BILL ANALYSIS Ó
AB 198
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Date of Hearing: April 17, 2013
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 198 (Wieckowski) - As Amended: March 21, 2013
Policy Committee: JudiciaryVote:7-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
The bill establishes additional exemptions for debtors, raises
the amount of the homestead exemption, and deletes the homestead
reinvestment requirement. Specifically, this bill:
1)Increases the amounts of the homestead exemption as follows:
a) From $75,000 to $200,000 for the base homestead
exemption.
b) From $100,000 to $300,000 for a married couple who
resides in the homestead.
c) 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.
2)Deletes provisions requiring the debtor to reinvest proceeds,
from the voluntary sale of a homestead, into a new dwelling
within six months, or lose the exemption for those proceeds.
3)Exempts the debtor's aggregate interest in benefits from a
matured life insurance policy, in an amount up to $500,000,
plus any amount reasonably necessary for the support of the
judgment debtor and his or her spouse and dependents.
4)Adds the following additional exemptions for debtors:
a) Vacation credits or accrued vacation pay.
b) A cause of action regarding the violation of any law
relating to the judgment debtor's employment.
c) An award of damages or settlement arising out of an
employment law violation, to the extent an exemption is
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necessary for the support of the debtor and the debtor's
spouse and dependents.
d) Up to $5,000 in aggregate interest in cash or deposit
accounts for a judgment debtor engaged in business.
5)Provides that a declaration of bankruptcy or status as a
debtor in bankruptcy shall not be treated as a default on a
car loan.
FISCAL EFFECT
Due to the expansion of exemptions available to debtors, the FTB
estimates that the state, as a creditor in some bankruptcy
cases, would incur the following revenue losses: $70,000 in
2012-13, $300,000 in 2013-14, and $500,000 annually thereafter.
COMMENTS
1)Background . 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. 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).)
2)Increasing the Homestead Exemption . The purpose of the
homestead exemption is to protect the sanctity of the family
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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 exemption amounts were most recently increased by
$25,000 by AB 1046 (Anderson)/Chapter 499 of 2009. According
to the author, however, the homestead exemptions warrant the
significant increases proposed in AB 198 because the exemption
amounts do not yet represent a fair baseline amount that
sufficiently protects a debtor's interest in the home,
especially given 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.)
In opposition, the California Bankers Association and the
California Association of Collectors assert these increases
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."
3)Eliminating the Homestead Reinvestment Requirement . 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.) According to the author, the six-month
reinvestment rule should be repealed 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 six months.
In opposition, 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.
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4)Exemption of Matured Life Insurance Policies . According to the
author, this exemption is intended to protect a debtor from
being forced to sell his life insurance policy on the market
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.
5)Exemption of Vacation Credits and Vacation Pay . 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.
Opponents argue the vacation exemption creates large potential
loopholes, particularly for wealthy individuals and
highly-paid professionals.
6)Prior Legislation . AB 929 Wieckowski/Chapter 678 of 2012,
increased the dollar amount of the exemptions for a debtor's
interest in motor vehicles, jewelry, and implements,
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 929 also included
significant increases in the homestead exemption similar in
magnitude to those contained in AB 198, but those increases
were amended out of the bill prior to final passage.
Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081