Can You Keep Your Home in California With a Bankruptcy?

In California, you may have to sell your home in bankruptcy.

A California home is always safe in a Chapter 13 bankruptcy, but the same home may be at risk of loss in a Chapter 7 bankruptcy. Generally, you can keep a home in Chapter 7 if the value of the home is less than the California state homestead exemption.

Types

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not involve a liquidation process. Liquidation occurs when the bankruptcy trustee assigned to a Chapter 7 case sells off all of your non-exempt property and uses the money raised to pay off your outstanding financial obligations. Chapter 13, however, only involves preparing a debt repayment plan, which does not include selling property. Therefore, a home is always safe in Chapter 13.

Geography

In a Chapter 7 bankruptcy, California state law determines whether your property is exempt or non-exempt. California law actually allows you to choose one of two different exemption systems. Each exemption system includes a homestead exemption. The homestead exemption protects your home that you occupy as a primary residence. California is the only state to provide two different exemption structures. The debtor can elect one structure or the other, but the debtor cannot mix and match exemptions between the two. Each debtor can select the exemption system that works most in her favor. This is a highly detailed analysis, but the exemption system that provides a higher homestead exemption also provides lower exemptions for other properties.

Features

Under the first California exemption system, the homestead exemption is equal to $20,725 regardless of marital status. Under the second exemption system, however, the California homestead exemption varies depending on marital status. A married couple can claim up to $75,000, while a single person can claim only $50,000.

Function

The homestead exemption protects your home up to the value equal to the exemption amount. Home value is based on the fair market value of the home, which means the amount the home would sell for in a regular arms-length transaction. If the value of your home is less than the homestead exemption, you are entitled to keep your home in a Chapter 7. However, if your home's value is greater than the homestead exemption, the trustee will sell your home and give you cash equal to the amount of the homestead exemption.

Considerations

Most people who file bankruptcy have a mortgage loan on their homes. A mortgage slightly complicates how you determine the value of your home. When you have a mortgage, you have to calculate your equity in the home and compare the equity to the homestead exemption. If your home equity is greater than the homestead exemption, the trustee will sell your home, pay off your mortgage and give you cash equal to the homestead exemption. However, if your home equity is lower than the homestead exemption amount, you will be able to keep your home -- subject to the existing mortgage -- as long as you remain current on your mortgage payments.

References

• "The New Bankruptcy: Will It Work For You?"; Stephen Elias; 2009
• U.S. Courts: Bankruptcy Basics