Homestead by type and amount
California is creating equity as fast-increasing home prices have reduced the number of negative-equity homes in the state. With increased home equity, recession-wary homeowners facing more aggressive debt collection efforts need to consider their right to protect the dollar amount of “homestead” they hold in their equity from loss to creditors.
As the economy improves, some homeowners will continue to experience financial difficulty, more concerned about losing their homes to creditors than to their mortgage lenders. Counterintuitively, personal bankruptcies tend to increase during these midpoints in a recovery as creditors (and assignees) renew their push to collect debt. Thus, a declaration of homestead needs to be considered as vital to the preservation of flexibility in the use of one’s equity when faced with creditor claims. [See RPI Form 465]
When a creditor obtains a judgment and records an abstract against a homeowner in the county of their residence, the judgment attaches as a lien against the title to their home. However, the type of homestead the homeowner uses determines the homeowner’s ability to:
- voluntarily sell the home and buy another home with the homesteaded amount they have in equity; or
- bar the judgment creditor from forcing a sale of the home to satisfy the judgment.
The equity protected as a homestead amount
A homestead is the dollar amount of equity in a homeowner’s dwelling they are able to protect against creditor seizure. The dollar amount of the homestead held by the homeowner in the equity of their home has priority on title over most judgment liens and state government liens.
Two types of homestead procedures are available to California homeowners:
- the declaration of homestead, which is recorded [Calif. Code of Civil Procedure §704.920]; and
- the automatic homestead, also called a statutory homestead exemption, which is not recorded. [CCP §704.720]
Both homestead procedures provide Californians the same dollar amount of home equity protection. However, to receive all the benefits available under the homestead laws, a homeowner needs to record a declaration of homestead when confronted with litigation by a creditor.
The benefits of a declared homestead differ from an automatic homestead. The declared homestead allows the homeowner to voluntarily sell their home, receive the net sales proceeds up to the dollar amount of the homestead and reinvest the funds in another home without interference by creditors before or after replacement of a residence. [See RPI Form 465]
Neither the declared nor the automatic homestead interferes with:
- voluntary liens placed on title to the property by the homeowner at any time, such as trust deeds;
- involuntary liens given priority to the homestead exemption under public policy legislation; or
- the homeowner’s credit ratings or title conditions.
Some involuntary liens have priority to the amount of the homestead exemption by statute. Liens with priority are enforced as senior, including:
- mechanic’s (contractor’s) and vendor’s (seller’s) liens;
- homeowners’ association (HOA) assessments;
- judgments for alimony or child support;
- real estate property taxes; and
- Internal Revenue Service (IRS) liens.
Involuntary liens that are subordinate and junior to the owner’s homestead amount include:
- Franchise Tax Board (FTB) personal income tax liens;
- Medi-Cal liens; and
- judgment creditor’s liens.
Automatic and declared homesteads
An automatic homestead is always available on the principal dwelling occupied by the homeowner or their spouse when:
- a judgment creditor’s abstract is recorded against the homeowner and attaches as a lien on the property; and
- the occupancy by the homeowner continues until a court determines the dwelling is a homestead. [CCP §704.710(c)]
The automatic homestead exemption applies to the equity in:
- a real estate dwelling (and its outbuildings);
- a mobilehome;
- a condominium;
- a planned development;
- a stock cooperative;
- a community apartment project together with the land it rests on; or
- a houseboat or other waterborne vessel used as a dwelling. [CCP §704.710(a)]
Conversely, a recorded declaration of homestead applies only to real estate dwellings. The amount of equity shielded from claims
The dollar amount of home equity protection a homeowner qualifies to preserve is the same under both the automatic homestead and the recorded declaration of homestead.
Homeowners qualify for one of three dollar amounts of net equity homestead protection:
- a $75,000 equity for an individual homeowner with no dependents;
- a $100,000 equity for a head of household who provides support for a spouse, dependent children, grandchildren, parents, grandparents or in-laws; or
- a $175,000 equity for homeowners when the homeowner or their spouse is:
- 65 or older;
- physically or mentally disabled; or
- 55 or older with an annual income of less than $15,000 or, if married, a combined gross annual income of no more than $20,000. [CCP §704.730]
Both spouses of a married couple may be the declared homestead owners in the same homestead declaration when both spouses own an interest in the property. [CCP §704.930(a)(1)]
However, a couple’s combined homestead exemption may not exceed the exemption limit for a head of household ($100,000), unless one or both qualify as an aged or disabled person ($175,000). [CCP §704.730(3)(B)]
Further, when both spouses are entitled to a homestead exemption, the homestead proceeds will be apportioned to each spouse according to their share of the ownership in the homesteaded real estate. [CCP §704.730(b)]
Combating a creditor’s attempt to sell the home
A judgment creditor with a recorded abstract of judgment lien who wants to foreclose always needs to first petition a court for authorization to sell a homesteaded property and collect on a money judgment. The task confronting the court is to determine whether the owner’s net sales equity in their home is a dollar amount greater than the amount of the owner’s homestead exemption. When it is, the creditor may proceed to judicial foreclosure on their judgment lien by an execution sale and recover the excess net sales proceeds beyond the homestead amount up to the amount of their judgment. [CCP §704.740(a)]
A home with a net equity less than the homestead amount (after transactional costs of a sale) leaves nothing for the creditor to sell and apply to the debt owed under the judgment.
