BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 929 (Wieckowski)
As Amended March 31, 2011
Hearing Date: June 14, 2011
Fiscal: Yes
Urgency: No
BCP:rm
SUBJECT
Debtor Exemptions: Bankruptcy
DESCRIPTION
Existing law identifies property of a debtor that is exempt from
all procedures for enforcement of a money judgment. Under
existing law, those exemptions (the "704 exemptions") are
available to a debtor in a federal bankruptcy case, whether a
money judgment is being enforced by execution sale or other
procedure, unless the debtor elects certain alternative
exemptions (the "703 exemptions").
This bill would revise, recast, and expand the set of 703
exemptions to generally conform to the 704 exemptions. This
bill would also increase the amounts of exemptions for the
debtor's motor vehicle, "tools of the trade," jewelry, and
significantly increase the homestead exemption that is available
to all judgment debtors.
BACKGROUND
In a bankruptcy action, exemptions generally allow a person to
protect certain types of assets during the bankruptcy process.
If an asset is exempt, the asset can generally not be taken to
pay creditor's claims. The concept behind exemptions is to
provide an individual with a minimum amount of property and
money that can be used to give him or her a "fresh start."
Individuals filing bankruptcy in California can choose between
two different sets of exemptions: the 703 exemptions or the 704
exemptions.
(more)
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The "703 exemptions," located in Code of Civil Procedure Section
703.140(b), consist of eleven categories that are modeled after
federal bankruptcy law. Those exceptions include a "wildcard"
exemption of up to $23,250 (consisting of $1,175 plus the unused
portion of the $22,075 homestead<1> exemption) that may be
applied to any property. That application is important for
those individuals who have little or no equity in a home. 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 but
do not include a "wildcard" exemption to cover unlisted
property. The homestead exemption 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. It should also be noted that 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 would revise, recast, and expand the set of 703
exemptions to more closely resemble the 704 exemptions. This
bill would also increase the amounts of exemptions for the
debtor's motor vehicle, "tools of the trade," and increase the
704 homestead exemption that is available to all judgment
debtors, whether in bankruptcy or not.
CHANGES TO EXISTING LAW
1. Existing law provides that in a case under Title 11 of the
United States Code (relating to bankruptcy), all of the
exemptions, other than the Section 703.140(b) exemptions, are
applicable regardless of whether there is a money judgment
against the debtor or whether a money judgment is being
enforced by execution sale or any other procedure. The
Section 703.140(b) exemptions may be elected in lieu of all
other available exemptions, as specified. (Code Civ. Proc.
Sec. 703.140 (a).)
Existing law , the 703 exemptions, provide for eleven
categories of exemptions, modeled after federal law, which the
--------------------------
<1> Homestead exemptions generally seek to protect the residence
of a debtor from forced sale to satisfy debts. See Comment 3
for additional discussion regarding homestead exemptions.
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bankruptcy debtor may elect to use in lieu of the 704
exemptions. Those exemptions include:
The debtor's aggregate interest, not to exceed $17,425
in value, in real property or personal property that the
debtor or a dependent of the debtor uses as a residence, in
a cooperative that owns property that the debtor or a
dependent of the debtor uses as a residence, or in a burial
plot for the debtor or a dependent of the debtor.
The debtor's interest, not to exceed $2,775 in value, in
one motor vehicle.
The debtor's interest, not to exceed $450 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 $1,150 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 $1,750 in
value, in any implements, professional books, or tools of
the trade of the debtor or the trade of a dependent of the
debtor. (Code Civ. Proc. Sec. 703.140(b).)
Existing law , the 704 exemptions, specify 21 different types
of property and the conditions under and amount of which a
debtor may claim an exemption from enforcement of a money
judgment. (Code Civ. Proc. Secs. 704.010 through 704.210.)
