BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015 - 2016 Regular Session
SB 308 (Wieckowski)
Version: April 6, 2015
Hearing Date: April 28, 2015
Fiscal: Yes
Urgency: No
TMW
SUBJECT
Debtor exemptions
DESCRIPTION
Existing law identifies property of a debtor that is exempt from
all procedures for enforcement of a money judgment. Under
existing law, those exemptions (the "704 exemptions") are
available to a debtor in a federal bankruptcy case, whether a
money judgment is being enforced by execution sale or other
procedure, unless the debtor elects certain alternative
exemptions (the "703 exemptions").
This bill would increase the amounts of all of the 703
exemptions and increase the amounts of 704 exemptions for motor
vehicles. This bill would expand the list of 704 exemptions to
include a debtor's interest in business, alimony, support, and
separate maintenance, accrued, or unused, vacation pay, sick
leave, and family leave, and causes of action and awards or
settlements thereto arising out of or regarding the violation of
any law relating to the judgment debtor's employment. This bill
would also remove the six-month homestead reinvestment
requirements and delete the three-tiered homestead exemption
and, instead, provide for a single homestead exemption of up to
$700,000 or an unlimited exemption for specified agricultural
property.
With respect to a debtor's obligations under a motor vehicle
contract, this bill would provide that the bankruptcy status of
the debtor or other individual liable on the contract would not
constitute a default of the obligations under the contract and
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the bankruptcy status could not be used as a basis for
accelerating the maturity of any part or all of the amount due
under the contract or for repossessing the motor vehicle.
BACKGROUND
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 creditors' claims. These property exemptions are designed
to ensure that a debtor maintains the ability to support himself
or herself, as well as dependent family members, after the entry
of judgment, and also to facilitate the debtor's financial
recovery.
Under the federal Bankruptcy Code, states may either adopt the
federal exemptions listed in the Bankruptcy Code or opt out of
those exemptions and create different judgment exemptions. (See
11 U.S.C. Sec. 522(b)(1).) California has not authorized the
use of the exemptions in the federal Bankruptcy Code, so
California residents filing for bankruptcy are limited to the
exemptions allowable to California residents under nonbankruptcy
law. (See Code Civ. Proc. Sec. 703.130.)
Individuals filing bankruptcy in California can choose between
two different sets of exemptions: the 703 exemptions or the 704
exemptions. The "703 exemptions," located in Code of Civil
Procedure Section 703.140(b), consist of 11 categories that are
modeled after federal bankruptcy law. In comparison, the "704
exemptions," contained in Code of Civil Procedure Sections
704.010 through 704.210, provide 21 different types of
exemptions that protect a wider range of property. The
homestead exemption, which generally seeks to protect the
residence of a debtor from forced sale to satisfy debts, 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. Notably, 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.
AB 198 (Wieckowski, 2013) would have created additional
categories of property exemptions available to debtors, raised
the amount of the homestead exemption from between $75,000 and
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$175,000 to between $200,000 and $400,000, and removed the
requirement that judgment debtors reinvest homestead exemption
money into another property within six months from the date the
home was sold, or else lose their judgment exemption status. AB
198 was substantially similar to AB 1853 (Wieckowski, 2014), and
both of those bills were held in the Assembly Committee on
Appropriations.
This bill is substantially similar to AB 198 and AB 1853, and
would also increase the 703 and 704 exemption amounts in
accordance with cost of living increases and revise the 704
homestead exemption to remove the three-tiered provisions and
instead provide for one homestead exemption up to $700,000.
This bill would also provide debtor protection from motor
vehicle repossession or loan maturity acceleration.
CHANGES TO EXISTING LAW
1. Existing law , in the absence of default, prohibits a motor
vehicle seller or holder of a contract from accelerating the
maturity of any part or all of the amount due under the
contract or repossess the motor vehicle. (Civ. Code Sec.
2983.3(a).)
Existing law , after default by a motor vehicle buyer, allows
the seller or holder to repossess or voluntarily accept
surrender of the motor vehicle and any person liable on the
contract has a right to reinstate the contract or the seller
or holder cannot accelerate the maturity of any part or all of
the contract prior to the expiration of the right to
reinstate, except under specified conditions. (Civ. Code Sec.
