News you might need! The new California homestead exemption is limited a little by the bankruptcy code.

I posted a comment on Facebook a few days ago about people using the new California Homestead Exemption of $300,000 (minimum) up to $600,000 (maximum) depending on the county you live in.  The new exemption takes effect January 1, 2021.  As I said in the post, don’t try to file your bankruptcy yourself.  Get a bankruptcy attorney to make sure there are no unknown “exceptions” as there tends to be to everything.  Generally speaking you can’t change your mind after you have filed chapter 7.

Anyway, my friend Richard Marshack commented on my Facebook post:

Do not forget about 522(o) and 522(p).  11 U.S.C. 522(o), provides that a debtor may not claim as exempt his or her homestead, or any portion of the homestead, that was acquired with non-exempt assets and actual fraudulent intent to defraud a creditor.  The argument usually comes down to a simple question: What was the intent of the debtor at the time of the purchase or pay down of the homestead.  Did they have an intention to defraud their creditors? 522(p) provides that the debtor may not exempt any amount of interest that was acquired by the debtor during the 1215 period preceding the filing of the petition that exceeds $170,350.  If it is a transfer within the same state then this cap does not apply. If there is a transfer from another state to another state then the cap applies.

Whoa!  What is all that about?   I have had people come in over the years, wanting to file because someone is suing them.  They find out the chunk of money or perhaps stock or something they have is not exempt.  They ask if they can use the money to buy a house and will the equity then be exempt?  I used to say, “of course.”  Well since 2005, not so fast – see section 522(o).  “Are you buying the house with fraudulent intent to defraud a creditor?”  On those facts you might be.  I have not seen that come up but I assume it has and certainly might.

As to section 522(p), Richard is right, the homestead exemption is limited in bankruptcy to $170,350 IF the home was purchased in the last 3.33 years OR the home was purchased with funds acquired from the sale of a previous home in the same state.  So if you bought the home two years ago and didn’t do it with “fraudulent intent,” (ridiculous says I), the maximum homestead is $170,350 UNLESS you sold your previous home in the same state and used those funds to buy the new home, then the exemption is back to $300,000 to $600,000.

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