BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair AB 929 (Wieckowski) Hearing Date: 08/25/2011 Amended: 03/31/2011 Consultant: Jolie Onodera Policy Vote: Judiciary 3-2 _________________________________________________________________ ____ BILL SUMMARY: AB 929 would revise and expand the set of specific asset exemptions available to bankruptcy debtors (the "703 exemptions") to generally conform to the exemptions under existing law available to all debtors in California seeking to exempt specified property from enforcement of a monetary judgment (the "704 exemptions"). The bill would also significantly increase the homestead exemption that is available to all judgment debtors. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Delayed FTB tax collection* $1,100 $1,500 $1,400General Debt collection costs Unknown; dependent on the length of General time required to receive full payment Update homestead Minor, absorbable costs to Judicial Council General** exemption rates to update and post rates on their website *Delayed tax collections of $200 in 2010-11 (for revenue accrued back one year) **Trial Court Trust Fund _________________________________________________________________ ____ STAFF COMMENTS: SUSPENSE FILE. In a bankruptcy action, exemptions generally allow a person to protect certain types of assets during the bankruptcy process. If an asset is exempt, the asset can generally not be taken to pay creditor's claims. Individuals filing bankruptcy in California can choose between two different sets of exemptions: the 703 exemptions or the 704 exemptions. AB 929 (Wieckowski) Page 1 The "703 exemptions," located in Code of Civil Procedure Section 703.140(b), consist of eleven categories that are modeled after federal bankruptcy law. Those exemptions include a "wildcard" exemption of up to $23,250 that may be applied to any property. That application is important for those individuals who have little or no equity in a home. In comparison, the "704 exemptions," contained in Code of Civil Procedure Section 704, provide 21 different types of exemptions that protect a wider range of property but do not include a "wildcard" exemption to cover unlisted property. The homestead exemption is also significantly greater, providing a base exemption of $75,000, $100,000 for married individuals, and $175,000 for seniors and disabled individuals, as specified. It should also be noted that the 703 exemptions are specific exemptions that a bankruptcy debtor may elect in lieu of all other exemptions, while the 704 exemptions are available to all debtors in California seeking to exempt specified property from enforcement of a money judgment. This bill would revise and recast the 703 exemptions so that the exemption language generally mirrors the corresponding 704 exemptions for various assets and would increase the dollar amount of the exemption for a debtor's interest in motor vehicles, household furnishings, jewelry, and tools/professional equipment. Existing law provides that a person or family unit may protect a specified portion of the value of their principal dwelling (homestead) from being sold pursuant to a court order to satisfy a debt to creditors. This bill would significantly increase the existing homestead exemptions as follows: From $75,000 to $150,000 for the base exemption; From $100,000 to $250,000 for married individuals; and From $175,000 to $350,000 for individuals aged 65 or older, disabled, or age 55 or older with limited income. The limits were last adjusted in 2009, when the above exemptions were raised from $50,000, $75,000, and $150,000, respectively. Under current law, the Judicial Council, on April 1, 2013, and at each three-year interval thereafter, is required to submit to the Legislature the amount by which the dollar amounts of the above homestead exemptions may be increased based on the change in the annual California Consumer Price Index (CPI) for All Urban Consumers and post the updated rates on their website. The AB 929 (Wieckowski) Page 2 Judicial Council has indicated there would be minor and absorbable costs to adjust the homestead exemption limits as required by this bill and post them on the website. Fiscal revenues collected by the Franchise Tax Board (FTB) for personal income tax Chapter 7 and Chapter 13 filings totaled $11.6 million in 2009-10, and have increased to $18.7 million in 2010-11 (year to date). Due to the increase in the exemption limits for motor vehicles, household furnishings, jewelry, and tools/equipment, the FTB estimates the provisions of this bill would reduce the amount of tax collections from bankruptcy cases by approximately five percent annually. The impact of the increased homestead exemption limits is estimated to be similar in magnitude. This impact represents a delay, rather than a loss, in tax collections, as FTB would have a lien in place to collect the tax debts in full upon the eventual sale of the home and/or assets. Further, FTB could collect unpaid debt by garnishing wages and/or levying bank accounts. FTB estimates a decrease in revenue due to delayed collections of $200,000 in 2010-11 (as revenue is accrued back one year), $1.1 million in 2011-12, $1.5 million in 2012-13, and $1.4 million in 2013-14. Dependent on the length of time it takes to receive full payment on the income tax debt, additional costs of an unknown amount would also be incurred for collection costs associated with retaining the account in inventory, maintaining current information, finding assets, and contacting the taxpayer. Prior Legislation. AB 1046 (Anderson) 2009 was related to this measure and increased the homestead exemptions to their current levels and requires the Judicial Council, on April 1, 2013, and at each three-year interval thereafter, to submit to the Legislature the amount by which the homestead exemptions may be increased based on the change in the annual CPI for All Urban Consumers.