Homestead: Protecting Your Home From Creditors

From California's earliest days of statehood, the state constitution has provided that "the Legislature shall protect, by law, from forced sale a certain portion of the homestead and other property of all heads of families." Article 20, Section 1.5. Consistent with this mandate, the Legislature has passed laws that protect homeowners in two ways: through an automatic homestead exemption, and by allowing homeowners in certain circumstances to declare a homestead. The homestead law is of particular interest now because the Legislature amended the homestead laws effective January 1, 2010 to increase the amounts protected under the law.

The first way in which the homestead laws protect homeowners is through an automatic exemption. Under the automatic homestead exemption, a homestead cannot be sold to satisfy a money judgment that is less than the exempt amount plus amounts necessary to satisfy all liens and encumbrances on the property. CCP §704.800. If the homeowner has enough equity to satisfy all encumbrances, he or she keeps the statutorily exempt amount while foreclosing creditors keep the remainder, up to the amount of their judgment lien. To qualify for the automatic exemption, the homeowner must have continuously resided in the house from the time that the creditor's judgment lien attached until the time that a court determines that the exemption applies. Homeowners automatically receive the benefits of this homestead exemption even if they do not record a homestead declaration.

The second way in which a homeowner may employ the protection of the homestead laws is to declare a homestead. A declared homestead does not arise automatically, but instead requires the homeowner to record a homestead declaration. The declaration must state that the homestead is the principal dwelling of the declared homestead owner. The declared homestead exemption can apply to both voluntary and involuntary sale situations.

In a declared homestead, the owner must reside in the declared homestead on the date the homestead declaration is recorded, but actual or continuous residence in a declared homestead after the declaration is not required. Recording the homestead declaration gives a homeowner priority over all subsequent judgment creditors. Because the declared homestead entitles a homeowner to an exemption even in a voluntary sale, recording a declared homestead allows a homeowner to retain a certain amount of equity if he or she chooses to sell the homestead, as long as the homestead was declared before the later judgment liens attached.

It is important to remember that recording a declared homestead does not prevent the forced sale of the house; it only ensures that, if the homeowner has equity, he or she will retain a certain amount of equity in the event of a sale. Moreover, the equity saved by the declared homestead must be reinvested within six months of the sale, or else the protections afforded by the homestead laws will be lost. During the six months, a homeowner can reinvest the protected proceeds from the sale in another house and file a new declared homestead for that new house. The homestead protection on the new house would run from the date of the original declared homestead. A creditor, however, would still be able to attach another judgment lien to the new house. A declared homestead can be deemed abandoned by operation of law when the declared homestead owner records a new homestead declaration on a different property.

Neither the automatic exemption nor the declared homestead apply to a mortgage or any other voluntary lien secured by real property. Behniwal v. Mix, 147 Cal.App.4th 621, 640 (2007); In re Morse, 11 Cal.4th 184, 217 (1995). As a result, the two exemptions would offer a homeowner protection only when another party is seeking to use the owner's equity to satisfy an otherwise unsecured obligation, such as when a debtor homeowner has filed a bankruptcy petition or a judgment creditor is seeking to foreclose.

The California Legislature recently passed Assembly Bill 1046 that, effective January 1, 2010, increases the homestead exemption for California homeowners from $50,000 to $75,000 for individuals, from $75,000 to $100,000 for married couples, and from $150,000 to $175,000 for seniors older than 65, the disabled or individuals older than 55 with limited income. In light of the continuing turbulence in California's real estate market and the likelihood of a high rate of forced sales in the foreseeable future, California's "homestead exemption" and its close cousin, the "declared homestead," may protect homeowners against the forced sale of their home in certain situations and ensure that homeowners retain a portion of their equity in the home in the event of a forced or voluntary sale. The amount a homeowner can claim as exempt is the same under either the automatic homestead exemption or the declared homestead.

Given the current cost of homes in California and the relatively low equity amounts protected under the homestead laws, it is questionable whether such laws truly protect the sanctity of the family home against a loss caused by a forced sale by creditors. See Title Trust Deed Service Co. v. Pearson, 132 Cal. App. 4th 168 (2005). Nonetheless, the homestead laws provide some protection for debtors, who are well advised to inform themselves about these protections.

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