Forced sale by court order only
To foreclose, the creditor needs to obtain a court order for the sale of a debtor’s dwelling by first filing an application for a judicially ordered sale, a foreclosure activity called an execution sale, stating:
- a description of the property;
- whether a declared homestead has been recorded on the property;
- the names of the person or persons who claim the homestead;
- the amount of the homestead; and
- the dollar amounts of all liens and encumbrances recorded on the property and the names and addresses of the lienholders. [CCP §704.760]
When a creditor challenges the validity of a recorded declaration of homestead, the creditor must prove the property does not qualify for a homestead.
However, when the homeowner has not recorded a declaration of homestead on the property, it is the property owner who must prove their residency in the dwelling qualifies the property for the automatic homestead exemption. [CCP §704.780(a)(1)]
Automatic homestead is a shield
When a court-ordered sale of the debtor’s home occurs, the dollar amount of the homestead disbursed to the homeowner from the sale’s proceeds is protected from the creditor’s attachment during a six-month reinvestment period following the sale. Further, an automatic homestead exemption is provided on the replacement residence to protect the reinvested funds. [CCP §704.720(b)]
However, when the replacement home acquired is in the same county where the judgment lien is recorded, the lien attaches to the new residence (subject to the owner’s homestead exemption) the instant title is transferred into the homeowner’s name.
Further, a homeowner who decides to voluntarily sell their residence when title is subject to a creditor’s lien may not use the automatic homestead exemption to protect the sales proceeds from being taken by the judgment creditor.
Only when a declaration of homestead is recorded prior to the recording of the judgment lien may the homeowner voluntarily sell their home and first withdraw their homestead amount from the net sales proceeds before the judgment creditor receives any funds.
Unlike a declared homestead, the homeowner claiming only an automatic homestead exemption may not use a quiet title action to remove the lien and sell the home. When an insufficient net equity exists barring the judgment creditor from forcing a sale of the home, the homeowner is unable to sell without dealing with the judgment creditor, as though in a short sale.
Declared homestead allows the owner to sell
In contrast to an automatic homestead exemption, a recorded declaration of homestead coupled with a quiet title action allows the homeowner to remove judgment liens attached to their title.
Also, judgment liens do not attach to the exempt homestead amount in the equity when the homestead declaration is recorded prior to the recording of the creditor’s abstract of judgment. [CCP §704.950(a)]
Judgment liens do, however, attach to any equity exceeding the amount of the declared homestead exemption and all liens and encumbrances on the property at the time the abstract of judgment is recorded. [CCP §704.950(c)]
It takes creditors several months of litigation to obtain and record an abstract of judgment. In contrast, a declaration of homestead may be prepared and recorded by the homeowner on readily available forms in a matter of hours.
Thus, a prudent homeowner totally avoids the issue of priority by recording the declaration when they become aware the creditor is going to obtain a court ordered judgment against them. [See RPI Form 465]
Once recorded, a declaration of homestead lasts until:
- the homestead owner records a declaration of abandonment of the homestead; or
- the homestead owner records a new declaration of homestead on another residence. [CCP §§704.980, 704.990]
A homeowner who decides to sell their home which is subject to a declared homestead with priority over a recorded creditor’s lien which clouds title to their home may either:
- negotiate a release of the lien with the creditor; or
- clear title to the home through a quiet title action based on the priority of their declaration of homestead.
Clearing title of a lien
A quiet title action determines the priorities of the creditor’s lien and the recorded homestead on title. When the homeowner demonstrates the homestead declaration is valid and was recorded prior to the creditor’s lien, the title will be cleared of the lien, provided the equity in the property does not exceed the homestead amount. Thus, the homeowner paves the way to sell the property and deliver clear title to a buyer. [Viotti v. Giomi (1964) 230 CA2d 730]
Judgment creditors junior to a declared homestead where no excess equity exists soon realize their futility in litigation. Thus, they are generally receptive to a negotiated release. Consequently, the homeowner can usually “buy” a partial (or full) release from the creditor — typically for less than the costs of a quiet title action. [See RPI Form 409]
After title is cleared and the homeowner sells their property, they have six months to reinvest the homestead proceeds in another home. When the proceeds are reinvested in a new residence within six months, the new residence may then be declared a homestead by recording a new homestead declaration.
When the homeowner records a new homestead declaration on their replacement residence, the recording relates back to the time the prior homestead was recorded. This leaves no gap for the creditor’s lien to gain priority over the homestead declaration on the new residence. [CCP §704.960]
However, when the homeowner does not invest the proceeds of the sale in a new homestead within six months, and the proceeds are still in the State of California, the exempt proceeds from the sale may be attached by the judgment creditor.
In times of financial stress for some homeowners, you are able to educate your clients on how to protect themselves against creditors who might pursue collection by litigation (since they need a money judgment if they expect to enforce collection by the sale of the home). Help them make sure they understand how to protect the net equity in their biggest investment — up to the dollar amount of their homestead exemption.
Advise them on the differences between the automatic homestead (no ability to voluntarily sell and use the exemption) and the declaration of homestead (ability to sell and use the exemption) so they can decide for themselves their best mode of protection against a creditor who has yet to obtain a judgment against them.