Home equity is one of the primary ways that people develop wealth. In California, though, creditors are free to place a judgment lien against your home to claim some debts. The lien is paid when you sell your home. The creditor, though, is only entitled to the equity portion of the sale. To further limit the creditor’s claim, you can place a homestead declaration on your property. This allows you to retain a portion of the equity in your home should you opt to sell it. Whether to claim a homestead declaration depends largely on your situation.
In California, you can obtain protection for some of the equity you have in your home by declaring it a homestead. Your declaration must include certain statements, including one that says the home is the principal dwelling of the declared homeowner. You also must provide the address and the legal description of your property. You must file your homestead declaration with the appropriate county recorder’s office. It must be signed and notarized, too.
By claiming a homestead declaration, you protect yourself against judgment debtors, who can obtain a lien against your home. Without a homestead declaration, the creditor is entitled to any equity up to the amount of the lien. This decreases the amount that you receive for the sale of your home. With a homestead declaration, a portion of the equity is exempt from collection via the lien.
To claim a homestead declaration, however, you must meet certain requirements. You must live in the house on a regular basis. A second home, such as a vacation home, does not qualify.
Homestead declarations only provide protection against creditors who file a lien while you are living in the house. You cannot claim the protection if you were not living in the house when the judgment lien was filed. As well, you cannot move out of the house before the court declares it your homestead.
California Code of Civil Procedure spells out the amount of protection, in dollars, a homestead declaration provides. A single individual with no dependents can claim an exemption of $50,000. If that individual is sued for $250,000 by a debtor who receives a judgment lien against your home, the first $50,000 in equity on the home is safe from collection by the debtor. If you have only $50,000 in equity, the debtor claims nothing.
The protection for a person who lives with at least one other family member who does not have any ownership interest in the house increases to $75,000. Meanwhile, a person 65 or older or a person who is physically or mentally disabled can declare $150,000. A person 55 or older with a gross annual income no greater than $15,000 also can claim a $150,000 exemption.
If you have not filed a homestead declaration with your county recorder’s office, you can still make the claim. To do so, you must appear in court to claim a homestead declaration after a debtor obtains a judgment lien against your home. As well, the state law on homestead declaration provides an automatic homestead protection when the sale of your home is required. This differs from the voluntary homestead declaration, which involves your voluntary interest in selling your home.
Filing a homestead declaration hinges on several factors. Foremost, you must decide whether you are likely to face a judgment lien. If you have little debt, you are probably safe. If not, however, you might want to consider a homestead declaration.
Another factor involves equity and how you might use that equity. If you have no equity in your home, a homestead declaration provides little protection. After all, there is nothing for a creditor to obtain. If you do have equity, though, a homestead declaration provides you with an opportunity to retain a portion of that equity, which you can use to purchase another home. According to California law, you have six months to reinvest the money into another homestead.
Of course, you also might have no intention of moving out of your home. If this is the case, you might not benefit from a homestead declaration, but it can be a good idea to file the declaration. After all, there are unforeseen circumstances that could require you to sell your home. Be aware that the creditor can apply a judgment lien against your new home, too, if debt still exists. Only by paying off the creditor do you enjoy permanent relief.