California Court Explains the Homestead Exemption in Bankruptcy Matters

Many Californians struggling to pay debts are worried that they will lose their homes if they file for bankruptcy. Fortunately, California’s bankruptcy laws allow certain properties to remain exempt from being liquidated and used to pay creditors, such as homes. A debtor must have some interest in a dwelling for the homestead exemption to apply, though. This was demonstrated in a recent California ruling in which the court denied the debtor’s attempt to apply the homestead exemption to a property owned by his company. If you own property and wish to seek debt relief, it is prudent to speak with a knowledgeable California bankruptcy attorney to discuss your options for retaining your assets.

The Debtor’s Petition for Homestead Exemption

Reportedly, the plaintiff filed for bankruptcy via a Chapter 11 petition in July 2019. In December 2019, it was converted to Chapter 7. The defendant was listed as the plaintiff’s largest creditor due to a disputed judgment obtained against the plaintiff. The plaintiff alleged the judgment was obtained via abuse of process, witness tampering, fraud, and perjury, and listed a cause of action against the defendant for the same amount as the judgment as an asset. He also listed his 50% membership interest in an LLC as an asset but did not list any real property.

It is alleged that the defendant obtained relief from the automatic stay to include the LLC as an additional judgment debtor under the theory of reverse alter ego. The plaintiff then amended his exemptions to include a property owned by the LLC. He claimed he resided there, and therefore it qualified for a homestead exemption. The court disallowed the exemption because the plaintiff did not own the property, and the plaintiff appealed.

Homestead Exemption Under California Law

California defines a homestead as the place where a person lives. Therefore, a person can claim a homestead exemption absent a fee simple interest in the property.  They must have some equitable or legal interest in the property for the exemption to apply, however. The plaintiff argued that the fact that the property in question was his residence was sufficient for the exemption to apply. The court noted, however, that he had no identifiable interest in the property, which was owned by the LLC.

The plaintiff argued his interest in the LLC was exempt under the homestead exemption. The court explained that under California law, an LLC is a distinct legal entity from its members, and therefore members have no interest in an LLC’s assets. As such, the court found that the homestead exemption did not apply to the plaintiff’s interest in the LLC, which was considered a personal property outside the statutory definition of a homestead. Based on the foregoing, the court affirmed the lower court ruling.

Meet with a Trusted California Bankruptcy Attorney

People overwhelmed with debts often worry that they will lose their homes, but many people who file for bankruptcy are able to claim their houses as exempt. If you are interested in filing for bankruptcy, attorney Matthew D. Roy can advise you of your rights and assist you in seeking any relief available. You can contact Mr. Roy through the online form or at (916) 361-6028 to set up a meeting.