2983.3(b).)
Existing law does not apply those protections for loans made
pursuant to the California Finance Lenders Law. (Civ. Code
Sec. 2983.3(f).)
This bill would provide that neither the act of filing a
bankruptcy petition by the buyer or other individual liable on
the contract nor the status of either of those persons as a
debtor in bankruptcy constitutes a default in the performance
of any of the buyer's obligations under the contract, and
neither may be used as a basis for accelerating the maturity
of any part or all of the amount due under the contract or for
repossessing the motor vehicle.
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This bill would delete a cross-reference to a repealed section
of the Finance Code.
2. Existing law provides that, except as otherwise provided by
law, all property of the judgment debtor is subject to
enforcement of a money judgment. (Code Civ. Proc. Sec.
695.010(a).)
Existing law provides that in a case under Title 11 of the
United States Code (relating to bankruptcy), all of the
exemptions, other than Code of Civil Procedure Section
703.140(b) exemptions, are applicable regardless of whether
there is a money judgment against the debtor or whether a
money judgment is being enforced by execution sale or any
other procedure. The Section 703.140(b) exemptions may be
elected in lieu of all other available exemptions, as
specified. (Code Civ. Proc. Sec. 703.140(a).)
Existing law , the 703 exemptions, provides for 11 categories
of exemptions, modeled after federal law, which the bankruptcy
debtor may elect to use in lieu of the 704 exemptions. Those
exemptions include:
the debtor's aggregate interest, not to exceed $24,060
in value, in real property or personal property that the
debtor or a dependent of the debtor uses as a residence, in
a cooperative that owns property that the debtor or a
dependent of the debtor uses as a residence, or in a burial
plot for the debtor or a dependent of the debtor;
the debtor's interest, not to exceed $4,800 in value, in
one motor vehicle;
the debtor's interest, not to exceed $650 in value in
any particular item, in household furnishings, household
goods, wearing apparel, appliances, books, animals, crops,
or musical instruments, that are held primarily for the
personal, family, or household use of the debtor or a
dependent of the debtor;
the debtor's aggregate interest, not to exceed $1,425 in
value, in jewelry held primarily for the personal, family,
or household use of the debtor or a dependent of the
debtor;
the debtor's aggregate interest, not to exceed $1,280,
as specified, in any property;
the debtor's aggregate interest, not to exceed $7,175 in
value, in any implements, professional books, or tools of
the trade of the debtor or the trade of a dependent of the
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debtor;
the debtor's aggregate interest not to exceed $12,860 in
value, in any accrued dividend or interest under, or loan
value of, any unmatured life insurance contract owned by
the debtor under which the insured is the debtor or an
individual of whom the debtor is a dependent;
the debtor's right to receive payment under a stock
bonus, pension, profit-sharing, annuity, or similar plan or
contract on account of illness, disability, death, age, or
length of service, to the extent reasonably necessary for
the support of the debtor and any dependent of the debtor,
unless the plan or contract was established by or under the
auspices of an insider that employed the debtor at the time
the debtor's rights under the plan or contract arose, the
payment is on account of age or length of service, and the
plan or contract does not otherwise qualify, as specified,
under the Internal Revenue Code; and
the debtor's rights to receive, or property that is
traceable to, a payment, not to exceed $24,060, on account
of personal bodily injury of the debtor, or an individual
of whom the debtor is a dependent. (Code Civ. Proc. Sec.
703.140(b).)
Existing law , if a bankruptcy petition is filed individually
and not jointly, for a husband or a wife, requires the husband
and wife to waive the right to claim 704 exemptions in order
to elect to instead utilize the applicable 703 exemptions.
(Code Civ. Proc. Sec. 703.140(a)(2).)
Existing law requires the Judicial Council to adjust the 703
exemptions at every three-year interval ending on April 1
thereafter, as specified, based on the change in the annual
California Consumer Price Index for All Urban Consumers, as
specified. (Code Civ. Proc. Sec. 703.150(a).)
