BILL ANALYSIS Ó
SB 308
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Date of Hearing: June 30, 2015
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
SB
308 (Wieckowski) - As Amended May 5, 2015
As Proposed to Be Amended
SENATE VOTE: 23-13
SUBJECT: DEBTOR EXEMPTIONS
KEY ISSUES:
1)SHOULD THE HOMESTEAD EXEMPTION, WHICH PROTECTS A SPECIFIED
AMOUNT OF HOME EQUITY FROM CREDITORS, BE INCREASED AND SHOULD
THE REQUIREMENT FOR THE DEBTOR TO REINVEST THOSE PROCEEDS INTO
ANOTHER PROPERTY WITHIN SIX MONTHS (AT RISK OF LOSING THE
EXEMPTION) BE ELIMINATED, IN LIGHT OF THE LEGAL AND PRACTICAL
IMPEDIMENTS TO DEBTORS IN OBTAINING CREDIT AND PURCHASING
OTHER PROPERTY?
2)SHOULD ADDITIONAL PROPERTY EXEMPTIONS BE CREATED THAT WOULD
ENABLE DEBTORS TO PROTECT MATURED LIFE INSURANCE POLICIES AND
VACATION PAY, AMONG OTHER THINGS, FROM BEING RELINQUISHED TO
CREDITORS IN ORDER TO SATISFY DEBTS?
SYNOPSIS
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According to the author, further revisions to the state's
bankruptcy exemption laws are necessary in order to assist
debtors in California, especially in light of still challenging
economic conditions. This bill is sponsored by the National
Association of Consumer Bankruptcy Attorneys and supported by
Public Law Center, Public Counsel, and over 60 consumer
bankruptcy law firms (representing debtors). Among its key
provisions, this bill seeks to increase the amounts of the
homestead exemptions that allow debtors to exempt a certain
amount of the equity in their homes from creditors. The author
asserts that the homestead exemption amounts should be increased
because they do not represent a fair baseline amount to
sufficiently protect a debtor's interest in the home, especially
given relatively high home values in California. Proposed
amendments to the bill would retain the three-tiered exemption
structure that is in existing law, and make more modest
increases to each of the three tiers. Specifically, the base
$75,000 exemption for unmarried persons would increase to
$175,000; the $100,000 exemption for married couples who reside
in the home would increase to $250,000; and the $175,000
exemption for debtors who are seniors or disabled, as specified,
would increase to $300,000. Bankers, debt collectors and
bankruptcy trustees all strongly opposed the previous version of
the bill that sought a blanket $300,000 homestead exemption for
all debtors. With respect to that version of the bill,
opponents alleged that the bill allowed debtors to unfairly
shield hundreds of thousands of dollars in assets from recovery
by creditors, thereby primarily benefitting wealthy debtors.
While the proposed amendments are intended to address the
opponents' concerns, it is not known at this time whether
opponents have revised their position on this aspect of the
bill.
This bill also seeks to remove the requirement that a debtor
reinvests homestead exemption funds into another property within
six months of the date when the homestead property is sold, or
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else lose those funds. According to the author, the six-month
reinvestment rule should be eliminated because it fails to take
into account the reality that debtors coming out of a bankruptcy
are not able to secure financing for another home so quickly.
The author notes that even if a consumer wanted to take the
homestead exemption proceeds and immediately reinvest them into
a new home, under federal lending rules, he or she wouldn't be
able to secure an FHA loan for at least two years from the date
of the discharge of the debt and would be required to establish
good credit. Nevertheless, opponents characterize this
provision of the bill as something primarily benefitting wealthy
investors by enabling them to shield hundreds of thousands of
dollars from creditors with no requirement to reinvest the funds
in property.
Among many other things, this bill also seeks to exempt benefits
paid to debtors from their matured life insurance policies and
vacation credits, or accrued or unused vacation pay, from
collection. The bill also makes modest increases to a number of
property exemption amounts, based on inflationary adjustments,
including exemptions for vehicles, jewelry and tools of the
trade. Opponents of the bill 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 just prior to claiming
bankruptcy.
