The homestead exemption protects a specific dollar amount of a homeowner’s home equity from his or her creditors. In California, the California homestead exemption amount of protection is substantially increasing as of January 1, 2021. This increase in protection makes it much more likely that homeowners in financial difficulty can keep their homes.
HOW DOES THE HOMESTEAD EXEMPTION WORK?
If you owe a debt the creditor can usually sue you, get a judgment against you, and then act to collect the judgment. Ways of collecting on a judgment include garnishing your paycheck and bank accounts. Creditors can also attempt to seize or force the sale of your other assets to pay the judgment. This could include the forced seizure or sale of your vehicle or even your home.
However, every state has laws protecting a certain amount of your assets. These protective laws are called exemptions. The homestead exemption protects debtors’ homes and the equity in their homes.
The homestead exemption comes into play in two situations. First, as just mentioned, it protects your home equity from a particular creditor which gets a judgment against you and then tries to have your home sold to pay its judgment. Second, the homestead exemption similarly protects part or all your home equity from your creditors overall when you file personal or business bankruptcy.
In both situations each dollar of legally available homestead exemption protects a dollar of home value or equity. And if the legally available homestead exemption amount is larger than the amount of equity you have in your home, your home is completely protected from your general creditors. (Creditors which are legally secured by your home such as your mortgage holder and other lienholders, have special rights against the home, which is a separate discussion.)
Here is an example of how the homestead exemption works. If your home is worth $500,000 and has a $450,000 mortgage, you have equity of $50,000. Assume for a moment that your homestead exemption is $75,000. Since the homestead exemption amount of $75,000 is larger than your $50,000 in home equity, all the equity is protected. A judgment creditor could not force the sale of your home to pay its judgment. And if you filed a bankruptcy case your home equity would be protected from your general creditors.
Protection From Creditors
A homestead exemption also provides some protection from creditors under certain circumstances. If your spouse passes away and the resulting financial situation brings creditors to your door, or if you file for bankruptcy, an exemption allows you to claim a certain amount of equity in your home as exempt from debt collectors.
When to File a Homestead Declaration
Homestead exemption in California is automatic, so you don’t necessarily have to file a homestead declaration with your County Clerk. However, if you do file it, your homestead isn’t lost after your home sells — whether that’s involuntarily or voluntarily. Moreover, if you file a declaration, your proceeds from selling your home are protected for six months after the sale. For these reasons, it’s wise to file a homestead declaration if you have equity in your home and serious financial problems.