This bill would provide that a waiver of 704 exemptions is not
required from a debtor who is separated from his or her spouse
as of the date the bankruptcy petition is commenced in order
for the debtor to elect to utilize the applicable 703
exemptions.
This bill would increase the dollar amounts of the following
703 exemptions:
the exemption for the debtor's aggregate interest in
real or personal property, not to exceed $25,575 (an
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increase from $24,060);
the exemption for the debtor's interest in a motor
vehicle or vehicles, not to exceed $5,100 (an increase from
$4,800 for a single vehicle);
the exemption for the debtor's interest in any
particular item, in household furnishings, household goods,
wearing apparel, appliances, books, animals, crops, or
musical instruments, not to exceed $650 (an increase from
$600);
the exemption for the debtor's aggregate interest in
jewelry, not to exceed $1,525 (an increase from $1,425);
the exemption for the debtor's aggregate interest in any
property, not to exceed $1,350 (an increase from $1,280);
the exemption for the debtor's aggregate interest in
implements, professional books, or tools of the trade of
the debtor or the trade of a dependent of the debtor, not
to exceed $7,175 (an increase from $7,265);
the exemption for the debtor's aggregate interest in any
unmatured life insurance contract, not to exceed $13,675 in
value (an increase from $12,860); and
the exemption for the debtor's receipt of payment on
account of personal bodily injury, not to exceed $25,575
(an increase from $24,060).
This bill would revise the exemption for stock bonus, pension,
profit-sharing, annuity, or similar plan or contract on
account of illness, disability, death, age, or length of
service, if the plan or contract does not otherwise qualify
under the Internal Revenue Code, on a basis other than a
technical defect alone.
This bill would add the following additional exemptions for
the following: (1) vacation credits or accrued, or unused,
vacation pay, sick leave, or family leave; (2) a cause of
action arising out of or regarding the violation of any law
relating to the debtor's employment; and (3) an award of
damages from or a settlement arising out of or regarding the
violation of any law relating to the debtor's employment, to
the extent necessary for the support of the debtor and the
spouse and dependents of the debtor.
This bill would make technical revisions to incorporate a
debtor's status as a spouse.
3. Existing law , the California Constitution, requires the
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Legislature to protect, by law, a certain portion of the
homestead and other property, from forced sale. (Cal. Const,
art. XX, Sec. 1.5.)
Existing law , the 704 exemptions, specify 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. (Code Civ. Proc. Secs. 704.010 through 704.210.)
Those exemptions include motor vehicles, up to $2,300,
vacation credits, and self-employed retirement plans and
individual retirement annuities, as specified.
Existing law contains both an automatic and a declared
homestead exemption that serve to protect a portion of equity
in a debtor's home from creditors. (Code Civ. Proc. Secs.
704.710 et seq., 704.910 et seq.) Existing law states that
the automatic homestead exemption applies to the principal
dwelling in which the judgment debtor, or spouse, continuously
resided from the date of attachment of the judgment creditor's
lien until a court determination that the dwelling is a
homestead. (Code Civ. Proc. Sec. 704.710.) A declared
homestead exemption applies, as specified, to a dwelling
specified in a recorded homestead declaration. (Code Civ.
Proc. Secs. 704.910, 704.920.)
Existing law sets the three-tiered amount of the homestead
exemption as follows:
$75,000, unless the judgment debtor or spouse of the
judgment debtor who resides in the homestead is a person
described below;
$100,000 if the judgment debtor or spouse of the
judgment debtor who resides in the homestead at the time of
sale is a member of the family unit, and there is at least
one member of the family unit who owns no interest in the
homestead or whose only interest in the homestead is a
community property interest with the judgment debtor; or
$175,000 if the judgment debtor or spouse of the
judgment debtor who resides in the homestead at the time of
sale is either: (1) a person 65 years of age or older; (2)
a person physically or mentally disabled and as a result of
that disability is unable to engage in substantial gainful
employment, as specified; or (3) a person 55 years of age
or older with a limited gross annual income, as specified.
(Code Civ. Proc. Sec. 704.730.)
