4 Limits to the California Homestead Exemption of 2021 You Must Know

limits to california homestead-exemption

4 Limits to the California Homestead Exemption of 2021 You Must Know

There are limits to the California homestead exemption. These ‘gotchas’ can cause disaster in your bankruptcy. If one of them is in your situation, you lose the homestead exemption, the protection, and possibly your house.

The Good: California’s Homestead Grew in 2021

In 2021, California law changed to protect between $300,000 and $600,000 of equity. For years, high-priced California real estate was protected by $75,000 of equity, or maybe $100,000.  So this generous adjustment was way overdue.  Think of this new exemption as a massive oversized umbrella which you might be able to fit your home (and its equity) under. This is due to a change in the 704s, and is good.

READ MORE: The 2021 California homestead exemption

The Bad: There are Limits to the California Homestead Exemption

The Source of our Concern: “What 704 giveth, 522 taketh away.”

For years, there’s been a law on the books that can limit a large homestead exemption. It’s 11 USC 522, and is all about exemptions, and ways that they apply… or don’t.  This isn’t new, and has been around for a while.

However, what is new is that Section 522 suddenly applies to California homeowners who are filing bankruptcy. The effect is that it might rip massive holes in your umbrella. Consequently, a Chapter 7 trustee might be able to take your home and sell it. You thought you were safe under a shelter, but it got destroyed and now you’re vulnerable.

Why does 522 suddenly apply?

The reason is that Section 522 of the Bankruptcy Code is now something that California bankruptcy attorneys need to worry about. Why? Because it limits a homestead exemption to approximately $170,000. For decades, our exemption was under that figure, so restricting it to under “only 170,000” wasn’t a big deal: our protection was already under that figure. We lost nothing.

However, our minimum exemption in California skyrocketed to $300,000. So, getting it cut to about half that is now a big deal. It’s now become a trap that every bankruptcy lawyer with a big homestead exemption needs to worry about. Play it wrong and you have a fraction of the protection you thought you had. Water pours into the umbrella, and you’re soaked.

So, here are four limits to the California homestead protection:

1.  You got the house too recently

The first way you can lose your home’s protection is if you acquired the house too recently.  Technically, the lookback time is 1215 days, or just under four years.  When did you acquire the home? Have you had it for only three years?  File bankruptcy in California and that $600,000 protection you thought you had is vanished, shattered, gone.

2. You rolled nonexempt assets into the home’s equity

Secondly, you can lose the homestead exemption if you attempted to hinder or defraud a creditor by taking something that wasn’t exempt and put it into your home’s equity “for safe keeping.” Guess what? That asset protection expert was wrong. Because you rolled the asset you couldn’t protect into something you thought you could, the protection is gone. And even worse, they can go back up to 10 years.

3. There are some bad acts involved

Third, there’s another limit to the California homestead exemption: if the debtor did some bad stuff. Now, you might say, rolling unexempt assets into an exempt one is a bad act, and you’d be right. But this point is about abuse of the bankruptcy provisions themselves, or some fraud, deceit, criminal act, other willful injury to someone going back five years.  This is not a complete list, but you get the idea: people who did something bad before the bankruptcy, or are using the bankruptcy to abuse the system lose the homestead protection.

4. You might lose your cars, cash, tax refunds or bank accounts

This fourth limit to the California homestead exemption isn’t really new, but it can be just as scary. It’s not related to the 704 or 522 at all, actually. The point is, if you use the new big umbrella to protect your house, you lose the ability to cover your cash, cars, tax refunds, bank accounts, and more. The good news is you saved your house. The bad news is they took your bank accounts and tax refund so you can’t pay your mortgage this month.

This isn’t a comprehensive list. See an experienced bankruptcy for more information.

Contact Me, I Got You Covered

If you’re anywhere in Los Angeles County, let’s set up a Zoom meeting and go over your options. We’ll figure out how securely strong that umbrella is, and how safe your home really is. I will be honest and upfront with you. I got you covered.


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