Generally, our office has found that while people do know there are some protections of your assets should you find yourself in bankruptcy or creditor trouble in general, many are unsure as to their options and exactly what is or can be protected. One of the most important protections is the homestead exemption.

While the rules for homestead exemptions vary by state, here in California, we recently had an increase in the exemption limit thanks to California Assembly Bill 1885 back in 2020, bringing it up to between $300,000 and $600,000. The actual amount will equal the prior year's median home sale price amount if it is within in this range. To put it simply, the minimum exemption is $300,000; the maximum is $600,000; but your particular exemption limit will be the median, not the average, home sale price from the prior year for your county. Additionally, these figures will be tied to inflation and adjusted annually beginning January 1, 2022. However, these numbers which, at the time of writing, have not yet been released for the entire year of 2021 by California’s Department of Industrial Relations.

For some examples, in September of 2020, the median home sales price in Los Angeles County was approximately $677,000. This meant everyone in Los Angeles County qualified for the maximum homestead exemption of $600,000. Contrast that with Riverside County, whose median sales price was around $490,000, meant Riverside County residents would have only qualified for an exemption of $490,000.

In case you are unaware, a homestead exemption protects home equity from a homeowner's creditors, up to a certain dollar amount, as previously mentioned. This means creditors are precluded from collecting funds within this amount to settle past-due debt. This protection applies if you were to file for bankruptcy or experience financial troubles stemming from things like a divorce, certain types of judgements, or the death of a spouse and can even cover property tax troubles.

To be clear, the homestead exemption is on one's principal residence, not a second home or commercial property, and by default, does not prohibit the sale of property. However, if the equity you have in your home is lower or equal to your homestead exemption, then your home is fully protected from creditors. A creditor cannot force the sale of your property. However, if your home equity is higher than your exemption, then you may be subject to a forced sale. From the sales proceeds, you would still receive your exemption limit, but any other funds collected from the sale go towards satisfying debts such as the mortgage, liens on the property, property taxes, etc.

Now, in case you're wondering how you can ensure a homestead exemption applies to your home, you should know that there are two types: automatic and declared homestead exemptions. A homestead exemption is automatically applied to your residence but only upon the forced sale of the property. It requires you to continually reside in the property throughout the process, otherwise you lose the exemption, and the burden of proving the exemption should automatically apply is on you.

By contrast, declared homestead exemptions apply both to forced and voluntary sales of the property. Exempt proceeds from a voluntary sale are protected if another home is purchased within 6 months. You do have to actually reside in the property on the date the exemption is declared, that is recorded with the county recorder, and the burden of proof to show the exemption is invalid is on the creditor.

There are more details and requirements for particular circumstances, but we'll cover those in a later post. For now, keep one more thing in mind: homestead exemptions are state-specific and thus vary from state to state and will need to bend to the whims of federal law under our Constitution's Supremacy Clause so, of course, be sure to at least make certain that Uncle Sam is paid.

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Additional Resources:

California Assembly Bill No. 1885 – Legiscan.com

California Department of Industrial Relations | California Consumer Price Index – Dir.ca.gov