Good news for homeowners!
Since Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), consumer debtors have had a rough road to travel. But in a sign that times may be changing, and the dire situations often faced by consumers require improvements in their laws, California has taken a step in that direction by overhauling its homestead laws.
Not having been substantially revised for almost 45 years, the existing homestead laws treated consumer debtors differently, depending upon their marital status, health, age, and income, with substantial differences.
A homestead is intended to protect equity. For example, if a home is worth $500,000, but is subject to a mortgage of $350,000, then the equity is the $150,000 of value in excess of the mortgage. A homestead, whether created by a homestead declaration recorded at the office of the County recorder, or arising automatically because a judgment creditor has attempted to force the sale of the home to satisfy a judgment, ensures that homes can’t be sold unless there is equity above and beyond the homestead. In order to be eligible for such protection, the property need only be the intended residence of the debtor.
Under current law, the amount of the homestead is $175,000 for married couples if either spouse is over 65 or disabled and unable to engage in substantial employment; $175,000 if the person is 55 or older with gross income of not more than $25,000 or if married not more than $35,000 and sale is involuntary; $100,000 if debtor or spouse resides in house with at least one member of the family with no ownership interest in the homestead; and $75,000 for all others.
Critics of this 3-tiered system often pointed to the fact that the purpose of the homestead is to protect Californians from the forced sale of their homes by creditors to satisfy debts, and that the distinctions based upon marital status, age and other factors bore little relation to the average cost of home ownership.
That has ended. Effective January 1, 2021, California will have an entirely new system of homestead laws. Recognizing that the cost of homes varies wildly from one part of the vast state to the next, the new laws will set the amount of the homestead as being equal to the median price for the purchase of a home in the prior year, with each county having a different homestead amount. But irrespective of the median price of a home in the county, there will be a statewide “floor” of $300,000 and a “cap” of $600,000.
Thus, in Orange County where the median price of a home in 2018 was $805,380, the homestead will be at $600,000, some $205,380 below median. But in Shasta County, where the median price of a home was $255,000 in 2018, the homestead will still be $300,000 as a result of the minimum floor of $300,000.
No longer will homeowners be “rewarded” for growing old, suffering from health issues that can be a matter of privacy concerns, experiencing low income, or maintaining a marriage or heading household with a dependent. In other words, a home protected by the homestead laws will not lose that protection due to a change in the character or lifestyle of the occupants.
At Heston & Heston, we have supported these changes through lobbying efforts and the good old proven technique of calling and writing our legislators. It is a change that has been long overdue. Further changes to improve the homestead laws are already underway and we will be keeping our clients informed as developments warrant.
Check back from time to time for further updates.