during court proceedings, valuable legal advice throughout the process, and help you prepare all the paperwork. Call us at 213-583-5547 to schedule a FREE consultation.

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