Existing law requires the Judicial Council to adjust the above
dollar amounts at every three-year interval ending on April 1
thereafter, as specified, based on the change in the annual
California Consumer Price Index for All Urban Consumers, as
specified. (Code Civ. Proc. Sec. 703.150.)
This bill would revise and recast the following 703 exemptions
so that the exemption's language generally mirrors the
corresponding 704 exemption:
The exemption for household furnishings, household
goods, wearing apparel, appliances, books, animals, crops,
or musical instruments.
The exemption for unmatured life insurance contracts.
The exemption for a cause of action for wrongful death,
or an award of damages or a settlement rising out of
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wrongful death.
The exemption for a cause of action for personal injury,
or an award of damages or a settlement rising out of
personal injury.
The exemption for unemployment compensation payments.
The exemption for a cemetery plot for the debtor and the
spouse of the debtor.
This bill would revise and recast the following Section 703
exemptions so that they mirror corresponding Section 704
exemptions for specified property, but with an increase in the
dollar amount of the exemption:
The exemption for the debtor's interest in a motor
vehicle or vehicles, not to exceed $4,800 (an increase from
$2,775 for a single vehicle).
The exemption for the debtor's aggregate interest in
jewelry, heirlooms, and works of art, not to exceed $5,000
(an increase from $1,150 for jewelry only).
The exemption for the debtor's aggregate interest in
tools, implements, instruments, materials, uniforms,
equipment, one commercial motor vehicle, and other personal
property (i.e. "tools of the trade") reasonably necessary
to and actually used by the debtor or the debtor's spouse
in the exercise of their respective professions, not to
exceed $6,075 (an increase from $1,750 for tools of the
trade, excluding any vehicles).
This bill would add the following additional exemptions to
Section 703 that mirror corresponding Section 704 exemptions
for the following property: (1) workers' compensation
benefits; (2) public aid or similar aid provided by a
charitable organization; (3) relocation benefits for
displacement from a dwelling, as specified; (4) financial aid
for higher education; (5) public retirement benefits; (6)
vacation credits; and (7) service of earnings assignment
orders for support, as specified.
2. Existing law , the California Constitution, requires the
Legislature to protect, by law, a certain portion of the
homestead and other property, from forced sale. (Cal. Const,
Art. XX Sec. 1.5.)
Existing law contains both an automatic and a declared
homestead exemption that serve to protect a portion of equity
in a debtor's home from creditors. (Code Civ. Proc. Secs.
704.710 et seq., 704.910 et seq.) Existing law states that
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the automatic homestead exemption applies to the principal
dwelling in which the judgment debtor, or spouse, continuously
resided from the date of attachment of the judgment creditor's
lien until a court determination that the dwelling is a
homestead. (Code Civ. Proc. Sec. 704.710.) A declared
homestead exemption applies, as specified, to a dwelling
specified in a recorded homestead declaration. (Code Civ.
Proc. Secs. 704.910, 704.920.)
Existing law sets the amount of the homestead exemption as
follows:
$75,000, unless the judgment debtor or spouse of the
judgment debtor who resides in the homestead is a person
described below;
$100,000 if the judgment debtor or spouse of the
judgment debtor who resides in the homestead at the time of
sale is a member of the family unit, and there is at least
one member of the family unit who owns no interest in the
homestead or whose only interest in the homestead is a
community property interest with the judgment debtor; or
$175,000 if the judgment debtor or spouse of the
judgment debtor who resides in the homestead at the time of
sale is either: (1) a person 65 years of age or older; (2)
a person physically or mentally disabled and as a result of
that disability is unable to engage in substantial gainful
employment, as specified; or (3) a person 55 years of age
or older with a limited gross annual income, as specified.
(Code Civ. Proc. Sec. 704.730.)
Existing law requires the Judicial Council, on April 1, 2013,
and at each three-year interval thereafter, to submit to the
Legislature the amount by which the dollar amounts of the
above homestead exemptions may be increased based on the
change in the annual California Consumer Price Index for All
Urban Consumers. Those increases shall not take effect unless
they are approved by the Legislature. (Code Civ. Proc. Sec.
