Tag Archives: Bankruptcy Exemptions

No Stacking of California Bankruptcy Exemptions

By Ryan C. Wood

There is no stacking of the California homestead exemption pursuant to California Civil Procedure.  The Ninth Circuit Court of Appeals held that Section 522(m) of the Bankruptcy Code is not applicable in California given California has opted out of the Federal Exemption scheme and adopted exemptions under California State law.  See CCP 703.140 and CCP 704.  Therefore a married couple cannot stack the homestead exemption, which means both spouses claiming the homestead exemption to double the amount of equity they can protect in their primary residence.  This issue became more relevant due to California recently increasing the maximum homestead exemption pursuant to CCP 704.30 to between $300,000 and $600,000 depending upon the median home value for the prior year in the California County.  In the Bay Area that means all residents of all Bay Area counties have a right to a $600,000 homestead exemption given the median home price in all Bay Area counties far exceeds $600,000. 

But a married couple in California cannot stack the $600,000 homestead exemption to exempt $1.2 million in equity in their primary residence when filing for bankruptcy; just $600,000.  This is not true in every state.  In Florida the homestead exemption can be stacked for the benefit of the bankruptcy filer.

What Are Exemptions?

Exemptions are what protect assets from being sold or liquidated when a bankruptcy case is filed.  The exemption exempts the asset from the bankruptcy estate that is created upon filing for bankruptcy protection.  There is the Federal Exemptions and each state may choose to create their own exemptions and opt out of the Federal Exemption scheme.  California created two sets of exemptions.  One set is pursuant to CCP 703.140 and is known for its generous wild-card exemption that can be applied to any type of asset.  California created a second set of exemptions pursuant to CCP 704 and is known for its large homestead exemption to protect equity in the bankruptcy filer’s primary residence.  The two sets of exemptions under California law are very different and protect different amounts of types of assets.

California Opted Out of The Federal Exemption Scheme 

Again California opted out of the Federal Exemption scheme and that has legal significance.  Bankruptcy Code Section 522(m) provides as follows:  “Subject to the limitation in section 522(b), this section shall apply separately with respect to each debtor in a joint case.”  States like Florida pursuant to Section 522(m) “stacking” of claims of exemption.  See (In re Rasmussen, 349 B.R. 747, 753-754 (Bankr. M.D. Fla. 2006)).  Stacking is expressly prohibited under applicable California law though.

California Civil Procedure Section 703.110(a) prohibits the claiming of separate exemptions by married couples.  This has been true since 1987.  See (In re Talmadge, 832 F.2d 1120, 1123-25 (9th Cir. 1987)).  The Talmadge case is from the Santa Rosa Division of the United States Bankruptcy Court for the Northern District of California.  The Bankruptcy Court first held that California exemption statutes were unconstitutional as applied to debtors that are married.  The lower Bankruptcy Court held that California Code exemptions/sections could not survive a constitutional attach given certain subsections of California Code: (1) contain vague and ambiguous language in violation of the fourteenth amendment’s due process clause, (2) arbitrarily discriminate against married couples in violation of the fourteenth amendment’s equal protection clause, and (3) conflict with federal law and, therefore, violate the Supremacy Clause of Article VI of the Constitution.

The District Court did not agree, reversed the Bankruptcy Court and instead held that equal protection of the law is not denied by the California exemption statutes limiting married debtors to a single set of exemptions and the Ninth Circuit Court of Appeal agreed.

In Talmadge each debtor claimed a full set of exemptions, thereby ‘doubling up’ their exemptions under applicable California statute.  The Talmadge’s and their bankruptcy attorney argued that California CCP 703.140 conflicted with Bankruptcy Code Section 522(m).  The Ninth Circuit, in affirming the District Court’s decision disallowing the debtors’ stacked exemptions, concluded that the provisions of 11 U.S.C. § 522(m) did not apply to California debtors because California had opted out of the federal exemption scheme and that provisions of the California Code of Civil Procedure prohibited married couples from obtaining more than a single exemption with regard to a specific property where the amount of the exemption had a maximum dollar amount limit. In re Talmadge, 832 F.2d 1120, 1123-25 (9th Cir. 1987).

