Effective January 1, 2021, Assembly Bill 1885 increases the amount of home equity protected against creditors, likely preventing more owners from losing their homes in bankruptcy.

The new homestead protection starts at a floor of $300,000 and caps at $600,000. The previous homestead exemption ranged from $75,000 for singles, $100,000 for a married couple and $175,000 for seniors and the disabled.

The law bases the exemption on a county's annual median price for single-family homes. Beginning in January 2022, the exemption will adjust for inflation based on changes in California's Consumer Price Index.

High-cost Los Angeles, Orange and San Diego Counties will fall into the equity cap of $600,000. Riverside County will be an estimated $400,000 and San Bernardino County roughly $340,000.

The idea behind the homestead exemption is to help homeowners keep their primary residence secure by placing it beyond the reach of the consequences of economic misfortune.

After filing Chapter 7 bankruptcy to discharge debts, a court-appointed bankruptcy trustee will evaluate the dollar value of a debtor's assets and figure out what is available to liquidate and pay the creditors.

The New Code:

Assembly Bill 1885 amends Section 704.730 of California’s Civil Code as follows:

(a) The amount of the homestead exemption is the 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.

Essentially, the exemption amounts have been raised significantly, and will adjust for inflation in the future.

No Mandatory Move to Shanty Town

The homestead exemption provides a certain amount of protection from judgment creditors – those creditors who sued in court and obtained a legal judgment to collect money owed. A judgment creditor has the right to take several actions to collect the debt, including selling assets like vehicles and real estate.

Under the new law, $300,000 – $600,000 of a home’s equity can’t be touched by judgment creditors.

A judgment creditor could force the sale of home, but a family would still have up to $600,000 to relocate to a less expensive city.

The Devil in the Details

There are some caveats:

1. Those who use their homes as collateral for loans will not be protected by AB 1885. The lender will have the right to foreclose, and the borrower will not qualify for the exemption.
   
2. Homeowners who choose to sell their homes also won’t be protected from judgment creditors – the homestead exemption only applies in the case of a forced sale.
   
3. State law does not protect from federal actions. If the IRS or other federal agencies are seizing and selling property, AB 1885 won’t help.
   

The current homestead exemption in California is automatic, homeowners don’t necessarily have to file a homestead declaration with the County Clerk. However, if a homeowner does file a declaration, the homestead’s equity isn’t lost after the home sells — whether that sale is involuntarily or voluntarily. Moreover, if a declaration is filed, proceeds from selling the home are protected for six months after the sale. For these reasons, if there’s equity in the home it’s wise to file a homestead declaration if there are serious financial problems.