BILL ANALYSIS Ó
AB 198
Page 1
Date of Hearing: April 2, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 198 (Wieckowski) - As Amended: March 21, 2013
SUBJECT : EXEMPT PROPERTY
KEY ISSUES :
1)SHOULD THE HOMESTEAD EXEMPTION, WHICH PROTECTS A SPECIFIED
AMOUNT OF HOME EQUITY FROM CREDITORS, BE INCREASED AND FREED
FROM THE REQUIREMENT THAT THE DEBTOR REINVEST THOSE PROCEEDS
INTO ANOTHER PROPERTY WITHIN SIX MONTHS OR LOSE THE EXEMPTION?
2)SHOULD ADDITIONAL PROPERTY EXEMPTIONS BE CREATED TO ENABLE
DEBTORS TO PROTECT MATURED LIFE INSURANCE POLICIES AND
VACATION PAY, AMONG OTHER THINGS, FROM BEING RELINQUISHED TO
CREDITORS IN ORDER TO SATISFY A DEBT?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
According to the author, further revisions to the state
exemptions statute are warranted to assist bankruptcy and
judgment debtors in California, especially in light of current
challenging economic conditions. This bill, sponsored by the
National Association of Consumer Bankruptcy Attorneys, seeks to
significantly increase the amounts of the homestead exemption
that allows a debtor to exempt a certain amount of the equity in
their home from creditors. The author asserts that the
homestead exemption amounts should be increased because they do
not yet represent a fair baseline amount that sufficiently
protects a debtor's interest in the home, especially given
current home values in California. This bill also seeks to
remove the requirement that debtors reinvest homestead exemption
money into another property within six months from the date the
home was sold, or else lose their exempt status. According to
the author, the six-month reinvestment rule should be
reconsidered because it fails to take into account that many
debtors coming out of a bankruptcy are not able to secure
financing for another home so quickly. Among many other things,
this bill also seeks to exempt benefits from matured life
insurance policies, including endowment and annuity policies,
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and vacation credits or accrued or unused vacation pay. The
bill is opposed by bankers and debt collectors, who contend that
these additional exemptions create loopholes that will allow
primarily higher income individuals to unfairly shield assets
from creditors by, for example, paying down a mortgage or
purchasing annuity policies just prior to claiming bankruptcy.
SUMMARY : Creates additional new categories of property
exemptions available to debtors, raises the amount of the
homestead exemption, and removes the homestead reinvestment
requirement. Specifically, among other things, this bill :
1)Exempts the debtor's aggregate interest in benefits from a
matured life insurance policy, including an endowment or
annuity policy, in an amount not to exceed five hundred
thousand dollars ($500,000) plus any amount that is reasonably
necessary for the support of the judgment debtor and his or
her spouse and dependents.
2)Exempts the debtor's vacation credits or accrued vacation pay.
3)Provides that a cause of action for an employment law
violation is exempt without making a claim, and that an award
of damages or settlement arising out of an employment law
violation is exempt to the extent necessary for the support of
the debtor and the debtor's spouse and dependents.
4)Allows a judgment debtor who is engaged in business to exempt
up to $5,000 in aggregate interest in cash or deposit
accounts.
5)Clarifies that for purposes of determining the exemptions
available to Title 11 bankruptcy debtors, the value of the
debtor's interest in property shall be determined as of the
date the petition commencing the case was filed. Further
provides that if the value of the debtor's interest in the
property on that date is less than or equal to the amount the
debtor is permitted to exempt, the debtor's entire interest in
the property, including any appreciation in value of that
interest following the date of the petition, is exempt.
6)Increases the amounts of the homestead exemption under Section
704.730, as specified:
a) Increases the base homestead exemption from $75,000 to
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$200,000.
b) Increases the exemption from $100,000 to $300,000 for a
married couple who resides in the homestead.
c) Increases the exemption from $175,000 to $400,000 if the
judgment debtor or spouse who resides in the homestead is
at least 55 years of age, or cannot work because of a
physical or mental disability.
7)Deletes statutory provisions requiring the debtor to reinvest
proceeds from the voluntary sale of a homestead in a new
dwelling within six months, or else lose exempt status for
those proceeds.
8)Provides that a person's declaration of bankruptcy or status
as a debtor in bankruptcy may not be treated as a default on a
car loan contract to which that person is obligated, and may
not be the grounds for accelerating the maturity of the amount
due or for repossessing the vehicle.