703.150(c).)
This bill would increase those exemptions to $150,000,
$250,000, and $350,000 respectively.
This bill would, with respect to the third exemption, increase
the qualifying gross income for a person 55 years of age or
older from not more than $15,000 to $22,000, and, if married,
from not more than $20,000 to $29,000.
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COMMENT
1. Stated need for the bill
According to the author:
Over the past few years of severe recession, Californians
have been increasingly forced to resort to bankruptcy.
Current exemptions under bankruptcy can leave debtors with
little left to start their lives over again. The exemptions
for tools of the trade, home equity, and automobiles are
currently insufficient.
AB 929 creates a more fair structure between debtors'
exemption options under bankruptcy. In particular, when
homeowners are at risk of losing their homes, the exemptions
should take into consideration the current home values.
Permitting debtors to both stay in their homes and to keep
such essential items as tools of their trade and an
automobile will allow Californians to retain sufficient
assets in order to get back on their feet, get back to work,
and recover from financial insolvency
2. Increasing and revising the 703 exemptions
As noted above, the amount of equity that a bankruptcy filer has
in his or her home is an important factor in the decision
regarding whether to use the 703 or 704 exemptions. If the
individual has a significant amount of equity, the 704
exemptions serve to both protect a significantly greater amount
of that equity and a broader range of items than the 703
exemptions. For filers who have little, none, or even negative
equity (because they owe more on the mortgage than the house is
worth), the 703 exemptions may provide greater protection due to
the availability of the "wildcard" exemption that allows
individuals to apply $1,175 plus any amount remaining from the
$22,075 homestead exemption to any other property. That
application allows the filer to prevent those selected items
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from being sold by the court to repay creditors in a Chapter 7
bankruptcy.
By amending the 703 exemptions to generally conform to the 704
exemptions, the provisions of this bill would appear to benefit
individuals that do not have significant equity in a home by
allowing them to have the benefit of the breadth of the 704
exemptions and the 703 wildcard exemption. The proposed
increases would also appear to benefit those with certain types
of property who do not have a significant amount of equity in a
home. The author similarly asserts that:
The �current] exemption amounts are too low to expect a
debtor to rebound from filing for bankruptcy and return
to financial solvency. By raising the exemptions to
reasonable levels, debtors may keep more assets such as
tools of the trade and a work-related automobile. This
will enable debtors to recover from financial insolvency
more quickly and successfully.
a. Proposed changes to the 703 exemptions
This bill would essentially make three types of changes to the
703 exemptions in order to conform them to the 704 exemptions.
First, for cases where certain property was exempt under 704
but not under 703 (for example, workers compensation benefits
and relocation benefits), this bill would exempt that property
using identical language. In cases where similar (but not
identical) exemptions exist under both 703 and 704, the bill
would generally conform the exemptions by adopting the form
contained in the 704 exemptions. Lastly, the proposed
increases and expansion of the categories of motor vehicles,
jewelry, and "tools of the trade" would mirror the 704
sections but significantly increase the dollar amount of the
exemption from what is currently available under section
703.140(b).
Specifically, the 703 exemptions contain an exemption of up to
$3,525 (adjusted from $2,775 by the Judicial Council) for one
motor vehicle, but in conforming to the 704 exemptions, this
bill would increase that exemption to $4,800 and broaden the
exemption beyond a single motor vehicle and, instead, apply
the exemption to any combination of (1) the aggregate equity
in motor vehicles, (2) proceeds of an execution sale of a
motor vehicle, and (3) the proceeds of insurance or other
indemnification for the loss, damage, or destruction of a
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motor vehicle. Staff notes that while the language of the
exemption conforms to the equivalent 704 exemption (Code Civ.
Proc. Sec. 704.010), the amount of the exemption is
significantly greater than the 704 exemption of $2,725. The
author, in support of the change asserts that:
AB 929 raises the automobile exception to an amount that
might actually leave a debtor with a reliable automobile.