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Existing law provides that if a declared homestead is
voluntarily sold, the proceeds of the sale are exempt in the
declared homestead exemptions for a period of six months after
the date of sale. Existing law provides that if the proceeds
of a declared homestead are invested in a new dwelling within
six months after the date of the voluntary sale or within six
months after proceeds of an execution sale or of insurance or
other indemnification for damage or destruction are received,
the new dwelling may be selected as a declared homestead by
recording a homestead declaration within the applicable six
month period. In that case, existing law provides that the
homestead has the same effect as if it had been recorded at
the time the prior homestead declaration was recorded. (Code
Civ. Proc. Sec. 704.960.)
Existing law requires, on April 1, 2007, and at each
three-year interval thereafter, the 704 exemptions for motor
vehicles and homesteads to be adjusted in accordance with the
change in the annual California Consumer Price Index for All
Urban Consumers. (Code Civ. Proc. Sec. 703.150(b).) Existing
law 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 dollar amounts of the
above homestead exemptions may be increased based on the
change in the annual California Consumer Price Index for All
Urban Consumers. Those increases shall not take effect unless
they are approved by the Legislature. (Code Civ. Proc. Sec.
703.150(c).)
This bill would increase the dollar amount of the exemption
for the debtor's motor vehicles up to $6,900 (an increase from
$6,000).
This bill would:
add an exemption for the debtor's aggregate interest in
cash or deposit accounts, accounts receivable, and
inventory of a business, not to exceed $5,000;
add exemptions for alimony, support, and separate
maintenance, to the extent reasonably necessary for the
support of the debtor and any dependent of the debtor;
expand the exemption for the debtor's vacation credits
to also include accrued, or unused, vacation pay, sick
leave, or family leave;
expand the exemption for the debtor's self-employed
retirement plans and individual retirement annuities or
accounts provided for in the Internal Revenue Code for
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accounts that do not qualify on the basis of a technical
defect alone; and
add exemptions for a cause of action arising out of or
regarding the violation of any law relating to the judgment
debtor's employment and an award of damages from or a
settlement arising out of or regarding the violation of any
law relating to the judgment debtor's employment, to the
extent necessary for the support of the judgment debtor and
the spouse and dependents of the judgment debtor.
This bill would delete the homestead exemption providing that
proceeds are exempt for a period of six months 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.
This bill would repeal the three tiers of the homestead
exemption to instead provide a homestead exemption up to
$700,000; however, if a homestead is no greater than 320 acres
and is primarily used for agricultural purposes, the homestead
exemption would be unlimited.
This bill would remove the restriction that proceeds of the
sale of a declared homestead are exempt only for a period of
six months after the sale and remove the six-month limitations
on claiming an exemption for the voluntary sale of a declared
homestead.
COMMENT
1. Stated need for the bill
The author writes:
California debtors must select between two code sections when
determining which exemptions they are permitted. Code of
Civil Procedure [Section] 703.140 et. seq. closely mirrors the
old federal bankruptcy code (11 U.S.C. [Section] 522). Code
of Civil Procedure [Section] 704.010 et. seq. represents the
state exemptions that have been codified, as California has
opted out of the federal exemption scheme. Many sections [of]
California's bankruptcy provisions have been untouched since
their enactment. SB 308 makes updates to both the 703
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exemptions and 704 exemptions in light of changing case law
and also makes changes so that the 703 exemptions more closely
mirror existing protections under the 704 exemptions.
SB 308 increases exemption amounts for many areas under both
the 703 and 704 exemptions. The bill ensures that a
bankruptcy filing alone does not trigger a default in an auto
loan. The bill also collapses the three homestead exemption
categories and provides for one homestead [exemption] that
applies to all debtors, regardless of family situation, age[,]
or other characteristics. SB 308 increases the homestead
exemption to $700,000.
2. Removing three-tiered system for the homestead exemption
The 704 homestead exemption generally seeks to protect the
residence of a debtor from forced sale to satisfy debts and
provides debtors with significantly greater protection in the
equity of their homes than the 703 exemptions. The homestead
exemption provides a three-tiered exemption system of $75,000,
$100,000 for married individuals, and $175,000 for seniors and
disabled individuals, as specified. (Code Civ. Proc. Sec.
