Bankruptcy is intended and designed to provide individuals who have fallen behind a means to have a fresh start. However, inflation and increasing home values in California can erode the protections provided by bankruptcy and result in outcomes not intended by legislators. Particularly, one of the harshest outcomes of bankruptcy wasn’t intended to be realized by the vast majority of individuals–when bankruptcy exemptions do not fully account for and protect the equity a person has in their home. The good news is, this situation may soon be remedied. California legislators are discussing the passage of a bill that would increase the amount of equity exemptions available while also making other important changes to home equity exemptions. The bankruptcy attorneys of The Bankruptcy Group are proud to serve Californians in Folsom, Sacramento, and surrounding areas. Our bankruptcy lawyers endeavor to stay up-to-date on developing bankruptcy trends and legal changes so that any potential filing is compliant with the latest in California bankruptcy law. To schedule a free consultation, call 1-800-920-5351 today or contact us online.
What Is the Bankruptcy Home Equity Exemption?
Before examining the proposed changes to the bankruptcy laws and exemptions in California, it is important to first understand what bankruptcy exemptions are and how they can affect one’s filing. To put it simply, exemptions in bankruptcy are the property that you can protect from being sold or liquidated by the trustee–it is the property you keep.
In California, there are two sets of bankruptcy exemptions. A bankruptcy filer may select either set of state exemptions, but (s)he may not mix and match the exemptions. Furthermore, federal exemptions are not available in the state. The first set of exemptions contains a larger exemption for home equity and is generally preferred by homeowners with equity. The second set of exemptions contain a more generous catch-all or wild card exemption and is typically preferred by those filers without home equity or with other valuable property.
SB308 Bankruptcy Reform Bill Would Shield Additional Home Equity for Californians
While housing values plummeted during and following the 2007 recession, home values have steadily increased in recent years, and in some instances, soared. Increases in the value of one’s home or primary residence is typically a good thing, but in the context of bankruptcy, significant amounts of equity in excess of California’s $100,000 in equity exemptions for couples and $75,0000 for individuals can be problematic. While senior citizens can protect up to $175,000 in equity, individuals with equity in excess of this amount can be forced by the trustee to sell the home to compensate creditors.
If passed, SB308 would increase bankruptcy exemptions for California homeowners. Single individuals would be able to protect up to protect up to $100,000 in equity and married homeowners would be able to protect up to $150,000 in equity. Senior citizens and homeowners with disabilities would be able to protect up to $300,000 in equity.
The bill would also alter another aspect of bankruptcy law that often has an unduly harsh effect. Under current law, when homeowners are forced to liquidate their equity and sell their home, the remaining equity funds must be used to purchase another home within six months. If the individual fails to do so, the trustee can seize these funds to compensate creditors. Unfortunately, a recent bankruptcy can make it difficult to qualify for a new mortgage and the protected equity alone may not be enough to purchase a home. This leads to a particularly harsh outcome for individuals who were merely looking for an opportunity to pursue a fresh start. TSB308 would remove this requirement and allow the filer to spend the equity funds as (s)he would like.
Critics and Supporters of Bankruptcy Bill Weigh in
SB308 is drawing both strong support and strong opposition. Among those who oppose the law is the California Association of Collectors Inc. In a letter stating the reasons for the organization’s opposition, it claims that the law would serve as a loophole to allow wealthy bankruptcy filers to shield money from creditors. And, they’ve stated that individuals would pay their mortgage up to the limits set forth in the bill before “walk[ing] away with an unconditional lump-sum of cash.”
The bill is supported by various consumer groups and California Attorney General Kamala Harris. Harris argues that the bill would better balance interests and would assist Californians by providing resources they could use as they see fit to start over.
A vote on the bill is expected to be held in Sacramento on June 13, 2016.
Contact a Sacramento Bankruptcy Attorney Today for Help
The attorneys of The Bankruptcy Group will continue watching this situation as it develops. If you would like to discuss how our firm can help you eliminate debt, or if you are considering a Chapter 7 bankruptcy or Chapter 13 bankruptcy in California, call us at 1-800-920-5351 to schedule a free consultation.