The current exemption value of $2,775 is deficient. A
2006 study by ADESA found that used cars and trucks sold
at auction for an average price of $10,094. Used cars
have also become more desirable since the recession,
driving resale values up.
The exemption for "tools of the trade" would similarly be
expanded and increased from $2,200 to either $6,075 or
$12,150, with the higher number applying where the tools (or
commercial vehicle) are actually used by the debtor and the
debtor's spouse in the exercise of the same trade, business,
or profession by which both earn a livelihood. Unlike the
motor vehicle exception, those amounts are slightly lower than
the current exemptions under 704. The 703 exemption for
jewelry would also be expanded to additionally apply to
heirlooms and works of art and increased from $1,425 to
$5,000. Similar to the "tools of the trade" exemption, that
substantial increase is still less than the $7,175 exemption
allowed under Code of Civil Procedure Section 704.040.
With respect to the motor vehicle and "tools of the trade"
exemptions, those increases would appear to benefit those
individuals who are self-employed and need those items in
order to generate future income. Given the present economic
crisis and the significant number of individuals who are
"underwater" in their mortgages, the changes proposed by this
bill would appear to make the 703 exemptions even more
appealing by providing the benefit of the breadth of the 704
exemptions while still allowing for a wildcard exemption to
protect any other property that would otherwise not be
covered.
While the proposed exemptions would, in fact, provide
struggling individuals with greater protection when selecting
the 703 exemptions, the policy question raised by this bill is
whether the proposed changes strike the appropriate balance
between the debtor and creditors. Regarding the issues raised
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in bankruptcy, the Ninth Circuit Court of Appeals in Beezley
v. California Land Title Co. (1993) 994 F.2d 1433 noted:
It cannot be overemphasized that we deal here with
matters that are absolutely fundamental to the integrity
of the Bankruptcy Code: the balance struck between the
rights of creditors on the one hand, and the policy of
affording the debtor a fresh start on the other. How to
strike that balance is an inordinately difficult question
- a question of public policy - as to which reasonable
minds may and quite frequently do differ. Id. at
1439-40.
Although this bill would impact the assets available to
creditors, the Committee has received no opposition, as of the
writing of this analysis, to the proposed changes that
arguably favor debtors. Regarding those debtors, data from
RAND California shows a significant increase in the number of
bankruptcy filings in California. The 984,262 filings last
year represented a 43 percent increase from 2009 (686,812
filings), and a 128 percent increase from 2008 (431,443
filings). Considering the present need to ensure that
individuals are able to recover from bankruptcy (especially
those who are self-employed), and the absence of objection by
the affected creditors, the proposed amendments to the 703
exceptions would appear to not unduly upset the balance
between the rights of those creditors and the policy of
affording debtors a fresh start.
3. Increase in the homestead exemptions that apply to all
judgment debtors
In addition to the above changes to the 703 exemption, this bill
would additionally increase the homestead exemption available
under the 704 exemptions. While that exemption may be elected
in lieu of the 703 exemptions, it should be noted that the 704
exemptions are available to all debtors whether filing for
bankruptcy or not.
a. Background on homestead exemptions
Pursuant to Section 1.5 of article XX of the California
Constitution, the Legislature is required to protect a portion
of a homestead, and other select property, from forced sale.
Furthermore, the California Supreme Court has stated that:
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The object of all homestead legislation is to provide
a place for the family and its surviving members,
where they may reside and enjoy the comforts of a
home, freed from any anxiety that it may be taken from
them against their will, either by reason of their own
necessity or improvidence, or from the importunity of
their creditors. In re Estate of Fath (1901) 132 Cal.
609, 613.