SUMMARY: Increases the amount of the homestead exemption,
removes the homestead reinvestment requirement, and revises and
increases various amounts in various categories of property
exemptions that are available to debtors. Specifically, this
bill:
1)Increases the amounts of the homestead exemption under Code of
Civil Procedure Section 704.730, as specified:
a) Increases the base homestead exemption (for a single,
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non-disabled person under the age of 55) from $75,000 to
$175,000.
b) Increases the exemption from $100,000 to $250,000 for a
married couple who resides in the homestead.
c) Increases the exemption from $175,000 to $300,000 for a
judgment debtor or spouse who resides in the homestead and
is at least 55 years of age, or cannot work because of a
physical or mental disability.
2)Deletes statutory provisions requiring the debtor to reinvest
proceeds from the sale of a homestead into a new dwelling
within six months, or else lose exempt status for those
proceeds.
3)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.
4)Increases the amount of the following California-only property
exemptions available to bankruptcy debtors ("Section 703
exemptions"):
a) The exemption for the debtor's aggregate interest in
real or personal property, not to exceed $25,575 (an
increase from $24,060).
b) 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).
c) 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).
d) The exemption for the debtor's aggregate interest in
jewelry, not to exceed $1,525 (an increase from $1,425).
e) The exemption for the debtor's aggregate interest in any
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property, not to exceed $1,350 (an increase from $1,280).
f) 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).
g) 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).
h) 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).
5)Revises the property exemptions available to all debtors
("Section 704 exemptions") to include:
a) An exemption for the debtor's vacation credits or
accrued, or unused, vacation pay, sick leave, or family
leave.
b) An exemption up to $5,000 in aggregate interest in cash
or deposit accounts, accounts receivable, and business
inventory for a debtor who is engaged in a business.
c) An exemption for alimony, support and separate
maintenance, to the extent reasonably necessary for the
support of the debtor and any dependent.
d) An increased exemption for equity or sale proceeds from
a motor vehicle (an increase from $2,300 to $6,000).
6)With respect to both the Section 703 and Section 704 set of
exemptions:
a) Creates a new exemption for the debtor's vacation
credits or accrued, or unused, vacation pay, sick leave, or
family leave.
b) Provides 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.
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7)Provides that a waiver of Section 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 Section 703
exemptions.
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)Requires, on April 1, 2004, and at each three-year interval
thereafter, the Section 703 property exemptions to be adjusted
in accordance with the change in the annual California
Consumer Price Index for All Urban Consumers. Further
requires, on April 1, 2007, and at each three-year interval
thereafter, the Section 704 exemptions to be adjusted in
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accordance with the change in the annual California Consumer
Price Index for All Urban Consumers. (Section 703.150, subd.
(a) and (b).)
5)Requires the Judicial Council, on April 1, 2013, and at each
three-year interval thereafter, to submit to the Legislature
the amount the homestead exemption 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 (d).)
6)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).)
7)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
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).)
FISCAL EFFECT: As currently in print this bill is keyed fiscal.
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COMMENTS: This bill seeks to make 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. As proposed to be amended,
this bill would increase the categorical amounts of the
homestead exemption, which protect the equity value of debtors
in their principal residence. In addition, the bill would
remove the requirement that proceeds from the forced sale of the
home be reinvested in another home within six months
("reinvestment requirement"). 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, from collection to
satisfy a debt.
Stated Need for the Bill: According to the author:
SB 308 makes much needed changes to the area of
bankruptcy law. As California's economy continues to
recover from the biggest downturn since the Great
Depression, it continues to present 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. SB 308 is an important
piece of the legislative protections desperately needed
by those families struggling to recover from the
downturn and restructuring of our economy.
