California’s governor, Gavin Newsome, signed a new bill (AB1885) into law that significantly increased protection for consumer’s residences when a consumer files bankruptcy. The new law takes effect on January 1, 2021. Under the new law, many people who could not file Chapter 7 bankruptcy without risking loss of their home can now safely file. The old law provided that an unmarried consumer without children could protect only $75,000 in home equity. That meant that the bankruptcy trustee could sell a debtor’s home to pay creditors if the unmarried debtor had more than $75,000 in equity in his home. The previous law, provided that the amount that could be protected increased incrementally from $75,000 up to a maximum of $175,000 for a disabled debtor or a debtor over age 65.

The new law eliminates these incremental levels of protection and provides a minimum of $300,000 in protection for every consumer in California. This higher level of protection reflects a more realistic value of residential property in California. Equity for purposes of the new statute is calculated by subtracting the balance of all loans secured by the property from the fair market value of the property. For example:

  • $415,000 fair market value of residence

  • -115,000 first mortgage

  • -25,0000 second mortgage

  • $275,000 net equity in need of protection

The home equity of the consumer filing bankruptcy in the above example is fully protected using the $300,000 provided for everyone by the new law.

In California counties where property values are higher, consumers may have even more protection. The new law provides up to a maximum of $600,00 in equity protection if the average home value in the county where the consumer lives is higher. The maximum equity protection available is calculated by averaging all home sales in a given county during the year before the consumer files bankruptcy. If the average home sale in the year prior to filing is $480,000 in the county where the consumer lives, the consumer is entitled to a maximum of $480,000 in net equity protection. The law provides a $600,000 equity protection cap even if the average home sale exceeds $600,000. The amount of protection available will be adjusted every year on January 1 to reflect inflation.

For the last several years, consumer groups have been lobbying, without success, for an increase in the amount of equity protection for homeowners. Considering the high prices for California homes, the old protection levels were terribly antiquated. For $75,000, the old exemption for an unmarried person in California, you couldn’t buy real property big enough to build a storage shed, much less a single family residence. This new law, allows many more consumers to retain their homes in the event they need to discharge their unsecured debt in bankruptcy.

Ms. Medrano is an experienced bankruptcy attorney practicing In Southern California. She is a graduate of Cornell University and Cal Western School of Law.

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