When a creditor sues a homeowner, what can that homeowner do to protect himself from a possible adverse judgment?
One such way for a homeowner to protect himself would be to make use of the homestead exemption provided by law. A “homestead” exemption protects a certain amount of equity in a debtor’s primary home from judgment creditors. This amount varies by State. In California, for example, the amount of exemption for an individual is $75,000. It goes up to $100,000 for a family unit. The maximum exemption is $175,000 for persons 65 & older or disabled, or, those above 55 years old with annual income below some threshold.
In some states, like California, there are 2 kinds of exemptions. The first one is an “automatic” exemption that does not require you to do anything. The other one requires the filing of a document with the county register where the home is located.
The automatic exemption applies when a home is sold to pay a debt incurred by the homeowner. When a creditor sues a debtor and wins a judgment, the creditor can levy or attach any of the debtor’s properties, including the debtor’s home. The home can then be sold at a public auction in order to satisfy the judgment.
After the house is sold, the first person to be paid is the lender who holds a mortgage on the property. Assuming there is enough equity in the house left over after the mortgage lender is paid, the second person to be paid will be the homeowner up to the amount of the homestead exemption. Only if there is still some equity left after the first 2 persons are paid, will the judgment creditor get something; otherwise, the judgment creditor (who is in the third preference) will get nothing.
Thus, for example, assume a case with the following facts: a creditor wins a judgment of $30,000 against the homeowner who has a home mortgage obligation of $350,000. The home is then sold at public auction for $450,000. The first person to get paid will be the mortgage lender who will be paid the full $350,000 mortgage. If the homeowner is single, he will get $75,000 for his homestead exemption. The judgment creditor will then only get the remaining $25,000 to satisfy the judgment.
On the other hand, with the same facts above but this time the homeowner lives with a spouse in the auctioned home, then their homestead exemption will go up to $100,000. This time, the mortgage lender will still get $350,000. However, the homeowner and the spouse will now get the remaining $100,000 as their homestead exemption. The judgment creditor will end up not getting anything out of the proceeds of the home sale. Thus, the homestead exemption protected the homeowner’s full equity in the house from an adverse judgment.
It is very important for our readers, however, to note the distinction between a mortgage lender as opposed to a subsequent judgment creditor. In most states, the homestead exemption does not protect you from a mortgage or other voluntary lien that you signed for the benefit of a creditor. You will still need to make your mortgage payment, as the homestead will not stop the mortgage lender from foreclosing if you default. The homestead exemption will only apply to other judgment creditors.
The second kind of exemption is a “declared” homestead. This requires the homeowner to file a written document with the county register declaring the homeowner’s primary dwelling as a homestead. The declared homestead can be useful in certain cases where a homeowner sells his home voluntarily. Once a home is sold, the cash proceeds of the sale are no longer protected by the “automatic” homestead exemption because the sale converted it from a “home” to a “cash” asset. Hence, if there are creditors lurking for the sale to be completed, the creditors can then pounce on the proceeds of the sale at escrow and satisfy their judgment. However, if the homeowner has a “declared” homestead, it will protect the cash or other proceeds from the sale if you then use the cash to buy a home within the next 6 month and you record a homestead declaration in the next home.
Everybody receives a homestead exemption by law, which would protect some of a homeowner’s equity from adverse judgments. A “declared” homestead gives homeowners an additional protection by also protecting the cash proceeds of a voluntary sale. Depending on a homeowner’s individual situation, recording a homestead may be beneficial to some homeowners but may not necessarily benefit all homeowners.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com
