California homestead laws help to protect you from losing your home to creditors. If you are sued for money in court and lose, the person who sued you will receive a judgment from the court. If you do not pay the judgment, the creditor can try to collect the judgment by garnishing your wages, having your automobile sold, or even having your home sold. The homestead protection laws will protect your home against most creditors, except consensual ones (mortgage companies, mechanics liens, or sales to pay property taxes, for example) up to the value of the homestead exemption, thus, the homestead protection laws protects a certain amount of your equity in your home from being taken to pay the judgments against you.
The policy behind the homestead protection laws is to ensure that insolvent debtors and their families should not be rendered homeless by virtue of an involuntary sale of the residential property they occupy. In this respect, the primary purpose of the homestead law is not to protect creditors, but to protect the home against creditors of the declarant, and thereby preserve the home for the family. This is especially important in situations when there has been a death in the family as the homestead laws seek to provide the surviving spouse with shelter.
The exemption does not prevent a foreclosure sale of a voluntary lien such as a deed of trust, and it does not prevent the involuntary sale of a homestead by creditors when the property has sufficient equity. It merely assures the homeowner that before the property will be sold he or she will receive the amount of the exemption that can be used to acquire another residence, and until the new residence is acquired, the funds will remain exempt. Therefore, when the homestead can be sold for an amount in excess of the debts secured by the liens on the property plus the homestead exemption, the property can be sold by an execution sale.
In California, there are the following two kinds of homestead exemptions:
Declared homestead: This type of exemption applies when the property owner records a declaration of homestead with the County Recorder's Office.
Automatic exemption: This exemption applies even when the debtor has not filed a declaration of homestead, or when the declaration was recorded after the creditor had perfected a lien against the property. This exemption provides the debtor protections against the claims of unsecured creditors similar to those afforded by the declared homestead with some essential differences.
Difference between two types of homesteads: The primary distinction between the two homestead exemptions is their application when there is no forced sale of the property by a creditor. The declared homestead provides protection upon the forced sale of the home by a creditor as well as a voluntary sale by the homestead owner. The automatic homestead only applies to involuntary sales (forced by a creditor) and does not apply when there is a voluntary sale by the property owner.
Should you file a homestead declaration or just wait for the "automatic" exemption?: The filing of a declared homestead does add to the homestead protection that the law automatically provides to all homeowners. While the typical homeowner need not file a declared homestead to enjoy some of the basic homestead protection, homeowners who are in financial trouble, or who expect to be in financial trouble, should file a homestead declaration to be on the safe side.
The following are some of the reasons that a homeowner, who is or expects to be in financial trouble, should file a declared homestead and not rely exclusively on the automatic homestead:
The owner who files a declared homestead can choose which of several different dwellings will be protected as the person's home.
The protection that is provided by a declared homestead will continue to apply to that homestead even if the owner moves. If a declared homestead has not been recorded, the automatic homestead protection may be lost if the owner moves.
The protection that is provided by a declared homestead will apply to the proceeds of a voluntary sale. If no declared homestead has been recorded, then protection of the owner's equity in a home may be lost in the event of a voluntary sale of the home. This means that the proceeds of the voluntary sale of the home will go to the judgment creditor rather than the owner.
If a declared homestead has been recorded, the law is clear that the proceeds of the sale (up to the dollar limit on the homestead) can be used to purchase another home.
Only if a declared homestead has been recorded will the proceeds of a voluntary sale assuredly be protected after they are used to purchase another home and only then will the protection given to the first home be carried over to the second home.
Any person can select and claim a homestead, as long as the declarant resides on the property and owns an interest in the property.
A person, who resides in the dwelling, can declare a homestead even if he or she is not a citizen. Also, an unmarried declarant can declare a homestead on his or her undivided interest in property owned in co-tenancy with another person.
The validity of the declaration of homestead is based on the person's residency at the time the declaration is recorded, but the amount of the exemption is based on the declarant's status at the time of the of the involuntary sale of property.
Generally, the amount of the homestead exemption is as follows:
$50,000. for a single person,
$75,000. for a married couple, and
$125,000. for a disabled person, someone over 65, or someone over 55 living on gross income of $15,000. or less per year ($20,000. if married).
Example: Let's assume the following facts (1) a married couple files a homestead declaration, (2) the home has a mortgage of $150,000., (3) a creditor has a judgment for $35,000., and (4) the market value of the home is $225,000.
In this situation, the automatic homestead protections laws would prevent the creditor from forcing the sale of the home since the proceeds of the sale ($225,000.) would be less than the combined amounts of the mortgage, the homestead exemption, and the judgment.
Homestead (Married Couple):
Amount available to Creditor:
Thus, as opposed to the example above, if you have a large amount of "equity" (the fair market value of the home minus any liens on the home) in your home, you might lose your home to a creditor, but you will retain the homestead exemption. For example, let's say your equity in the home is $300,000.
Homestead (Married Couple):
Amount available to Creditor:
Note that only a qualified licensed attorney can provide you with the exact exemption amount depending on your circumstances as the law is complex and varies depending on each individual clients situation.
A declared homestead exemption must (1) be signed by a homeowner, (2) notarized by a notary and (3) is "recorded" (original signed and notarized homestead declaration) and filed in the clerk's or recorder's office for the County in which the home is located.
The law requires that a homestead filing service handle the entire task of completing and filing the homestead declaration, including payment of all notary and recording fees. The declaration must be recorded within ten (10) days after it is signed before a notary.
The best way to ensure you will comply with the law is to have a Estate Planning Attorney review the particular circumstances of your case.
California homestead law simply dictates the amount of equity in your home that you can protect from creditors in a bankruptcy. If the equity in your home is equal to or less than the allowable homestead exemption and you keep up your mortgage payments, you should be able to keep your home if you file for a Chapter 7 Bankruptcy. If you have a large amount of equity in your home, you might lose your home in a Chapter 7 if the Trustee decides to sell it. In that case, a Chapter 13 repayment plan might be better for you.
This office provides all services related to preparing and filing Bankruptcy as well as the supplemental documentation needed for filing declared homestead exemptions.
When the property subject to a recorded declaration of homestead is sold, the sale proceeds retain the exemption for a period of six months after the date of sale. If the proceeds are reinvested in a new dwelling that qualifies as a homestead, and a new homestead declaration is recorded that describes the new property, within the six month period, the homestead exemption continues into the new property and the exemption on the new property has the same effect as it would have had if it had been recorded at the time the prior declaration was recorded.
The law is different depending on whether you are filing an automatic homestead or a declared homestead. In an automatic homestead, the six month period commences when the proceeds are "actually received", whether the sale is voluntary or involuntary. In a declared homestead, the six month period commences on the date of a voluntary sale and on the date of receipt in an involuntary sale.