The purpose of bankruptcy is to allow a "fresh start"
to honest, hard-working but unfortunate debtors while
allowing creditors to be repaid for some of their
losses. Despite the stated purpose of a "fresh start,"
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current bankruptcy law falls short of effectively
leaving a debtor with enough assets to get back on his
feet, and successfully move forward again. This is due
to the fact that many exemptions in the law have been
allowed to languish behind the times. The exemptions do
not reflect our economic reality and so debtors
continue to struggle post-bankruptcy in spite of their
supposed "fresh start." SB 308 moves California closer
to fully restoring the original purpose of bankruptcy
and will allow for the proper "fresh start" that was
always intended in the law.
In support of the contention that current bankruptcy laws do not
leave debtors with enough assets to achieve a fresh start, the
author cites the findings of a 2006 study in the Cornell Law
Review which analyzed original, longitudinal data of Chapter 7
debtors to evaluate the effect of having gone through bankruptcy
upon postbankruptcy financial experiences. The report found
that one year after bankruptcy, one in four debtors was
struggling to pay routine bills, and one in three debtors
reported an overall financial situation similar to, or worse
than, what they faced when they filed for bankruptcy. According
to the report, the data "demonstrated that steady and sufficient
income is the key to improved post-bankruptcy financial health,"
further stating:
The postbankruptcy expenses that families struggled to
pay were mundane. More than one-third of the families
reported that it was difficult to pay their monthly
utility bills, such as heat, electricity, water, phone,
or garbage. Approximately one in three families
struggled with car payments or car repairs. [ . . . ]
Even more alarming, about one-fourth of families found
it hard to make their mortgage or rent payments after
bankruptcy.
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These data illustrate another important point: These
families are not struggling because they are misusing
credit. Rather, the debts that worry these families,
such as utilities, transportation, housing, and taxes,
are mostly for necessities and are frequently not even
"credit" purchases; utilities, housing and
transportation are normally prepaid or carry a deposit
to protect the merchant. Credit cards were a problem
for fewer than one in six families. One year
postbankruptcy, families are not borrowing themselves
back into debt. Their difficulties arise from trying
to meet typical middle-class expenses: keeping a roof
over their family's heads, fixing their car's radiator,
or repaying the family doctor. (Porter and Thorne,
Cornell Law Review (Vol. 92, 2006) The Failure of
Bankruptcy's Fresh Start, p.85-86.)
Accordingly, the author contends, this bill seeks to modestly
increase various debtor exemptions to ensure that typical
middle-class families have sufficient assets after bankruptcy to
pay routine bills and essentials of life without borrowing
themselves back into debt.
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
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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. (72 California Law Review, at p. 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
sets of exemptions reveals that the Section 704 exemptions are
more numerous and better protect debtors who own homes because
of the more generous homestead exemption provided by Section
704.730. It provides a $75,000 base level, whereas its
counterpart under Section 703.140(b) provides only $24,060.
Section 704 exemptions are not limited to bankruptcy cases, but
are generally available to debtors in California who seek 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
homes they occupy. (Title Trust Deed Service Co. v. Pearson
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(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 up to $175,000 if
the judgment debtor or spouse residing in 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. As currently in print, this bill would delete the
three-tiered homestead exemption and provide a uniform homestead
exemption of up to $300,000, applicable to all debtors
regardless of age and marital status.
The bill, and the proposed change to the homestead exemption in
particular, are strongly opposed by the California Bankers
Association and the California Association of Collectors, who
charge that the homestead exemption increases proposed by this
bill would allow debtors to shield hundreds of thousands of
dollars in assets from recovery by creditors, potentially
benefitting "a special class of higher income individuals." The
Committee has also received opposition letters from the offices
of nearly twenty different bankruptcy trustees and attorneys
objecting to the proposed $300,000 homestead exemption. A
representative letter from these opponents, in this case from
Malcolm Cisneros, A Law Corporation, reads: "SB 308 would shield
an absurdly high amount of equity in residences from being
available to pay creditors. It would only benefit wealthy
individuals who want to shield their assets from the claims of
creditors. The average consumer does not have $300,000 in
equity in a residence."