704.730.) This bill would delete the three-tiered system and,
instead, provide a homestead exemption up to $700,000,
regardless of the debtor's or other resident's marital status,
age, or disability, and add an unlimited exemption if the
property is no greater than 320 acres and is primarily used for
agricultural purposes.
a. Background on homestead exemptions
Pursuant to Section 1.5 of article XX of the California
Constitution, the Legislature is required to protect a portion
of a homestead, and other select property, from forced sale.
Furthermore, the California Supreme Court has stated that:
The object of all homestead legislation is to provide
a place for the family and its surviving members,
where they may reside and enjoy the comforts of a
home, freed from any anxiety that it may be taken from
them against their will, either by reason of their own
necessity or improvidence, or from the importunity of
their creditors. In re Estate of Fath (1901) 132 Cal.
609, 613.
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Thus, 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. If the dwelling cannot
be sold for an amount that exceeds the exemption (plus liens
and encumbrances on the property itself), it may not be sold
to satisfy the judgment.
b. Current homestead exemption structure under the 704
exemptions
Existing law provides a three-tier system for the homestead
exemptions with a base exemption of $75,000. The base
exemption applies if neither the family unit nor the exemption
relating to seniors and the disabled applies. A $100,000
exemption applies if the judgment debtor or spouse resides in
the homestead and there is at least one other member of the
family unit also residing in the homestead. Finally, a
$175,000 exemption applies if the judgment debtor or spouse is
age 65 or older, disabled, or age 55 or older with limited
income, as specified. Those exemptions were last adjusted in
2009, when the above exemptions were raised from $50,000,
$75,000, and $150,000, respectively. (AB 1046 (Anderson,
Chapter 499, Statutes of 2009).)
Regarding the increases proposed by AB 1046, this Committee's
analysis noted that:
. . . the first two increases proposed by [AB 1046] are
less than the change in the Consumer Price Index [(CPI)]
since their last adjustment. The Bureau of Labor
Statistics' inflation calculator states that $50,000 in
1990 is today's equivalent of $81,576.13, and $75,000 is
equivalent to $122,364.19. The third proposed increase
(from $150,000 to $175,000) almost exactly reflects the
change in CPI between 2003 and 2009 (today's equivalent
is $173,836.96). Accordingly, the proposed changes
appear to be modest adjustments in response to changes in
the CPI since their last increase.
AB 929 (Wieckowski, Chapter 678, Statutes of 2012) would have
increased those same exemptions to $150,000, $250,000, and
$350,000, respectively. The Committee's analysis noted that
"[g]iven that the current homestead exemptions have been in
place since January 1, 2010, and that inflation alone would
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only justify a small increase ($100,000 in 2010 is roughly
equivalent to $103,140 in 2011), the proposed increases must
be justified by a different policy rationale than prior
proposed increases." In support of the proposed increases,
the author based the rationale for the increases on the median
home price ($286,000 in 2011) and a 2003 study indicating that
states with high or unlimited homestead exemptions had
homeowners who were 35 percent more likely to be self-employed
than in states with low exemptions, which supported the idea
that raising the homestead exemption to a level reflective of
current conditions would foster entrepreneurial activity. The
homestead exemption increases proposed in AB 929 were
subsequently stricken from the bill.
As the increase proposed by this bill is significantly higher
than the amount that is supported by inflation alone, the
author points to the following rationale for the increase:
The average cost of a home in the state of California is
$387,000. But even in the least expensive California
county (Del Norte), a married couple will have their home
forcibly sold to satisfy an unsecured debt. In other
words, almost nobody can hope to retain his home when
filing for bankruptcy in California; [y]ou would need to be
over 65 or completely disabled and living in one of the
poorest counties in the state. These counties also happen
to be some of the least populated counties so alas, even
the highest homestead exemption would shield exceedingly
few Californians from a forced sale.
The author further asserts that this bill seeks "to restore
the original purpose of having codified homestead exemptions
by protecting those who have shrewdly accrued some equity in
their homes. Even at the $700,000 exemption contained in SB
308, homes could still be forcibly sold from millions of
Californians who live in the Bay Area and Los Angeles area."
