Applying New California Homestead Exemption Isn't Always Easy

On January 1, 2021, California’s homestead exemption grew from a prior low of $75,000 to a minimum of $300,000, to as much as $600,000, depending on county wide home prices. And the homestead floor and ceiling adjust annually for inflation.

A big part of the change is that the increased homestead is available to homeowners regardless of age, health, or marital status.

But with the increase comes a couple of complexities not usually part of our bankruptcy homestead drill. One is a Bankruptcy Code limitation on homesteads. The other is the question of the rights of creditors with a judgment lien predating the homestead increase.

Bankruptcy Code limitations on homestead

Section 522(p) of the Bankruptcy Code limits claims of homestead under state or local law to $170,350 if the property was acquired during the 1215 days prior to the bankruptcy filing.

1215 days is approximately 3 years four months.

This limitation came in with the debtor-skeptic provisions of the bankruptcy “reform” amendments of 2005. It is an attempt to limit debtors from moving their wealth to states with large or unlimited homestead exemptions. Remember O.J. Simpson’s move to Florida with its unlimited homestead exemption?

The limitation does not apply if the residence was acquired within that period using proceeds of a house located in the same state acquired outside of the limitations period.

So, as a bankruptcy practitioner, it’s no longer sufficient to know where the debtor lived 2 years ago for purposes of determining which set of exemptions apply, you now need to know when they acquired their home and how the purchase was funded.

Navigating state law rights of pre-increase creditors

The second complexity is sorting out the rights of creditors holding claims against California debtors whose claim arose when the homestead exemption was much lower.

Remember, California has two varieties of homesteads: the automatic, or dwelling house, exemption in CCP 704.720 and the declared homestead of 704.910.

California Code of Civil Procedure 704.965, in dealing with declared homesteads, provides that any increase in the amount of the homestead is not effective against creditors with a judgment lien recorded prior to the statutory increase.

But, that state law provision for enforcement of judgments gives way to federal bankruptcy law. In bankruptcy, the applicable exemption is the one in force on the date the petition is filed. CCP 703.140.

(a) In a case under Title 11 of the United States Code, all of the exemptions provided by this chapter, including the homestead exemption, other than the provisions of subdivision (b) are applicable regardless of whether there is a money judgment against the debtor or whether a money judgment is being enforced by execution sale or any other procedure…

In a case involving a judgment lien that attached to debtor’s home when it was a rental, the 9th Circuit BAP held that the date of the judgment lien and the exemption available when it was recorded was irrelevant to the amount of the homestead available when debtor filed.

The … judgment lien is not relevant in determining whether [debtor] is entitled to the homestead exemption listed in his schedules. The filing of the petition constitutes an attempt by the trustee to levy on the property. It is this hypothetical levy the court must focus on in analyzing [debtor’s]entitlement to a homestead exemption. In re Mayer, 167 B.R. 186, 189 (B.A.P. 9th Cir. 1994)

Given the language in Mayer and cases following that the homestead exemption is determined on the date of filing, it seems clear that even a creditor with a judgment lien recorded before the homestead increase but give way to the increased homestead exemption.