Opponents also contend that this bill would cause California to
have one of the most generous homestead exemptions in the
nation. They state: "If SB 308 is enacted, California will
truly be on the fringes with an individual homestead exemption
that will be higher than the individual homestead exemptions in
38 states, and only four states (Minnesota, Massachusetts,
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Nevada, and Rhode Island) will have a higher homestead
exemption. The remaining states have homestead exemptions based
on the dimensions of the exempted property." The author notes
that in those states where the homestead exemption is only
limited by the size of the property (including Florida, Iowa,
Kansas, Oklahoma, Texas, South Dakota, and Louisiana), the
median home values are much lower than in California (ranging in
estimate from $120,000 to $175,000). California's home values
are much more in line with the values in states such as
Massachusetts and Rhode Island that have levels even higher than
those proposed by the bill as it is now in print.
The author and supporters contend that the homestead exemption
amounts in California warrant an increase because they do not
yet represent a fair baseline amount to sufficiently protect a
debtor's equity interest in the home, especially given current
home values in this state. The author cites data indicating
that the median home price in California is now estimated to be
$441,000 (See: http://www.zillow.com/ ca/home-values/ ), and that
even at that lowest point of the housing market in California
after the recession, the median price of a home bottomed out at
$310,000.
The author contends that significantly increasing the homestead
exemption is appropriate given these figures, and promotes the
correct public policy of encouraging Californians to become
homeowners and invest in their homes. 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.
(Journal of Law and Economics, "Personal Bankruptcy and the
Level of Entrepreneurial Activity" (2003) 46(2), pp. 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
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as hoped for in their business enterprises.
Proposed amendment to retain the three-tiered homestead
exemption structure with more modest increases to each tier.
Nevertheless, to address concerns raised by the opposition that
the uniform $300,000 homestead exemption in the current version
of the bill is too high, the author proposes to amend the bill
to retain the three-tiered exemption structure in existing law,
with more modest increases to each tier, proposed as follows:
(1) The base $75,000 exemption for unmarried persons would
increase to $175,000.
(2) The $100,000 exemption for married couples who reside in
the home at the time of attempted sale would increase to
$250,000.
(3) The $175,000 exemption for the 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, would increase to $300,000.
The Committee notes that by restoring a tiered exemption
structure, the proposed author's amendments represent a more
narrowly tailored approach to the homestead exemption. The
tiered system recognizes and takes into account that seniors and
disabled persons, who would enjoy the highest available
exemption amount, have less future earning potential after
emerging from bankruptcy, compared to younger and non-disabled
individuals who likely have many more years of earning potential
in front of them. In addition, the proposed amendments reflect
a balanced compromise by the author that would extend a $300,000
exemption to seniors and disabled persons, but only a $175,000
and $250,000 exemption to the other tiers. This represents a
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significant decrease from the amount of $700,000 originally
sought in the introduced version of the bill, as well as from
$300,000 in the last amended version of the bill. The Committee
notes the proposed levels would place California in the middle
of the pack with respect to other states in terms of homestead
exemption amounts. The proposed amendments are:
On page 15, strike lines 5 to 20 inclusive, and replace with:
704.730. (a) The amount of the homestead exemption is one
of the following:
(1) One hundred seventy-five thousand dollars ($175,000)
unless the judgment debtor or spouse of the judgment debtor
who resides in the homestead is a person described in
paragraph (2) or (3).
(2) Two hundred fifty thousand dollars ($250,000) if the
judgment debtor or spouse of the judgment debtor who
resides in the homestead is at the time of the attempted
sale of the homestead a member of a 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.
(3) Three hundred thousand dollars ($300,000) if the
judgment debtor or spouse of the judgment debtor who
resides in the homestead is at the time of the attempted
sale of the homestead any one of the following:
(A) A person 65 years of age or older.