The California Association of Collectors, Inc., the California
Bankers Association, and DBA International, in opposition,
note that the homestead exemption applies to the equity in the
home, and assert that "[t]o ensure there is no
misunderstanding, this bill applies to $700,000 of equity in a
home. A millionaire with a $1.3 million mortgage on a $2
million home can shield up to $700,000 in their home." The
opposition further argues that "[i]n January 2010, California
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increased its homestead exemption from $50,000 to $75,000 for
a single person; $75,000 to $100,000 for a family unit; and
from $150,000 to $175,000 for seniors and the disabled. Those
increases were accompanied by a mechanism for review every
three years by the Judicial Council for increases to homestead
exemptions due to inflation. This bill circumvents the
existing statutory system by eliminating the tiered exemption
structure and establishing an across the board $700,000
homestead exemption. This astronomical exemption benefits the
wealthy by enabling them to shield their fortune in their
mansions."
In order to address concerns that this bill would create a way
for wealthy debtors to shield assets because of the large
homestead exemption provided in this bill, the author offers
the following amendments, which would decrease the homestead
exemption from $700,000 to $300,000.
Author's amendments :
1. On page 15, in line 8, delete "seven" and insert
"three"
2. On page 15, in line 8, delete "$700,000" and insert
"$300,000"
c. Federal Bankruptcy Code cap on homestead exemption
It is important to note that the federal Bankruptcy Code was
amended in 2005 and enacted the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005. Part of that Act was
Section 522(p), which provides a federal cap of $125,000
(subsequently adjusted to $155,675) for a homestead exemption
if the claimed property was acquired by the debtor within
three years and four months preceding the filing of the
bankruptcy petition. That cap was intended to "address the
well-documented and often-expressed concern by members of
Congress about the so-called 'mansion loophole' by which
wealthy individuals could shield millions of dollars from
creditors by filing bankruptcy after converting nonexempt
assets into expensive and exempt homesteads in one of the
handful of states that have unlimited homestead exemptions."
(In re Greene (2009) 583 F.3d 614, 619, citing In re Kane
(2006) 336 B.R. 477, 482.) Further, it was found that
deference to state law exemptions had created a system that
multiplied the opportunities for debtor forum shopping and
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prebankruptcy asset conversion. (Id.) Accordingly,
California debtors, who have purchased a home within three
years and four months of filing for bankruptcy, would have a
homestead exemption capped at $155,675, regardless of the
$700,000 exemption provided in this bill.
3. Removing the homestead exemption six-month reinvestment
requirement
Existing law provides that if a debtor's home is sold
involuntarily by the trustee or voluntarily by the debtor, the
debtor may claim an exemption for the proceeds of the sale, as
specified, provided that the proceeds are then reinvested in
another home within six months of the date of the voluntary sale
or the date proceeds are received from an involuntary sale of
the original home. The purpose of this exemption is to ensure
that debtors and their families do not become homeless (Webb v.
Trippet (1991) 235 Cal.App.3d 647, 650), and reinvestment is
required to prevent the debtor from squandering the proceeds for
nonexempt purposes (In re Golden (1986) 789 F.2d 698, 700).
The author argues that the removal of the reinvestment
requirement is necessary because not many debtors coming out of
a bankruptcy can secure financing for another home quickly. The
author suggests that many people trying to get back on track
following bankruptcy could use the homestead exemption money for
other essential living and medical expenses, and this bill would
permit people to use their percentage of equity from the sale of
their home as they see fit. The author notes that the amount of
the exemption is whatever money is left over from the forced
sale of selling a debtor's home after creditors have been paid
off. The author questions the equitability of the reinvestment
requirement when the debtor's home is sold in order to extract
the equity the debtor had saved in the home to satisfy unsecured
creditors, wait six months, then return to the debtor to take
the exemption amount from the debtor who failed to purchase
another home.
