BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 308| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 308 Author: Wieckowski (D) Amended: 5/5/15 Vote: 21 SENATE JUDICIARY COMMITTEE: 5-1, 4/28/15 AYES: Jackson, Hertzberg, Leno, Monning, Wieckowski NOES: Anderson NO VOTE RECORDED: Moorlach SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8 SUBJECT: Debtor exemptions SOURCE: Author DIGEST: This bill increases the amounts of all of the specific asset exemptions available to bankruptcy debtors (the "703 exemptions") and increases certain amounts and expands the list of exempt specified property regarding monetary judgments (the "704 exemptions"). This bill also removes the six-month homestead reinvestment requirements and deletes the three-tiered homestead exemption and, instead, provides for a single homestead exemption of up to $300,000. ANALYSIS: Existing law: 1) Prohibits, in the absence of default, a motor vehicle SB 308 Page 2 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. 2) Allows, after default by a motor vehicle buyer, 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. 3) Does not apply those protections for loans made pursuant to the California Finance Lenders Law. 4) Provides that, except as otherwise provided by law, all property of the judgment debtor is subject to enforcement of a money judgment. 5) 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. 6) Provides for 11 categories of exemptions (the 703 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; SB 308 Page 3 the debtor's interest, not to exceed $4,800 in value, in one motor vehicle; the debtor's interest, not to exceed $600 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 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 SB 308 Page 4 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. 1) Requires, if a bankruptcy petition is filed individually and not jointly, for a husband or a wife, the husband and wife to waive the right to claim 704 exemptions in order to elect to instead utilize the applicable 703 exemptions. 2) 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. 3) Requires, under the California Constitution, the Legislature to protect, by law, a certain portion of the homestead and other property, from forced sale. 4) Specifies 21 different types of property and the conditions under an amount of which a debtor may claim an exemption from enforcement of a money judgment. Those exemptions (the 704 exemptions) include motor vehicles, up to $2,300, vacation credits, and self-employed retirement plans and individual retirement annuities, as specified. 5) Contains both an automatic and a declared homestead exemption that serve to protect a portion of equity in a debtor's home from creditors. 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. A declared homestead exemption applies, as specified, to a dwelling specified in a recorded homestead declaration. 6) Sets the three-tiered amount of the homestead exemption as SB 308 Page 5 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: (a) a person 65 years of age or older; (b) a person physically or mentally disabled and as a result of that disability is unable to engage in substantial gainful employment, as specified; or (c) a person 55 years of age or older with a limited gross annual income. 1) 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. 2) 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. Existing law requires the Judicial Council, on SB 308 Page 6 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. This bill: 1)Provides 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. 2)Provides 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. 3)Increases 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 increase from $24,060); the exemption for the debtor's interest in a motor vehicle or vehicles, not to exceed $6,000 (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); SB 308 Page 7 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 $7,625 (an increase from $7,175); the exemption for the debtor's aggregate interest in any unmatured life insurance contract, up to $13,675 in value (increased 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). 1)Revises 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. 2)Adds the following additional exemptions for the following: (a) vacation credits or accrued, or unused, vacation pay, sick leave, or family leave; (b) a cause of action arising out of or regarding the violation of any law relating to the debtor's employment; and (c) 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. 3)Increases the dollar amount of the exemption for the debtor's motor vehicles up to $6,000 (an increase from $2,300) and: adds 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; adds exemptions for alimony, support, and separate SB 308 Page 8 maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; expands the exemption for the debtor's vacation credits to also include accrued, or unused, vacation pay, sick leave, or family leave; expands the exemption for the debtor's self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code for accounts that do not qualify on the basis of a technical defect alone; and adds 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. 1)Deletes 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. 2)Repeals the three tiers of the homestead exemption to instead provide a homestead exemption up to $300,000. 3)Removes 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. Comments In a bankruptcy action, exemptions generally allow a person to SB 308 Page 9 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. This bill increases the 703 and 704 exemption amounts in accordance with cost of living increases and revises the 704 homestead exemption to remove the three-tiered provisions, and, instead, provides for one homestead exemption up to $300,000. This bill also provides debtor protection from motor vehicle repossession or loan maturity acceleration. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No SB 308 Page 10 SUPPORT: (Verified5/18/15) National Association of Consumer Bankruptcy Attorneys One individual OPPOSITION: (Verified5/18/15) California Association of Collectors, Inc. California Bankers Association DBA International One individual ARGUMENTS IN SUPPORT: The author writes: "Many sections [of] California's bankruptcy provisions have been untouched since their enactment. SB 308 makes updates to both the 703 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 $[3]00,000." The National Association of Consumer Bankruptcy Attorneys (NACBA), in support, argue that this bill 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. One individual argues that the cost of living increases in this bill are appropriate because the current exemptions are too low. Further, that individual contends that because California is a car society, having the ability to exempt your SB 308 Page 11 car is a necessity. NACBA also argues that the "current exemption of $2,900 is wholly inadequate today to protect a modest vehicle in good working condition." ARGUMENTS IN OPPOSITION: Opponents of this 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. . . . 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." Opponents also argue that this bill "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." Prepared by:Tara Welch / JUD. / (916) 651-4113 5/18/15 16:24:15 **** END ****