Accord, In re Rabin, 336 B.R. 459, 460 (Bankr. ND CA 2005) (“Under California law, spouses who own and reside in a homestead are entitled in bankruptcy to a single homestead exemption. Cal. Code Civ. Proc. §§ 703.110, 704.710(b), (c), 704.730(a) (2). This is so regardless of whether both spouses file bankruptcy, and regardless of whether the spouses file joint or separate bankruptcy petitions. Cal. Code Civ. Proc. § 704.730(b); Talmadge v. Duck (In re Talmadge), 832 F.2d 1120, 1123-25 (9th Cir. 1987) [**3] (married debtors filing joint bankruptcy petition); In re Nygard, 55 B.R. 623, 626 (Bankr. E.D. Cal. 1985) (dictum re married debtors filing individually.

Why Bankruptcy Exemptions Stacking Became an Issue

Unfortunately in 1984 bankruptcy attorneys lost a tool to help bankruptcy filers keep their assets when seeking to discharge their debts. Prior to 1984 California bankruptcy filers could choose between using the Federal Exemptions under Section 522(d) or choose California State exemptions.  In 1984 the California State legislature took advantage of opt out provision of Bankruptcy Code Section 522(b)(1) when enacting California Civil Procedure Code 703.130 and 703.140.  Once California exemptions became the only legal chose for California bankruptcy filer’s Bankruptcy Code Section 522(m) no longer was applicable.  Since 1984 stacking of exemptions for California bankruptcy filers is prohibited. 

Bankruptcy Exemptions Are Very Powerful: See Supreme Court of the United States Decision in Law vs. Siegel, Chapter 7 Trustee

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Filing for bankruptcy protection is a way to obtain a fresh start. But what if after bankruptcy you are left penny less and barefoot. How can you start over at all? Exemptions protect some or all of your assets when filing for bankruptcy. Whether the exemptions protect all your stuff really depends upon what you have and how much it is worth. There are Federal Exemptions and each state can choose not to follow the Federal Exemptions and create their own. California Exemptions are pursuant to California Civil Procedure 703 and California Civil Procedure 704. In the Law case recently decided by the Supreme Court of the United States the Homestead Exemption pursuant to CCP §704.730(a)(1) is the focus of the case and the debtor’s conduct.

The bankruptcy filer, Stephen Law, filed for Chapter 7 bankruptcy in the Bankruptcy Court for the Central District of California. Alfred H. Siegel was appointed as the Chapter 7 bankruptcy trustee to administer the bankruptcy estate. Mr. Law and his bankruptcy lawyers properly listed his primary residence as an asset in Schedule “A” and that the primary residence had to mortgages or liens recorded against it as listed in Schedule “D”. Mr. Law valued the house at $363,348.00. Schedule D listed the first deed of trust of $147,156.52 and the second Lin deed of trust of $156,929.04. So the alleged secured debt recorded against Mr. Law’s house at the time of filing was $304,085.56. If the house is worth $363,348.00 then there is in theory $59,262.44 in equity Mr. Law can protect with the CCP 704 homestead exemption totaling $75,000. That is exactly what Mr. Law did. In his Schedule “C” Mr. Law applied the $75,000 exemption to the equity in his home and therefore there is allegedly no value to the bankruptcy estate for the benefit of creditors.

Bankruptcy Exemptions Are Very Powerful: See Supreme Court of the United States Decision in Law vs. Siegel, Chapter 7 Trustee

See Law vs. Siegel regarding how powerful bankruptcy exemptions are.

But wait a second. The Chapter 7 trustee, Alfred H. Siegel, for whatever reason believed the second deed of trust was a fraud. If that were true, the bankruptcy estate would be entitled to around $140,000 in equity in Mr. Law’s home after applying the homestead exemption. Turns out Mr. Siegel was right and to prove the second mortgage was a fraud in a lengthy legal battle. The bankruptcy court then surcharged Mr. Law’s $75,000 homestead exemption to pay for attorney’s fees and costs of the Chapter 7 trustee. This is where things went wrong according to the Supreme Court of the United States. SCOTUS held that surcharging an exemption to pay for administrative fees and costs is not allowed pursuant to the Bankruptcy Code. Even though Mr. Law committed fraud and it was proven at great expense, the Bankruptcy Court could not try and help remedy this wrong in this way. Bankruptcy exemptions are very powerful and once applied and not objected to in a timely manner prevent assets from being available to the Chapter 7 trustee and creditors for payment.

What could have happened is the Chapter 7 trustees’ bankruptcy attorney could have objected to Mr. Law’s use of the CCP 704 homestead exemption before the deadline passed. What the outcome of that fight would be is for further speculation. What we do know is that the bankruptcy court may have been able to penalize Mr. Law for his conduct within the grant of power the Bankruptcy Code provides. Bankruptcy exemptions are very powerful as provided in Supreme Court case Law. Vs. Siegel, Chapter 7 Trustee.