Thus, existing law provides that a person or family unit may
protect a specified portion of the value of their principal
dwelling ("homestead") from being sold pursuant to a court
order to satisfy a debt to creditors. If the dwelling cannot
be sold for an amount that exceeds the exemption (plus liens
and encumbrances on the property itself), it may not be sold
to satisfy the judgment.
b. Current homestead exemption structure under the 704
exemptions
Existing law provides a three-tier system for the homestead
exemptions with a base exemption of $75,000. The base
exemption applies if neither the family unit nor the exemption
relating to seniors and the disabled applies. A $100,000
exemption applies if the judgment debtor or spouse resides in
the homestead and there is at least one other member of the
family unit also residing in the homestead. Finally, a
$175,000 exemption applies if the judgment debtor or spouse is
age 65 or older, disabled, or age 55 or older with limited
income, as specified. Those exemptions were last adjusted in
2009, when the above exemptions were raised from $50,000,
$75,000, and $150,000, respectively. (AB 1046 (Anderson,
Chapter 499, Statutes of 2009.) Regarding the increases
proposed by AB 1046, this Committee's analysis noted that:
. . . the first two increases proposed by �AB 1046] are
less than the change in the Consumer Price Index since
their last adjustment. The Bureau of Labor Statistics'
inflation calculator states that $50,000 in 1990 is
today's equivalent of $81,576.13, and $75,000 is
equivalent to $122,364.19. The third proposed increase
(from $150,000 to $175,000) almost exactly reflects the
change in CPI between 2003 and 2009 (today's equivalent
is $173,836.96). Accordingly, the proposed changes
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appear to be modest adjustments in response to changes in
the CPI since their last increase.
In comparison, this bill would increase those same exemptions
to $150,000, $250,000, and $350,000, respectively. Given that
the current homestead exemptions have been in place since
January 1, 2010, and that inflation alone would only justify a
small increase ($100,000 in 2010 is roughly equivalent to
$103,140 in 2011), the proposed increases must be justified by
a different policy rationale than prior proposed increases.
In support of the proposed increases, the author asserts:
AB 929 raises the homestead exemption based on two
important figures. Despite the current housing crisis
with home prices bottoming out, the median home price in
California in 2011 is $286,000 (California Association of
Realtors' market data). Increasing the homestead
exemption to approximately half of that amount makes good
sense. Also, a study conducted in 2003 indicated that
states with high or unlimited homestead exemptions have
homeowners who are 35% more likely to be self-employed
than in states with low exemptions ("Personal Bankruptcy
and the Level of Entrepreneurial Activity." Journal of
Law and Economics (2003) 46(2), 543-567). This supports
the idea that raising the homestead exemption to a level
that reflects current conditions also would foster
entrepreneurial activity in California because residents
would not fear losing their homes.
From a policy standpoint, if the purpose of the homestead
exemption is to allow individuals to retain their home after a
bankruptcy (consistent with the court's statement in In re
Estate of Fath (1901) 132 Cal. 609), exemptions that permit
homeowners to protect only a fraction of the home's equity
would appear to be insufficient to accomplish that goal. That
protection would appear to be particularly important for
elderly individuals with significant equity in their homes
that are forced to file for bankruptcy due to overwhelming
medical expenses.
It should be noted that at the time of increasing those
exemptions, AB 1046 also required the Judicial Council to
review the exemptions every three years and submit to the
Legislature the amount they may be increased due to changes in
the California Consumer Price Index for All Urban Consumers.
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The Judicial Council's first submission is required to be
submitted on April 1, 2013, and if the increases proposed by
this bill were to be enacted, that review would arguably be
based on the updated homestead exemption amounts (not the
amounts enacted by AB 1046).
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : AB 1046 (Anderson, Chapter 499, Statutes of
2009), raised the homestead exemptions to the current amounts of
$75,000, $100,000, and $175,000, respectively.
Prior Vote :
Assembly Floor (Ayes 54, Noes 21)
Assembly Appropriations Committee (Ayes 13, Noes 3)
Assembly Judiciary Committee (Ayes 8, Noes 0)
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