Is the Homestead Exemption in California Chapter 7 Bankruptcies Still What We Think It Is?

Posted by on Jul 25, 2013 in Bankruptcy Exemptions | 1 comment

Recently I attended a great Central District Consumer Bankruptcy Attorney Association event regarding the Homestead Exemption and Chapter 7 Bankruptcies.

So first of all, there’s a difference in California as it relates to Automatic Homesteads (CCP 704.710) and Declared Homesteads (CCP 704.910).  Courts under California’s jurisdiction have held that the homestead was created to allow debtors to live in a principal residence and/or substitute one family residence for another.  The homestead was not created to shelter equity from creditors.  Thus there is a requirement under current law that the Debtor reinvest the proceeds in a new homestead within six months of receipt under the current case law applicable to California.

So what in the world does this all mean for someone who owns a home and is currently contemplating filing a chapter 7 bankruptcy in California?  The answer:  beware of the chapter 7 trustee and what he or she may do with respect to the residential real estate.

Furthermore, the concept of the Homestead Exemption used to be something a Debtor could rely upon.  Now, there are cases holding that a chapter 7 trustee can surcharge the Homestead Exemption!  That means in certain cases, a debtor could find the Homestead surcharged by the trustee for bad faith conduct or depletion of non-exempt assets or Property of the Estate.  At issue in these surcharge cases is whether a bankruptcy court even has the inherent authority to do so under Section 105(a) of the Bankruptcy Code.

As one can see, the Homestead Exemption as it relates to California and the 9th Circuit as it applies to bankruptcy law is an evolving matter.   A debtor will need to rely upon a well informed attorney to assist with these potential complex and tricky matters.





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