EXISTING LAW :
1)Permits debtors who file for bankruptcy to elect either the
regular exemptions available to all debtors ("Section 704
exemptions") or special California exemptions available only
to bankruptcy debtors ("Section 703 exemptions"). (Code of
Civil Procedure Section 703.140(a). Unless otherwise stated,
all further references are to this code.)
2)Describes eleven categories of exemptions ("Section 703
exemptions"), modeled after federal law (11 U.S.C. § 522,
subd. (d)) which the bankruptcy debtor may elect pursuant to
Section 703.140(a). (Section 703.140(b), paragraphs
(1)-(11).)
3)Pursuant to Article 3 (Exempt Property) of Chapter 4 of
Division 2 of Title 9 of Part 2 of the Code of Civil
Procedure, specifies 21 different types of property and the
conditions under and amount of which a debtor may claim an
exemption from enforcement of a money judgment. (Sections
704.010 through 704.210.)
4)Provides that if a homestead is sold to satisfy a money
judgment, the proceeds of the sale are exempt in the amount of
the homestead exemption as provided in Section 704.730.
Exemption of the proceeds is only for a period of six months
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after the time the proceeds are actually received by the
judgment debtor, except that, if a homestead exemption is
applied to other property of the judgment debtor or the
judgment debtor's spouse during that period, the proceeds
thereafter are not exempt. (Section 704.720(b).)
5)Provides that the amount of the homestead exemption is one of
the following:
a) An exemption for $75,000 as the base homestead
exemption.
b) An exemption for $100,000 for a married couple who
resides in the homestead;
c) An exemption for $175,000 if the judgment debtor or
spouse who resides in the homestead is 65 years of age or
older, disabled, or 55 years of age or older with a limited
income, as specified. (Section 704.730(a).)
6)Requires the Judicial Council, on April 1, 2013, and at each
three-year interval thereafter, to submit to the Legislature
the amount the homestead exemptions may be increased based on
changes in the California Consumer Price Index, and provides
that those increases shall not take effect unless they are
approved by the Legislature. (Section 703.150 (c) to (e).)
COMMENTS : This bill seeks a number of changes to California
laws that collectively permit debtors to exempt various types of
property, in specified amounts, from enforcement of a money
judgment. First, this bill would increase the amounts of the
homestead exemption, which protects equity value of debtors in
their principal residence, and remove the requirement that
proceeds from the forced sale of the home be reinvested in
another home within six months or lose exempt status. Among
other things, this bill also seeks to exempt benefits from
matured life insurance policies, including endowment and annuity
policies, and vacation credits or accrued or unused vacation
pay.
Stated need for the bill . According to the National Association
of Consumer Bankruptcy Attorneys (NACBA), the sponsor of the
bill:
The current economic climate in California presents
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serious challenges for honest, hardworking men and
women. Long-term unemployment and underemployment have
devastated the financial health of families throughout
the state. For these families who face collection
lawsuits, home foreclosures, and garnished wages,
bankruptcy is the final and best hope for protecting
most basic household assets and modest incomes. AB 198
is an important piece of the legislative protections
desperately needed by the victims of our struggling
economy.
Brief background on exemption statutes. Both the federal
Bankruptcy Code and California law provide numerous exemptions
that are intended to save bankruptcy debtors and their families
from extreme hardship. "The fundamental purpose behind
exemptions in bankruptcy is to ensure that the debtor is not
left destitute and dependent upon the public purse after
distribution of his assets to creditors. Along with the
discharge of debts, exemptions are the principal means by which
the bankruptcy proceeding allows the debtor to rehabilitate
himself and his family financially. Thus, exemptions provide
the debtor with a fresh start, and 'shift the burden of
providing the debtor with minimal financial support from society
to the debtor's creditors.'" (Exemptions Under the Bankruptcy
Code: Using California's New Homestead Law as a Medium for
Analysis. 72 California Law Review 922 (1984).)
The exemption provision of the U.S. Bankruptcy Code has two key
provisions. The first permits the debtor to choose between the
Code's exemptions and those provided by the debtor's state of
domicile. The second exemption provision of the Code, however,
allows the states to completely negate the Code's exemptions and
instead apply only their own exemption provisions to the
bankruptcy case. (Id. at 925.) Under this so-called "opt-out
provision," California has chosen to opt-out of the federal
exemption scheme, so California residents filing for bankruptcy
are limited to the exemptions afforded under state law. (In re
Rolland, Bkrtcy.C.D.Cal.2004, 317 B.R. 402.)