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(B) A person physically or mentally disabled who as a
result of that disability is unable to engage in
substantial gainful employment. There is a rebuttable
presumption affecting the burden of proof that a person
receiving disability insurance benefit payments under
Title II or supplemental security income payments under
Title XVI of the federal Social Security Act satisfies
the requirements of this paragraph as to his or her
inability to engage in substantial gainful employment.
(C) A person 55 years of age or older with a gross annual
income of not more than twenty-five thousand dollars
($25,000) or, if the judgment debtor is married, a gross
annual income, including the gross annual income of the
judgment debtor's spouse, of not more than thirty-five
thousand dollars ($35,000) and the sale is an involuntary
sale.
(b) Notwithstanding any other provision of this section,
the combined homestead exemptions of spouses on the same
judgment shall not exceed the amount specified in paragraph
(2) or (3), whichever is applicable, of subdivision (a),
regardless of whether the spouses are jointly obligated on
the judgment and regardless of whether the homestead
consists of community or separate property or both.
Notwithstanding any other provision of this article, if
both spouses are entitled to a homestead exemption, the
exemption of proceeds of the homestead shall be apportioned
between the spouses on the basis of their proportionate
interests in the homestead.
Elimination of the homestead reinvestment requirement. Under
existing law, a debtor with sufficient equity in the home who
claims the homestead exemption is able to keep that dollar
amount after the trustee sells the home. However, existing law
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also requires the debtor to reinvest that money into another
property within six months of the date of sale. If not
reinvested, the trustee can leave the case open and seize the
equity that person had in the 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 Ortale v. Mulhern (1976) 58
Cal.App.3d 861.) According to the author, the six-month
reinvestment rule should be reconsidered because it fails to
take into account that most debtors coming out of a bankruptcy
cannot secure financing for another home so quickly,
particularly when the six-month period overlaps with the period
when 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 by
being able to either save the money to invest in property after
their credit is repaired, or to use the proceeds for other
essential living expenses. The author writes:
The reinvestment requirement does not comport with the
realities of today's lending world. Even if a consumer
wanted to take her homestead exemption proceeds and
immediately reinvest in a new home, she wouldn't be
able to secure an FHA loan for at least two years from
the date of the discharge along with a re-establishing
of good credit. Fannie Mae and Freddie Mac require a
four year waiting period from the dismissal date unless
the debtor can prove extenuating circumstances. (See:
(https://www.fanniemae.com/content/guide/selling
/b3/5.3/07.html and
http://www.freddiemac.com/learn/pdfs/
uw/caution_remind.pdf.)
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In addition to the impossibility of securing lending
before six months expires, people emerging from a
bankruptcy are trying to get back on track and really
need the flexibility to use some of that homestead
exemption money for rent, groceries, their children's
schooling, and other essential living and medical
expenses. SB 308 would permit people to use their
percentage of equity from the forced sale of their home
for housing and other necessities. It is important to
remember that this is whatever money is left over from
the forced selling of a person's home after creditors
have been paid off: It is incomprehensible to force
the sale of one's home in order to extract the equity
the debtor had saved for years in the home all to
satisfy creditors who never collateralized against that
house when issuing the credit, wait 6 months, then come
back and take that money as well.
In opposing the bill, the bankers and debt 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
pocket a greater amount of money to avoid paying their debts.
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 or other assets 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
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residences, fewer forced sales of homesteads would likely occur,
meaning that more debtors could stay in their homes, instead of
looking for new homes, and the reinvestment rule (and
opportunity for mischief) would apply in far fewer situations.
Furthermore, the purpose of the homestead exemption would be
furthered if the exemption were not premised on the highly
unlikely scenario that a debtor is able to reinvest proceeds (by
qualifying for a mortgage) within six months of being subject to
a forced sale.
