Can’t Touch This
One of our area’s most famous bankruptcy filers sang that line over thirty years ago, and it is even more true today. Legislation over the last few years has greatly increased the dollar amount debtors can protect from judgment creditors. Some of these changes occurred in the middle of the pandemic, so many creditors may be unaware of the new rules until they begin collections.
A debtor can protect the equity in their home by exempting it under California Code of Civil Procedure (CCP). The exemption for a family home was increased to $45,000 in the late 1980’s, moved to $75,000 by the late 1990’s, and was up to $100,000 in 2010. Unlike many other state exemptions, the homestead was not indexed to inflation. That changed when AB 1885 went into effect on January 1, 2021. The minimum homestead is now $300,000. If the median sales price for a single-family home in your county exceeded that last year, you can exempt the median sales price instead, capped at $600,000. Both figures are adjusted annually. While there is some disagreement on the exact figure, most attorneys agree that a Contra Costa County homeowner can claim at least a $675,000 homestead this year. That is a lot more than the $100,000 they could protect a few years ago. This homestead is automatic, meaning a homeowner does not need to file anything with the county recorder’s office in order to later claim the exemption. However, the automatic homestead does not prevent a creditor from placing a lien against real estate. If a homeowner does want to prevent a creditor from placing a lien against their residence, they can file a homestead declaration and bar a creditor from attaching a lien against the property unless the equity in the property exceeds the homestead amount. Debtors who hope to use this provision to protect their home in a bankruptcy case will need to jump through a few additional hoops, including length of homeownership.
A bank used to take all the funds in the account when responding to a bank levy. A debtor could file a claim of exemption, but the process could take multiple weeks before the funds were returned. Now, under the CCP, a minimum amount in the account is protected “without making a claim.” This rule went into effect on September 1, 2020, so it’s no wonder that some banks and credit unions were still unaware of the rule as recently as last year. Now the financial institution must leave roughly $2,000 in the account. This figure adjusts annually in July.
In addition to the automatic exemption above, a debtor can claim a new exemption pursuant to the CCP to protect funds “to the extent necessary for the support of the judgment debtor,” their spouse, and their dependents. This code section does not have a minimum or maximum dollar amount listed. The statute is still too new to have much case law on point, but this will likely be a case-by-case determination based on the debtor’s income, expenses, and other assets.
A wage garnishment – officially called an Earnings Withholding Order – is a common way of collecting on a debt. Instead of a one-time pull against a bank account, a debtor’s employer deducts funds from the debtor’s wages until the debt is paid in full. How much a creditor receives is based on a formula from the CCP. This formula provides that the levy is the lesser of 25% of post-tax wages or 50% of the amount that the post-tax wages exceed 40 times minimum wage. You do not need to memorize this as the court provides a calculator for employers. High-income debtors generally pay the 25% figure, while low-income debtors pay a lower percentage or nothing. Effective September 1, 2023, SB 1477 reduced the withholding from 25% of post-tax wages to 20% of post-tax wages. The low-income multiplier is also reduced to 40% of the amount that post-tax wages exceed 48 times minimum wage.
For example, a debtor earning $100,000 per year may pay $3,000 per year less in garnishments now. A debtor earning minimum wage may now pay little or nothing, depending on their tax withholding. In addition, the CCP still allows debtors to exempt wages that are “necessary for the support of the judgment debtor or the judgment debtor’s family.” The result is more money for debtors and less for creditors.
Loss of Exemption
In addition to the above exemptions, debtors may exempt jewelry, vehicles, and other items, although the exemption amount is often capped. Sometimes a defendant will transfer an asset out of their name during a pending lawsuit in a misguided attempt to protect it from the plaintiff if they lose. This is akin to pulling the Go to Jail card in Monopoly. “Go directly to jail. Do not pass Go. Do not collect $200.” The Uniform Voidable Transactions Act allows a creditor to undo a transfer made while the debtor was insolvent or which made the debtor insolvent. By transferring the asset, a debtor loses their ability to exempt it. If a creditor successfully voids the transaction, the creditor may get the asset itself or the value of the asset. For example, if an insolvent debtor gifts his car to his daughter, a judgment creditor may be able to take the car from the daughter. Neither the debtor nor his daughter are allowed to protect it.
If you represent a debtor, go through their present assets as well as their financial transactions for at least the last year. Dates matter. If you represent a creditor, pull the most recent EJ-156 and doublecheck all the dates to see if an adjustment is coming. Compare that with the debtor’s financial disclosures and your asset searches. You do not want to waste attorney time and pay sheriff’s fees if your client will nott ultimately be able to collect.
While California’s exemptions have definitely increased, there are still many assets like vehicles that may not be fully protected. Both sides should identify what income or assets are at risk and use that in their settlement negotiations.
 Stanley Burrell, better known by most as MC Hammer, filed bankruptcy in the Northern District of California in 1996. His hits include “U Can’t Touch This” and “2 Legit 2 Quit.”
 Cal. Civ. Proc. Code §704.730
 CCP §§704.920, 704.950
 11 U.S.C. §§522(p), (q).
 CCP §704.220
 CCP §704.225
 CCP §706.050
 CCP §706.051
 Cal. Civ. Code §§3439-3439.14