Under state law, California bankruptcy debtors must choose
between two sets of exemption options: one set of state law
nonbankruptcy exemptions (hereafter "Section 704 exemptions")
and a second set modeled after federal bankruptcy exemptions
(hereafter "Section 703 exemptions") (In re Steward, 9th Cir.
BAP (Cal.) 1998, 227 B.R. 895). A comparison between these two
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sets of exemptions reveals that the §704 exemptions are more
numerous and better protect debtors who own homes, because of
the more generous homestead exemption provided by Section
704.730 ($75,000 base level) as compared to its counterpart
under §703.140(b) ($24,060). Section 704 exemptions are not
limited to bankruptcy cases, but are generally available to
debtors in California seeking to exempt certain property from
enforcement of a money judgment.
Increasing the homestead exemption amounts available to all
debtors. The purpose of the homestead exemption is to protect
the sanctity of the family home against a loss caused by a
forced sale by creditors, and to ensure that insolvent debtors
and their families are not rendered homeless by the sale of the
home they occupy. (Title Trust Deed Service Co. v. Pearson
(2005) 132 Cal. App.4th 168.) The homestead exemption protects
a portion of any equity that the debtor has in the home from
claims by creditors. Existing law sets a $75,000 base amount,
which increases to $100,000 for married couples who reside in
the home at the time of attempted sale, and to $175,000 if the
judgment debtor or spouse who resides at the home at the time of
the sale is either 65 years of age or older, disabled, or 55
years of age or older and living on a limited income, as
specified. This bill seeks to raise those amounts to $200,000,
$300,000, and $400,000, respectively, and lower the age of a
senior citizen to 55 for the purpose of determining whether the
$400,000 amount applies. The increased exemption amounts would
be available to all debtors, not just bankruptcy debtors, by
virtue of their inclusion within the §704 slate.
In opposing the bill, the California Bankers Association and the
California Association Collectors charge that the homestead
exemption increases proposed by this bill will allow debtors to
shield hundreds of thousands of dollars in assets from recovery
by creditors, and will potentially have the effect of
benefitting "a special class of higher income individuals."
Additionally, the bankers contend such increases are unnecessary
because the Legislature already increased these amounts
significantly in January 2010, accompanied by a mechanism to
review such amounts automatically every three years to adjust
for costs of inflation.
According to the author, however, the homestead exemptions still
warrant further increase because they do not yet represent a
fair baseline amount that sufficiently protects a debtor's
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interest in the home, especially given current home values in
California. The author cites data from the California
Association of Realtors indicating that the median home price in
California in 2012 was $317,000, and is estimated to be $335,000
in 2013. The author contends that increasing the homestead
amount for a married couple to $300,000 is appropriate given
these median home price figures, and promotes the correct public
policy of encouraging Californians to become homeowners and
invest in their homes.
Furthermore, the author cites a 2003 research study indicating
that in states with high or unlimited homestead exemptions,
homeowners are 35% more likely to be self-employed as compared
to states with low exemption levels. ("Personal Bankruptcy and
the Level of Entrepreneurial Activity", Journal of Law and
Economics (2003) 46(2), 543-567.) The author contends that this
study supports the idea that raising the homestead exemption to
a level reflecting challenging current economic conditions would
help encourage entrepreneurial activity in the state because
homeowners would have less fear of losing their homes if things
do not go as well as hoped for.
Elimination of the homestead reinvestment requirement. Under
existing law, a debtor who has sufficient equity in her home to
claim the homestead exemption is able to keep that dollar amount
after the trustee sells her home. However, existing law also
requires the debtor to reinvest that money into another property
within six months from the date of sale, or else the trustee can
leave the case open and seize the equity that person had in her
home. The purpose of exempting the proceeds of the sale of the
homestead property from creditors for six months is generally to
allow the debtor to substitute one home for another without
losing the exemption. (See, e.g., Ortale v. Mulhern (1976) 58
Cal.App.3d 861.)
In opposing the bill, the bankers and collectors question
whether the bill might help wealthier individuals take advantage
of the homestead exemption as a potential loophole to shield
money from creditors. Under this scenario, the bankers argue
that the bill could encourage wealthy debtors to stealthily
shield their liquid assets by paying down their mortgage prior
to bankruptcy. Without a requirement to reinvest the money in
another home within six months, the bankers contend, wealthier
individuals who are less likely to need their homestead
exemption funds for another home would effectively be able to
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pocket a greater amount of money to avoid paying their debts.
