BILL ANALYSIS Ó
SB 308
Page 1
Date of Hearing: August 26, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
SB 308
(Wieckowski) - As Amended August 17, 2015
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill increases various existing exemptions, and establishes
new exemptions, from creditor claims, for the assets of
bankruptcy debtors (Code of Civil Procedure "Section 703
exemptions") and all debtors (Code of Civil Procedure "Section
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704 exemptions). Specifically, this bill:
1)Increases the amounts of home equity exempt under Code of
Civil Procedure Section 704.730 as follows:
a) Increases the base homestead exemption (for a single,
non-disabled person under the age of 55) from $75,000 to
$100,000.
b) Increases the exemption from $100,000 to $150,000 for a
married couple who resides in the homestead.
c) Increases the exemption from $175,000 to $300,000 for a
judgment debtor who is 65 or older, 55 or older with
limited income, or who cannot work because of a physical or
mental disability.
2)Provides that the existing requirement for a 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, does not apply in the event of a bankruptcy
filing.
3)Increases the amount of eight specific Section 703 exemptions,
mostly by around six percent.
4)Modifies the following Section 704 exemptions:
a) Adds an exemption of 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.
b) Adds an exemption for alimony, support and separate
maintenance, to the extent reasonably necessary for the
support of the debtor and any dependent.
c) Increases the exemption for equity or sale proceeds from
a motor vehicle from $2,300 to $6,000.
5)With respect to both the Section 703 and Section 704
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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 that a cause of action for an employment law
violation is exempt without making a claim, and that an
award of damages or settlement arising out of an employment
law violation is exempt to the extent necessary for the
support of the debtor and the debtor's spouse and
dependents
6)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, unless the debtor and spouse share an ownership
interest in property eligible for a homestead exemption at the
time the bankruptcy petition is filed.
FISCAL EFFECT:
Any impacts on state and local revenues should be minor. In
general, government has a priority claim on debts and such
claims are paid prior to monies being set aside for exemptions.
While the increase in the homestead exemption provided in this
bill may lead to a greater use of this option, the number of
annual bankruptcy cases where homestead exemptions are applied
is very small, and the number of those cases with exemptions
exceeding the homestead limits and also involving government
claims is even smaller. For example, in 2013, only 36 bankruptcy
cases statewide included a homestead exemption exceeding $50,000
and only 7 of these cases also included government claims, with
the majority such government claims being from the federal
Internal Revenue Service.
COMMENTS:
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1)Background. Both the federal Bankruptcy Code and California
law provide numerous exemptions that are intended to save
bankruptcy debtors and their families from extreme hardship.
Under state law, California bankruptcy debtors must choose
between two sets of exemption options: one set of state law
non-bankruptcy exemptions ("Section 704 exemptions") and a
second set modeled after federal bankruptcy exemptions
("Section 703 exemptions"). 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. 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.
2)Purpose. According to the author, "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,' 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."
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. This bill is supported by the AARP,
and National Association of Consumer Bankruptcy Attorneys
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(NACBA) and numerous law firms and individuals.
3)Increasing the Homestead Exemption. The purpose of the
homestead exemption is to protect the sanctity of the family
home against a loss caused by a forced sale by creditors, and
to ensure that insolvent debtors and their families are not
rendered homeless by the sale of the home they occupy. (Title
Trust Deed Service Co. v. Pearson (2005) 132 Cal. App.4th
168.) The exemption amounts were most recently increased by
$25,000 by AB 1046 (Anderson)/Chapter 499 of 2009. That
legislation also required the Judicial Council to report every
three years on the amounts that the homestead exemptions could
be increased to adjust for inflation based on changes in the
California Consumer Price Index. Any such adjustment is
subject to legislative approval, however.
According to the author, the homestead exemptions warrant
further increases as proposed in SB 308 because the exemption
amounts do not yet represent a fair baseline amount that
sufficiently protects a debtor's interest in the home,
especially given home values in California. (The author cites
data from the California Association of Realtors indicating
that the median home price in California in 2012 was
$317,000.) The author contends that increasing the homestead
exemption promotes the correct public policy of encouraging
Californians to become homeowners and invest in their homes.
4)Homestead Reinvestment Requirement. 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 also requires the debtor to reinvest
that money into another property within six months of the date
of sale. This is intended to allow the debtor to substitute
one home for another, without losing the exemption. According
to the author, this rule should be reconsidered, as 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
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process. This bill removes the reinvestment requirement for
bankruptcy debtors. According to representatives of NACBA,
this change restores what was common practice prior to the
2012 Federal 9th Circuit Court decision (In re Jacobson, 676
F.3d 1193).
5)Exemption of Vacation Credits and Vacation Pay. According to
proponents of the bill, vacation time is not time that can be
cashed in for most employees, but existing law nevertheless
allows a bankruptcy trustee to keep the case open indefinitely
and, when the debtor is eligible to take vacation time, then
demand that pay received for that time is turned over. The
author contends that requiring a debtor to lose their accrued
vacation time or vacation credits in order to satisfy a debt
is simply unconscionable and bad public policy.
6)Opposition. The California Bankers Association and the
California Association of Collectors note that debtors' assets
above exemption amounts are used to reimburse a variety of
creditors and obligors, which can include tax payments,
employee wages, businesses, and child and spousal support
payments. They argue that allowing debtors to shield larger
amounts of assets, for example with regard to home equity and
removing the six-month reinvestment requirement in bankruptcy
cases, could allow some debtors to shield hundreds of
thousands of dollars in assets from recovery by creditors, and
will potentially have the effect of benefitting "a special
class of higher income individuals." These opponents make a
similar argument with respect to the bill's other provisions.
The California Association of County Treasurers and Tax
Collectors, noting public agencies' frequent interest as a
creditor in bankruptcy proceedings, particularly related to
delinquent property tax payments, argues that this expansion
of exemptions will diminish counties' ability to recover those
taxes, resulting in a revenue loss to education and other
local government services.
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7)Prior Legislation. AB 1853 (Wieckowski) of 2014, which 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, was held on this committee's Suspense
file.
AB 198 (Wieckowski) of 2013, a similar bill to AB 1853, was
also held on this committee's Suspense file.
AB 929 Wieckowski/Chapter 678, Statutes of 2012, increased the
dollar amount of the exemptions for a debtor's interest in
motor vehicles, jewelry, and implements, professional books,
or tools of the trade of the debtor or the debtor's dependent,
and also increased the amount of the homestead exemption for
persons 55 years of age or older who meet specified low-income
criteria.
Analysis Prepared by:Chuck Nicol / APPR. / (916)
319-2081