BILL ANALYSIS �
AB 1853
Page 1
Date of Hearing: April 29, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 1853 (Wieckowski) - As Introduced: February 19, 2014
SUBJECT : DEBTOR EXEMPTIONS
KEY ISSUES :
1)SHOULD THE HOMESTEAD EXEMPTION, WHICH PROTECTS A SPECIFIED
AMOUNT OF HOME EQUITY FROM CREDITORS, BE FREED FROM THE
REQUIREMENT THAT THE DEBTOR REINVEST THOSE PROCEEDS INTO
ANOTHER PROPERTY WITHIN SIX MONTHS OR LOSE THE EXEMPTION?
2)SHOULD ADDITIONAL PROPERTY EXEMPTIONS BE CREATED TO ENABLE
DEBTORS TO PROTECT MATURED LIFE INSURANCE POLICIES AND
VACATION PAY, AMONG OTHER THINGS, FROM BEING RELINQUISHED TO
CREDITORS IN ORDER TO SATISFY A DEBT?
SYNOPSIS
According to the author, further revisions to the state
exemptions statute are warranted to assist bankruptcy and
judgment debtors in California, especially in light of current
challenging economic conditions. This bill seeks to remove the
requirement that debtors reinvest homestead exemption money into
another property within six months from the date the home was
sold, or else lose their exempt status. According to the
author, the six-month reinvestment rule should be reconsidered
because it fails to take into account that many debtors coming
out of a bankruptcy are not able to secure financing for another
home so quickly, and that they would be better served if they
could instead use the proceeds from the homestead exemption for
other essential living expenses. 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. The bill is opposed
by bankers and debt collectors, who 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 or purchasing
annuity policies just prior to claiming bankruptcy. Should this
bill be passed here, it will be referred to the Assembly
Appropriations Committee.
AB 1853
Page 2
SUMMARY : Creates additional new categories of property
exemptions available to debtors and removes the homestead
reinvestment requirement. Specifically, this bill :
1)Exempts the debtor's aggregate interest in benefits from a
matured life insurance policy, including an endowment or
annuity policy, in an amount not to exceed five hundred
thousand dollars ($500,000) plus any amount that is reasonably
necessary for the support of the judgment debtor and his or
her spouse and dependents.
2)Exempts the debtor's vacation credits or accrued vacation pay.
3)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.
4)Allows a judgment debtor who is engaged in business to exempt
up to $5,000 in aggregate interest in cash or deposit
accounts.
5)Clarifies that for purposes of determining the exemptions
available to Title 11 bankruptcy debtors, the value of the
debtor's interest in property shall be determined as of the
date the petition commencing the case was filed. Further
provides that if the value of the debtor's interest in the
property on that date is less than or equal to the amount the
debtor is permitted to exempt, the debtor's entire interest in
the property, including any appreciation in value of that
interest following the date of the petition, is exempt.
6)Deletes statutory provisions requiring the debtor to reinvest
proceeds from the voluntary sale of a homestead in a new
dwelling within six months, or else lose exempt status for
those proceeds.
7)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.
AB 1853
Page 3
8)Increases, from $4800 to $6000, the amount of the exemption
for the debtor's interest in one or more motor vehicles.
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)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.
COMMENTS : This bill seeks 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. Among other things, this bill exempts benefits from
matured life insurance policies, including endowment and annuity
policies, and vacation credits or accrued or unused vacation
pay, and increases the exemption for motor vehicles. With
respect to the homestead exemption, which protects equity value
AB 1853
Page 4
of debtors in their principal residence, this bill would remove
the requirement that proceeds from the forced sale of the home
be reinvested in another home within six months or lose exempt
status.
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
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. (Id. at 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 �704 exemptions are more
numerous and better protect debtors who own homes, because of
the more generous homestead exemption provided by Section
704.730 ($75,000 base level) as compared to its counterpart
under �703.140(b) ($24,060). Section 704 exemptions are not
limited to bankruptcy cases, but are generally available to
AB 1853
Page 5
debtors in California seeking to exempt certain property from
enforcement of a money judgment.
