Entering into bankruptcy can be one of the hardest choices a financially stressed individual can make. Aside from the stigmas associated with bankruptcy - whether deserved or not - there are a number of lifestyle and spending changes that will need to be adjusted after bankruptcy has been filed. However, in most cases, one thing the average California family will not have to adjust to is a new home. This is thanks to a protection known as the homestead exemption, which allows someone undergoing bankruptcy to retain his primary residence. Though homestead exemption goes a long way towards protecting one’s right to a home, even after filing for bankruptcy, the laws surrounding the statute are many and varied. Additionally, every state treats the exemption differently, which is why knowing the particulars that apply to California is crucial when determining what will be protected.
According to Robert Canning, a California bankruptcy lawyer based in Los Angeles, there are several important things to know. “In California,” Canning says, “there is an automatic homestead exemption from anywhere from $100,000 to $175,000 dollars depending on the age and specific situation.” Other factors that can affect the exemption is marital status, disabilities and dependents in the household.
“The interesting part,” Canning continues, “is that in California bankruptcy law, if you don’t own a home, you are entitled to something that is known as the ‘wild card.’ This gives you 21,000 dollars of money that you can use on anything.”
The wild card allows a degree of flexibility for those not fortunate enough to have equity in a home. “For example,” Canning says, “if I have a client that has a bank account of 10,000 dollars, and he doesn’t own a home, he can exempt that money. Similarly, if they have don’t own a home but do have equity in an automobile, they can exempt that. It’s like free money!” However, like all things in life, there are exceptions, such as the inability to exempt student loans (which can never be exempted).
Another fact about homestead exemptions worth noting is that they can only apply to what is known as a “primary residence.” According to Canning, a primary residence is a home that has been lived in for three of the six months prior to filing bankruptcy. Other residences, such as vacation homes and mobile homes, would not be entitled to homestead exemption. However, interestingly enough, nearly any property that is owned and lived in can count as a primary residence. This applies to boat homes, mobile homes, apartments, and so forth.
Canning goes on to explain another benefit to filing bankruptcy in California. “In the state of California, there’s something called a Strip Motion, which can be filed during Chapter 13 bankruptcy. Since Chapter 13 is almost always filed by people behind on mortgage, we go in and create a Chapter 13 plan and they have to prove to the satisfaction of the trustee that they can’t pay back their mortgage. A Strip Motion is when a person has a second mortgage that is unsecured that can be stripped off and discharged and exempted. If you have a home worth $500,000 dollars and their first mortgage is $500,000 plus 1 dollars, and they have a second mortgage of 120,000, that second can be stripped off because it’s unsecured.”
However, understanding whether one is eligible to have a 2nd mortgage lien stripped, like anything else in bankruptcy, can be complicated by the details of an individual case. Therefore, the best bet is to seek the help of a lawyer who is thoroughly versed in the nuances of bankruptcy law in the state of California.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.