According to the author, the six-month reinvestment rule should
be reconsidered because it fails to take into account that many
debtors coming out of a bankruptcy are not able to secure
financing for another home so quickly, particularly when the
six-month period overlaps with the period that the debtor is
going through the bankruptcy process. By removing this
requirement, the author contends, debtors who have experienced a
forced sale of their home may be better off if they could use
the proceeds from the homestead exemption for other essential
living expenses, rather than having no option other than to
reinvest those funds in another home within 6 months.
The Committee notes that by definition, the reinvestment
requirement only applies in cases where sale of the home was
unavoidable, presumably because the debtor did not have enough
equity to keep the home. If the amounts of the homestead
exemptions were increased, as proposed by this bill, and debtors
were allowed to exempt more equity in their residence, then
fewer forced sales of homesteads would likely occur, more
debtors could stay in their homes instead of looking for a new
home, and the reinvestment rule (and opportunity for mischief)
would apply in far fewer situations.
Exemption of matured life insurance policies . This bill exempts
benefits from matured life insurance policies, including
endowment and annuity policies, in an aggregate amount not to
exceed $500,000 plus any amount reasonably necessary for the
support of the debtor and his family. According to the author,
this exemption is intended to protect a debtor from being forced
to sell his life insurance policy on the market in order to
satisfy a debt in bankruptcy because without this exemption, a
bankruptcy trustee can remove the existing beneficiaries of a
life insurance policy and replace them with creditors,
potentially leaving the debtor's dependents without the life
insurance proceeds intended to provide for them. Because
insurers generally recommend a policy worth ten times the annual
income of the insured, the author believes that $500,000 is an
appropriate amount for a mature life insurance policy because
that amount will protect an average California family with a
modest annual income of $50,000.
Opponents of the bill contend, however, that this bill creates
an "enormous loophole" that allows debtors to shield, in
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addition to the court-determined amount reasonably necessary for
the support of the debtor and his family, an additional $500,000
for each matured insurance policy, endowment, or annuity. The
bankers and collectors state "Because there is no limit on the
amount of investment policies that can be shielded, debtors can
shield millions of dollars from creditors. This scheme benefits
wealthy individuals by encouraging them to funnel money to
several policies to avoid paying debts they have incurred."
The March 21 amendments to the bill appear to address this
concern. The bill exempts, at most, an aggregate amount
(emphasis added) of up to $500,000, in multiple policies, plus
any amount reasonably necessary for support of the debtor's
family. The author also notes that this exemption applies only
to matured life insurance policies-that is, a policy in which
the person has paid every premium to a date or age specified in
the policy-and that because such policies typically are set to
mature when the policy holder reaches age 100, most policies
never mature. With respect to annuity policies, which are
similar but not identical to life insurance policies, the author
may wish to consider whether additional safeguards are needed to
prevent abuse, such as restricting the time between the date of
purchase and the bankruptcy filing.
Exemption of vacation credits & vacation pay : Section 704.113
currently allows California debtors to exempt vacation credits.
This bill creates a similar exemption for vacation credits or
accrued or unused vacation pay for bankruptcy debtors within the
Section 703 slate of exemptions. According to proponents of the
bill, vacation time is not time that can be cashed in for most
employees, but existing law nevertheless allows a bankruptcy
trustee to keep the case open indefinitely and, when the debtor
is eligible to take vacation time, then demand that pay received
for that time is turned over. The author contends that
requiring a debtor to lose their accrued vacation time or
vacation credits in order to satisfy a debt is simply
unconscionable and bad public policy. The bankers and
collectors contend, however, that because professionals and
other highly paid individuals may receive large amounts of
vacation pay, this bill creates another loophole that will help
the wealthy to shield assets from collection.
Prior Legislation : AB 929 (Wieckowski), Ch. 678, Stats. 2012,
increased the dollar amount of the exemptions for a debtor's
interest in motor vehicles, jewelry, and implements,
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professional books, or tools of the trade of the debtor or the
debtor's dependent, and also increased the amount of the
homestead exemption for persons 55 years of age or older who
meet specified low-income criteria.
AB 1046 (Anderson), Ch. 499, Stats. 2009, raised the amounts of
the California homestead exemption by $25,000 in each category,
establishing their current statutory levels of $75,000,
$150,000, and $175,000.
REGISTERED SUPPORT / OPPOSITION :
Support
National Association of Consumer Bankruptcy Attorneys (NACBA)
Law Offices of Gerald L. White
Opposition
California Bankers Association
California Association of Collectors
USCB, Inc.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334