Exemption of vacation credits & vacation pay. Section 704.113
currently exempts vacation credits without a claim, but this
provision only applies to vacation credits accumulated by a
state or public employee pursuant to applicable law. This bill
seeks to expand this exemption to include accrued, or unused,
vacation pay, sick leave, and family leave, and seeks to make
the exemption available to bankruptcy debtors under the Section
703 slate of exemptions. According to the proponents of this
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 accrued vacation time or vacation
credits in order to satisfy a debt is absurd (because most
vacation time cannot be converted to cash) and bad public
policy. The bankers and collectors contend, however, that
because professionals and other highly paid individuals may
accrue large amounts of vacation pay that is payable upon
retirement or separation, this bill creates another loophole
that will potentially help the wealthy to shield assets from
collection.
Exemption for employment law claims. This bill seeks to
establish a new exemption for any cause of action arising out
of, or regarding, the violation of any law relating to the
debtor's employment, specifying that the exemption would
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automatically apply without the debtor having to make a claim.
In addition, the bill provides that an award of damages from 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. The author contends that
without these specific exemptions, a bankruptcy trustee could
take a debtor's lawsuit from her, settle it for whatever amount
they decide, and use that money to pay off the debt.
Moreover, the author asserts that a person who, for example,
experienced harassment, discrimination, or retaliation for being
a whistleblower, or who was denied her wages should not have to
give up her claim to a creditor simply because she is in
financial straits. According to a Massachusetts Bar Association
journal article cited by the author:
[It] 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." (B. Hardy, The Bankrupt's Employment
Claim - List It or Lose It (2003) Massachusetts Bar
Association.)
This bill would mirror the cause of action exemptions that
currently exist for causes of action for personal injury,
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wrongful death, and workers' compensation under Sections
704.140, 704.150, and 704.160, respectively, of the Code of
Civil Procedure. These existing exemptions protect
causes-of-action from being taken from the debtor and settled at
less than their true worth simply to generate revenue to pay off
debt. Like those other exemptions for causes of action, this
bill would specifically protect an employment law cause of
action, leaving the debtor the right to pursue his or her own
claim (for example, for employment discrimination or labor
violations) and use any award of damages or settlement monies to
pay everyday bills and other life essentials.
Opponents contend that this exemption "allows debtors to keep an
unlimited amount of money from a lawsuit relating to a debtor's
employment, regardless of the frivolous nature of the suit," but
do not elaborate further. It is not clear to the Committee how
a frivolous employment law claim by a debtor could result in a
large sum of money, or any sum at all, that the debtor would
then seek to exempt from his or her creditors under this bill.
Exemption of $5,000 for small business debtors. This bill
creates a new exemption intended to allow small business owners
to claim an exemption of up to a total of $5,000 for cash or
deposit accounts, accounts receivable, and business inventory if
they elect to use the Section 704 exemptions. Proponents state
that while wage-earners can exempt paid and unpaid earnings
under the Section 704 exemptions, there is no corresponding
protection available for small business debtors under existing
law. They contend that adding this new protection for small
business owners will allow them to retain the modest amount of
assets necessary to resume business operations. Opponents
contend, however, that this new exemption creates a set of new
unresolved issues over whether the case and bank account funds
came from the business, or somewhere else.
Spousal Waiver. This bill seeks to clarify that a spouse who is
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separated (but not yet divorced) at the time of filing a
bankruptcy is not prohibited from using the 703 exemptions
solely because he or she was unable to secure approval from the
other spouse. According to the author, current law may cause
significant hardship for women who find themselves unable to get
sign-off from their spouses. The author notes this could be for
any one of several reasons; for example, the woman may not know
where her estranged husband is living; the husband may refuse to
permit her to file for bankruptcy out of spite, even though they
are separated; or she may not be able to approach him without
risking her own safety. Consequently, even if not homeowners,
these women are forced to use the 704 homeowners' exemption
slate, often to their own detriment. To make matters worse, the
author contends, it is not uncommon for the woman to be in
financial difficulty because of problems caused by her husband
during the marriage, or caused by her having to flee an
unhealthy or abusive marriage.
