California, unlike Texas and Florida, is not generous when it comes to debtor protections.
But the “homestead exemption” and the “homestead declaration” are two important protections every homeowner should know about.
These exemptions protect a portion of a homeowner’s equity against unsecured creditors who obtain judgment liens against the home.
These exemptions apply regardless of whether the principal residence is owned outright or in a living trust.
Let’s examine how these protections work and how much equity can be protected.
The homestead exemption applies automatically to a person’s or a family’s principal residence in California.
You can only have one principal residence. The homestead exemption protects a certain amount of equity against judicial foreclosures by judgment creditors.
Equity is the amount by which the value of your principal residence exceeds the combined value of all secured loans (typically mortgages and equity lines of credit). The homestead exemption does not apply to voluntary sales.
To apply, the declaration of homestead requires the homeowner to file a sworn and notarized declaration of homestead form with the county where the principal residence is situated.
Once filed, the declared homestead protects the same amount of equity as the homestead exemption, but this time with respect to voluntary sale of the principal residence.
The date when the declaration of homestead is filed is very important. The declaration does not pertain to judgment liens filed with the county prior to the declaration. So filing one’s declaration early when no judgment liens are imminent is prudent.
Moreover, if the homeowner buys a new home within six months, the homeowner can record a new declaration of homestead. Any equity from the sale of the first home that is used to buy the second home is also protected.
Now, how much equity is protected varies greatly depending on the homeowner(s)’s circumstances. A single homeowner generally is entitled to only $50,000, unless he or she qualifies for the $150,000 exemption.
A family unit generally is entitled to $75,000. A family unit includes a married couple, a single parent, or a dependent person and his caregiver.
The $150,000 (highest) exemption applies to homeowners who are 65 years of age and older, disabled persons, and persons between 55 and 65 years of age if their annual income does not exceed $15,000 (or $20,000 if married), but only in respect of nonvoluntary sales.
Let’s see how the homestead exemption works by example.
Consider John and Mary Smith, a hypothetical married couple who own a home.
The home is worth $300,000, and has a mortgage with an unpaid balance of $200,000; the Smiths have $100,000 of equity.
The Smiths owe $80,000 to a judgment creditor who has filed a judgment lien against their home. They qualify for the $75,000 homestead exemption amount, as they are not 65 or older and are not disabled. Thus, $25,000 of their $100,000 equity is exposed to judgment creditors.
The judgment creditor would be entitled to proceed with an auction sale. If the residence sold for $300,000, the $200,000 secured mortgage would be paid first, and the Smith’s would receive their $75,000 exemption amount. Lastly, the judgment creditor would receive the excess (up to his $80,000 lien).
Lastly, while the homestead exemption usually protects a conventional single-family home, it can also protect a temporary or mobile home such as a trailer, a mobile home or a boat.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at dennis @dennisfordhamlaw.com or by phone at 707-263-3235. Visit his website at http://www.dennisfordhamlaw.com.