Elimination of the homestead reinvestment requirement. Under
existing law, a debtor who has sufficient equity in his or her
home to claim the homestead exemption is able to keep that
dollar amount after the trustee sells that home. However,
existing law also requires the debtor to reinvest that money
into another property within six months from the date of sale,
or else 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, e.g.,
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 many
debtors coming out of a bankruptcy are not able to secure
financing for another home so quickly, particularly when the
six-month period overlaps with the period that 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 if they could use
the proceeds from the homestead exemption for other essential
living expenses, rather than having no option other than to
reinvest those funds in another home within 6 months. The
author questions whether, after compelling the sale of the
debtor's home in order to extract the equity saved in the home
to satisfy unsecured creditors, it is equitable to allow the
bankruptcy estate to come back after six months and take that
money as well.
In opposing the bill, the bankers and 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.
AB 1853
Page 6
Exemption of matured life insurance policies . This bill exempts
benefits from matured life insurance policies, including
endowment and annuity policies, in an aggregate amount not to
exceed $500,000 plus any amount reasonably necessary for the
support of the debtor and his family. According to the author,
this exemption is intended to protect a debtor from being forced
to sell his life insurance policy on the market in order to
satisfy a debt in bankruptcy because without this exemption, a
bankruptcy trustee can remove the existing beneficiaries of a
life insurance policy and replace them with creditors,
potentially leaving the debtor's dependents without the life
insurance proceeds intended to provide for them. Because
insurers generally recommend a policy worth ten times the annual
income of the insured, the author believes that $500,000 is an
appropriate amount for a mature life insurance policy because
that amount will protect an average California family with a
modest annual income of $50,000.
Opponents of the bill contend, however, that this bill creates
an "enormous loophole" that allows debtors to shield, in
addition to the court-determined amount reasonably necessary for
the support of the debtor and his family, an additional $500,000
for each matured insurance policy, endowment, or annuity. The
bankers and collectors state "Because there is no limit on the
amount of investment policies that can be shielded, debtors can
shield millions of dollars from creditors. This scheme benefits
wealthy individuals by encouraging them to funnel money to
several policies to avoid paying debts they have incurred."
With respect to the contention that the bill potentially allows
debtors to shield millions of dollars, the Committee notes that
the bill exempts, at most, an aggregate amount of up to
$500,000, in multiple policies, plus any amount reasonably
necessary for support of the debtor's family. Furthermore, the
proposed exemption applies only to matured life insurance
policies-that is, a policy in which the person has paid every
premium to a date or age specified in the policy-and that
because such policies typically are set to mature when the
policy holder reaches age 100, most policies never mature. With
respect to annuity policies, which are similar but not identical
to life insurance policies, the author may wish to consider
whether additional safeguards are needed to prevent abuse, such
as restricting the time between the date of purchase and the
bankruptcy filing.
AB 1853
Page 7
Exemption of vacation credits & vacation pay : Section 704.113
currently allows California debtors to exempt vacation credits.
This bill creates a similar exemption for vacation credits or
accrued or unused vacation pay for bankruptcy debtors within the
Section 703 slate of exemptions. 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.
Exemption of $5,000 for small business debtors. This bill
creates a new exemption intended to allow small business owners
to claim 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 CCP �
704, 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 a modest amount of assets which are essential 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.
Prior Legislation : AB 198 (Wieckowski) of last year was
substantially similar to this bill, but died in Assembly
Appropriations Committee.
AB 929 (Wieckowski), Ch. 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, and also
increased the amount of the homestead exemption for persons 55
years of age or older who meet specified low-income criteria.
REGISTERED SUPPORT / OPPOSITION :
Support
National Association of Consumer Bankruptcy Attorneys (NACBA)
AB 1853
Page 8
Law Office of Gerald L. White
Opposition
California Association of Collectors
California Bankers Association
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334