Property exemptions are a complicated, but critically important, aspect of bankruptcy law that incorporate both federal and state law. California has two systems of exemptions that apply to bankruptcy cases, known as System 1 and System 2. System 1 allows for higher exemptions for assets like a homestead property, so it may appeal to people who have a large amount of equity in their home. This system draws directly from provisions in California’s Code of Civil Procedure pertaining to the enforcement of money judgments. If only one spouse files for bankruptcy, the question arises of how much of the exemption the debtor spouse may claim. California statutes and federal case law offer an idea of how one spouse may claim the full homestead exemption.
California is a community property state, meaning that most property acquired by a married couple during their marriage belongs to the marital estate, with each spouse owning an undivided half. Some spouses prefer to hold title to their homestead property as tenants in common, in which each spouse may own different percentages. State law defines “homestead” as the principal residence of a judgment debtor, or the debtor’s spouse, on the date that a judgment creditor’s lien attached to the property, provided that the debtor or the debtor’s spouse continually lived there from that date until the date a court rules that the property is a homestead. The homestead exemption may also apply to proceeds from the sale of a qualifying residence, or insurance proceeds from the destruction of such property, if the debtor uses those proceeds to purchase a new primary residence within six months.
The amount of the California homestead exemption available to each spouse depends on whether they hold title to the property as tenants in common as community property. For families with only one homestead, the exemption amount is currently $100,000. If only one spouse files for bankruptcy, that spouse may claim half of the exemption amount if the homestead is community property, or may claim the entire exemption if the spouses own it as tenants in common.
Case law has established that if only one spouse files for bankruptcy, and the couple holds title to the property as tenants in common, the debtor spouse may claim the entire available homestead exemption. In re McFall, 112 B.R. 336 (B.A.P. 9th Cir. 1990). The couple owned a house as tenants in common, with each spouse owning one-half. The husband filed individually for Chapter 7 bankruptcy. The couple sold the house with the court’s permission, leaving each spouse with net proceeds of $66,891. The debtor spouse claimed $45,000 under the homestead exemption, which was the statutory amount at the time, and applied the other $21,891 to the bankruptcy estate. The trustee objected, arguing that the debtor was only entitled to 1/2 of the $45,000 exemption, but the court disagreed and ruled for the debtor.
A bankruptcy filing may bring some relief to an individual whose debt is too great to pay from available income. A debtor may be able to restructure bill payments to something more manageable, pay debts by liquidating assets, and possibly discharge certain debts entirely. Bankruptcy attorney Devin Sawdayi has over sixteen years of experience helping clients in the Los Angeles area through the bankruptcy process. To schedule a free and confidential consultation to see how we can assist you, contact us today online or at (310) 475-9399.
More Blog Posts:
Exemption of Property in California Bankruptcies, System 2, Los Angeles Bankruptcy Lawyer Blawg, September 20, 2013
Exemption of Property in California Bankruptcies, System 1, Los Angeles Bankruptcy Lawyer Blawg, September 18, 2013
Mortgage Debt is Dischargeable in a Chapter 7 Bankruptcy Case, According to Los Angeles Federal District Court, Los Angeles Bankruptcy Lawyer Blawg, August 28, 2013