Bankruptcy News

Jacobson: Big Change to California Homestead Exemption in Chapter 7

October 2, 2012

“Exemption Laws” are those laws that allow people who file bankruptcy cases to keep certain amounts of certain categories of assets.  Like most states, California (where I practice) has its own set of exemption laws.

If you’re over 65 or disabled, California allows you to keep $175,000 worth of equity in your house.  That’s called the “Homestead Exemption.”

So, for example, if you’re a Californian over 65 and owe $500,000 on your house, and it’s worth $675, 000 or less, then that $175, 000 in equity is fully protected.  If a Trustee in a Chapter 7 case took your house and sold it, she’d have to pay the mortgage holder (the bank) first, and then give you a check for $175, 000 before she had any assets with which to pay your creditors.  That being the case, she’s not going to bother trying.

However, if the house was worth $700, 000, she would be much more likely to go after your house: She would sell it for $700,000, give $500,000 to the bank, give $175,000 to you, and then distribute the remaining $25,000 to your creditors.

A recent Ninth Circuit Court of Appeals decision (Wolfe v. Jacobson, U.S. Court of Appeals, Ninth Circuit, No. 10-60040) stands to have an enormous impact on the bankruptcy cases of people who make use of the Homestead Exemption.

In this case, the Jacobsons, both over 65, had more than $150,000 equity in their home. ($150,000 was the Homestead Exemption amount at the time they filed their case.) A creditor asked for, and the Court granted, permission to proceed with a foreclosure of the home.  The house was sold, the Jacobsons got $150,000, and everything else went to pay off the creditors.

However, the Jacobsons didn’t use that money to buy another house; they put it in the bank to use for ordinary expenses.  The Trustee in their Chapter 7 case then pursued the $150,000, claiming that because the Jacobsons didn’t use it for a new home within six months, it had lost its exempt status.  The Bankruptcy Court and the Bankruptcy Appellate Panel decided against the Trustee, but the Ninth Circuit Court of Appeals reversed those decisions.

An appeal is pending, and a question remains as to whether this applies to sales by the Trustee as well as to sales by creditors, but under this precedent, a debtor who receives proceeds from the sale of his or her house pursuant to the Homestead Exemption, must reinvest those proceeds in to a new home within 6 months or lose those proceeds.