BILL ANALYSIS Ó
SB 308
Page 1
SENATE THIRD READING
SB
308 (Wieckowski)
As Amended August 17, 2015
Majority vote
SENATE VOTE: 23-13
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Judiciary |6-3 |Mark Stone, Chau, |Wagner, Gallagher, |
| | |Chiu, Cristina |Maienschein |
| | |Garcia, Holden, | |
| | |O'Donnell | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Appropriations |12-5 |Gomez, Bloom, Bonta, |Bigelow, Chang, |
| | |Calderon, Gordon, |Gallagher, Jones, |
| | |Eggman, Eduardo |Wagner |
| | |Garcia, Holden, | |
| | |Quirk, Rendon, Weber, | |
| | |Wood | |
| | | | |
| | | | |
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SB 308
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SUMMARY: Increases the amounts 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 from $75,000 to
$175,000 for a single, non-disabled person under the age of
55.
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 ("Code of Civil
Procedure Section 703 exemptions"):
a) The exemption for the debtor's aggregate interest in
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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
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
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("Code of Civil Procedure 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 Code of Civil Procedure 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.
7)Provides that a waiver of Code of Civil Procedure 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 Code of Civil Procedure Section 703 exemptions.
FISCAL EFFECT: According to the Assembly Appropriations
Committee, any impacts on state and local revenues should be
minor. In general, government has a priority claim on debts and
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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 seven of these cases also included
government claims, with the majority of such government claims
being from the Internal Revenue Service.
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. First, this bill would
increase the categorical amounts of the homestead exemption,
which protect the equity value of debtors in their principal
residence. In addition, this 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 expand exemptions
for benefits from matured life insurance policies, including
endowment and annuity policies, and vacation credits or accrued
or unused vacation pay.
The bill is supported by numerous consumer bankruptcy attorneys
and Attorney General Kamala Harris, among others, who contend
that "current bankruptcy law does not leave debtors with
sufficient assets to achieve a 'fresh start.' This bill allows
debtors to retain a little more of their assets . . . [and] as
a result, they will have a more realistic opportunity to become
self-sufficient again, rather than assuming more debt, filing
again for bankruptcy, or becoming dependent on public
assistance." 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
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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. 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 costs of life without
borrowing themselves back into debt.
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
(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. This bill seeks to increase the base
homestead exemption for a single, non-disabled person under the
age of 55 from $75,000 to $175,000; increase the exemption from
$100,000 to $250,000 for a married couple who resides in the
homestead; and increase 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.
This 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
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bill is also opposed by numerous individual bankruptcy trustees
and attorneys. A representative opposition letter 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."
Proponents 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 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. Finally, 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.
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
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
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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 states "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
six months, then come back and take that money as well."
In opposing this 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 this 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, they 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.
Exemption of vacation credits and 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,
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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
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.
This bill would mirror the cause of action exemptions that
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currently exist for causes of action for personal injury,
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 routine bills and costs of living.
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, however, 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 exempted funds came from the
business or somewhere else.
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Spousal Waiver. This bill seeks to clarify that a spouse who is
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.
Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN:
0001544
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