Opponents of the bill argue that "[t]he purpose of the homestead
exemption is for homeowners to protect some equity in their
homes, both before and after bankruptcy, so they can use those
funds to purchase another home. The purpose of this statute is
not to allow wealthy individuals to use their homestead
exemption as a loophole to shield money. With establishing this
excessive $700,000 exemption, wealthy debtors may stealthily
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shield their liquid assets by paying down their mortgage prior
to claiming bankruptcy. Although wealthy individuals may not
need their homestead exemption funds for another home, they
would be able to pocket those funds to avoid paying their
debts."
4. Additional 703 and 704 exemptions
In 2012, the 703 exemptions were expanded to include workers
compensation benefits, relocation benefits, motor vehicles,
jewelry, and tools of the trade. (See AB 929 (Wieckowski,
Chapter 678, Statutes of 2012).) Those additions conformed to
the 704 exemptions. This bill would expand the 703 and 704
exemptions as follows.
a. Proposed changes to the 704 exemptions
This bill would essentially make four types of changes to the
704 exemptions. First, the bill would add a new exemption for
the aggregate interest of a debtor who is engaged in business,
up to $5,000, in cash or deposit accounts, accounts
receivable, and inventory of the business. The National
Association of Consumer Bankruptcy Attorneys (NACBA), in
support, argue that this provision will allow small business
owners to retain a modest amount of assets, which are
essential to resume business operations, and is particularly
important given the fact that many underemployed workers
attempt to start home-based business in order to put food on
the family table.
Second, the bill would add a new exemption for alimony,
support, and separate maintenance, to the extent reasonably
necessary for the support of the debtor and any dependent of
the debtor, which conforms to the same 703 exemption. (See
Code Civ. Proc. Sec. 703.140(b)(10)(D).)
Third, the bill would expand the vacation credit exemption to
include accrued, or unused, vacation pay, sick leave, and
family leave. For this exemption, the author argues that "a
debtor should not have to pay a creditor for the value of her
vacation time she has accrued over years of work; the
employee's vacation credits are recorded as time, not money,
and forcing an employee to cash out the value of these to
satisfy a debt is absurd."
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Fourth, the bill would add an exemption for a cause of action
arising out of or regarding the violation of any law relating
to the debtor's employment, and an award of damages from or a
settlement arising out of or regarding the violation would be
exempt to the extent necessary for the support of the debtor
and the debtor's spouse and dependents. On this point, the
author argues that if these provisions are not specifically
exempted, bankruptcy trustees can take a debtor's lawsuit from
her, settle it for whatever amount they decide, and use that
money to pay off a debt.
Further, the author argues that a person who was sexually
harassed, racially discriminated against, retaliated against
for being a whistleblower, or has been denied her wages should
not have to give up her claim to a creditor because she is in
financial straits. The author points to a State Bar article,
which noted that "[i]t is not uncommon for potential
plaintiffs in civil actions to find themselves in desperate
financial circumstances. Indeed, in many instances their
financial plight may be the direct result of tortious or
wrongful conduct, which gives rise to their legal claims.
This is often the case with regard to plaintiffs who believe
they have been wrongfully discharged from their employment.
Oftentimes, terminated employees who believe that they may
have a claim for wrongful discharge resulting from race, age,
sex, national origin, religion, handicap, or some other
unlawful reason are unable to find new employment or
employment at a level of compensation comparable to their
prior job. As a consequence, these individuals and their
families become financially stressed and must resort to a
bankruptcy filing." (See B. Hardy, The Bankrupt's Employment
Claim - List It or Lose It, Massachusetts Bar Association
(2003) [as of Apr. 6, 2015].)
This bill would mirror the new employment cause of action
exemptions that currently exist for causes of action for
personal injury, wrongful death, and workers' compensation.
(Code Civ. Proc. Secs. 704.140, 704.150, 704.160.) Notably,
the existing cause-of-action exemption reflect a significant
change in the debtor's ability to work and pay his or her
bills, and this bill would further provide a debtor protection
relating to the debtor's potential inability to pay bills
because of an employment action against the debtor.
