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.