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
$125,000 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 $125,000
(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
non voluntary 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
Smith’s have $100,000 of equity. The Smith’s owe $80,000 to a judgment creditor
who has filed a judgment lien against their home.   The
Smiths 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.

 

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