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a. Proposed changes to the 703 exemptions
This bill would essentially make three types of changes to the
703 exemptions. First, the bill would add an exemption for
vacation credits, as currently exists under the 704 exemption,
and expand that credit exemption to include accrued, or
unused, vacation pay, sick leave, and family leave in the same
manner as the bill expands the 704 exemption. Second, the
bill would add the same exemption discussed above for a cause
of action arising out of or regarding the violation of any law
relating to the debtor's employment, and an award of damages
from or a settlement arising out of or regarding the violation
would be exempt to the extent necessary for the support of the
debtor and the debtor's spouse and dependents.
While the proposed exemptions would, in fact, provide
struggling individuals with greater protection when selecting
the 703 exemptions, the policy question raised by this bill is
whether the proposed changes strike the appropriate balance
between the debtor and creditors. Regarding the issues raised
in bankruptcy, the Ninth Circuit Court of Appeals in Beezley
v. California Land Title Co. (1993) 994 F.2d 1433 noted:
It cannot be overemphasized that we deal here with
matters that are absolutely fundamental to the integrity
of the Bankruptcy Code: the balance struck between the
rights of creditors on the one hand, and the policy of
affording the debtor a fresh start on the other. How to
strike that balance is an inordinately difficult question
- a question of public policy - as to which reasonable
minds may and quite frequently do differ. Id. at
1439-40.
Opponents of this bill argue that it "shields investments in
vehicles, vacation credits and accrued or unused vacation pay.
Considering the amount of vacation pay professionals or
highly paid individuals may receive, this amount of pay may be
significantly large. This is another loophole that wealthy
and highly compensated people can shield from collection."
5. Cost of living increases
Existing law requires the Judicial Council to adjust, at
three-year intervals, the 703 and 704 exemptions that have
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specified dollar amounts based on the change in the annual
California Consumer Price Index for All Urban Consumers (CPI),
as specified. (Code Civ. Proc. Sec. 703.150.) This bill would
codify CPI increases reflected in the Judicial Council exemption
increases effective April 1, 2013, for all of the 703
exemptions. It is important to note that this bill increases
the 703 motor vehicle exemption from $4,800 to $6,000, although
the CPI adjustment for this exemption would only be $5,100.
This bill also increases the 704 combined property exemption,
which includes the aggregate equity in motor vehicles, from
$2,300 to $6,900. One individual argues that these increases
are appropriate because the current exemption is too low.
Further, that individual contends that because California is a
car society, having the ability to exempt your car is a
necessity. Further, NACBA argues that the "current exemption of
$2,900 is wholly inadequate today to protect a modest vehicle in
good working condition."
Support : National Association of Consumer Bankruptcy Attorneys;
one individual
Opposition : California Association of Collectors, Inc.;
California Bankers Association; DBA International; one
individual
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
AB 1853 (Wieckowski, 2014) See Background.
AB 198 (Wieckowski, 2013) See Background.
AB 929 (Wieckowski, Chapter 678, Statutes of 2012) See Comments
2b and 4.
AB 1046 (Anderson, Chapter 499, Statutes of 2009) raised the
amounts of a debtor's homestead exemption by $25,000 in each
available category, establishing the current statutory levels of
$75,000, $150,000, and $175,000.
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AB 182 (Harman, Chapter 379, Statutes of 2003), on or before
April 1, 2003, and at three-year intervals thereafter, required
the Judicial Council to adjust the amount of the exemptions
applicable to exempt property based on changes in the annual
California Consumer Price Index for All Urban Consumers, and
increased the statutory value of various forms of real and
personal property a debtor may claim for exemptions from
enforcement of a money judgment and in bankruptcy actions.
SB 832 (Kopp, Chapter 196, Statutes of 1995) raised the dollar
amounts a debtor may claim for exemptions from enforcement of a
money judgment and in bankruptcy actions.
AB 2885 (Committee on Banking and Finance, Chapter 1115,
Statutes of 1994) repealed the Personal Property Brokers Law,
the Consumer Finance Lenders Law, and the Commercial Finance
Lenders Law, consolidated those laws, and reenacted them as the
California Finance Lenders Law.
AB 707 (McAlister, Chapter 1364, Statutes of 1982) codified the
Enforcement of Judgments Law (Code Civ. Proc. Sec. 680.010 et
seq.), including the statutory dollar amount of personal
property exempted from the enforcement of monetary judgments.
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