Accordingly, the bill provides that a waiver of Section 704
exemptions is not required from a debtor who is separated from
his or her spouse as of the date when the bankruptcy petition is
commenced, allowing the debtor to elect to utilize the
applicable Section 703 exemptions.
Prior Related Legislation. AB 1853 (Wieckowski) of 2014 would
have removed the homestead reinvestment requirement and created
additional property exemptions, including exemptions to protect
vacation pay and matured life insurance policies, among other
things. AB 1853 died in Assembly Appropriations.
AB 198 (Wieckowski) of 2013 would have increased the amounts of
the homestead exemption, removed the homestead reinvestment
requirement, and created additional property exemptions for
debtors, as specified. This bill also died in Assembly
Appropriations.
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AB 929 (Wieckowski), Chap. 678, Stats. 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. The bill
also increased the amount of the homestead exemptions for
persons 55 years of age or older who meet specified income
criteria, and requires the Judicial Council every three years
(beginning in 2013) to submit to the Legislature the amount by
which the amounts of the homestead exemptions may be adjusted
based on the change in the annual California Consumer Price
Index for All Urban Consumers, as specified.
AB 1046 (Anderson), Chap. 499, Stats. 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.
REGISTERED SUPPORT / OPPOSITION:
Support
National Association of Consumer Bankruptcy Attorneys (NACBA)
(sponsor)
Acuna, Regli & Klein, LLP
Arizmendi Law Firm
Alvarado Law Group
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Boring Law Offices
Borowitz & Clark, LLP
Blonsley Law
Bruce R. Babcock
Christiansen Law Offices
Christine C. Quinquileria
Conference of California Bar Associations (CCBA)
DeosLaw, P.C.
EBankruptcy Assistants, Inc.
Frank L. Kuccers, Esq.
Gold and Hammes
Hale Andrew Antico
James A. Michel
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Javed Ellahie Jeral Smith
JC Law Group PC
John A. Vos
Jon Cooper, Esq.
Law Office of Gerald White
Law Offices of Jeffery S. Styers
Law Office of Pere M. Lively
Law Offices of Mark J. Markus
Law Office of Michael J. Primus
Law Office of Michael T. O'Halloran
Law Office of Virginia Lopez
Law Offices of John C. Colwell
Law Office of Asaph Abrams
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Lawrence L. Szabo
Law Offices of W. Kirk Moore
Law Offices of Jon G. Brooks
Law Offices of Deborah L. Raymond
Law Offices of Gerald L. Bohart, A.P.C.
Law Offices of Jenny L. Doling
Lenderman & Salorio
Mlnarik Law Group, Inc.
Michael G. David
Public Counsel
Public Law Center
Patricia Blackmon
Rounds and Sutter, LLP
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Ramos Law Firm
Ross S. Heckmann
Shulman Law Office
Southern California Law Advocates
Tamela Kinstle
Wendy W. Smith
Opposition
Berkshire Hathaway
California Association of County Treasurers and Tax Collectors
(CACTTC)
California Bankers Association
California Association of Collectors
Office of C.R. Barclay, Trustee
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David M. Goodrich, Trustee
DBA International
Elissa D. Miller, Trustee
Gary E. Slater, Slater and Truxa, LLP
Gerald H. Davis, U.S. Bankruptcy Trustee
Howard M. Ehrenber, Trustee
John P. Pringle, Roquemore, Pringle & Moore, Inc.
Karthyn M. Otto, Esq.
Law Office of Carolyn A. Dye
Law Office of Marlene G. Weinstein
Law Office of Thomas H. Casey
Linda S. Green, Bankruptcy Trustee
Lynda T. Bui, Chapter 7 Trustee
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Malcom Cisneros, Law Corporation
Marc Del Piero, Esq.
Richard A. Marchack, Marchack Hays LLP
Ronald E. Stadtmueller, Chapter 7 Trustee
Shulman, Hodges & Bastain LLP
Analysis Prepared by:Anthony Lew / JUD. / (916)
319-2334