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On September 18, 2020, Governor Newsom signed into law Assembly Bill 1885, Section 1 of which increases the homestead exemption against creditors with respect to a debtor’s equity in his or her personal residence. Specifically, the new law amends Code of Civil Procedure §704.730, effective January 1, 2021, replacing California’s current and often confusing homestead exemption regime which provides for a three-tiered system: one for singles [$50,000 exemption]; one for married couples within a “family unit” [$100,000 exemption]; and one for elderly persons age 65 or older [$175,000 exemption]. The new homestead exemption will have a minimum baseline of $300,000, but can reach as high as $600,000, depending on the median sale price of single-family homes within that particular county during the calendar year prior to the calendar year in which the judgment debtor claims the exemption. Furthermore, starting on January 1, 2022, the homestead exemption amount will be adjusted annually for inflation such that it will automatically increase without the Assembly’s having to revisit the subject. The index to be used for adjustments will be the California Consumer Price Index for All Urban Consumers for the prior fiscal year, as published by the Department of Industrial Relations.

The new law will not alter any of the statutory exceptions to the homestead exemption, such as for consensual security interests (e.g., mortgages, deeds of trust and other voluntary encumbrances), or for state taxes. As for federal taxes, IRS is not bound by state exemptions anyway, so the new law does not affect Uncle Sam. Those debts were not protected before AB1885 and will not be protected after AB1885.

The rationale behind the bump in the homestead exemption seems to be that, under current law, many Californians who incurred debt, whether or not through any fault of their own, were displaced from their homes because of that indebtedness, which often rendered them homeless and thus an additional burden on the state’s dwindling public resources. Accordingly, where this new law will likely help the most is with financially-distressed individual debtors who have accumulated a modest amount of equity in their homes but are burdened by consumer debt, such as credit cards and auto loans, and who previously could not file for Chapter 13 bankruptcy protection without fear of losing their home to foreclosure. This new state law should allow such debtors to reorganize their financial affairs without as much pain as before.

Some observers have argued that this change is long overdue, as the previous California exemptions have been too low to give any meaningful relief to debtors for at least the past two decades. They also argue that it was correct for the California Assembly to index the new amounts against inflation, going forward, so that the Assembly does not have to periodically revisit the exemption amounts through new legislation or risk having them fall out of date.