Tag: exemption

Exemption

An exemption is the way you protect your assets in a bankruptcy. For example, the California homestead exemption is one example of how debtors can protect their home in a Chapter 7 bankruptcy. In California, there’s also an exemption to allow you to protect anything you want, but it has limits.

time of bankruptcy filing determines homestead exemption

9th Cir: To Avoid a Judgment Lien, Use Exemptions at this Time

9th Circuit: Lien Avoidance Homestead Determined at Time of Bankruptcy Filing

If someone wants to avoid a judgment lien in bankruptcy, is the homestead exemption the one at the time the lien attached, or at the time of the bankruptcy filing? The Ninth Circuit Court of Appeals has recently weighed in, and the answer can affect thousands of dollars of liens on your home.

Why it matters

Liens in bankruptcy don’t usually go away. But there are times we bankruptcy lawyers can reduce or avoid liens. You may have heard that the California homestead exemption got a massive increase in 2021. This protects more home equity than ever before for people filing bankruptcy.

Now couple that with the fact that some liens in bankruptcy can be avoided if they impair an exemption. So, the bigger the exemption, the better the chances you can avoid a judgment lien and make thousands — or tens of thousands — of dollars of judgment liens disappear forever.

It’s very common for bankruptcy attorneys to be asked to remove an old judgment lien from a property. This can be done by reopening an old bankruptcy case where the lien then existed but wasn’t known, or filing a new case if the lien now impairs an exemption. But for a new case on an old lien, given that the homestead law just changed; there can be confusion which timing — and exemption amount — is used.

The question then is: to determine if the judgment lien impairs an exemption (a simple math problem), do we use the puny California homestead exemption at the time of the lien attaching where the lien won’t impair an exemption? Or the massively humongous homestead at the time of filing? It will determine the very question as to whether the lien can be removed in bankruptcy.

The Ninth Circuit, citing the Supreme Court, clarified which timing counts

In the battle of the clock, bankruptcy lawyers fight over which timing to use. The Ninth Circuit Court of Appeals just clarified the answer. It ruled that, “we must look to the amount of the homestead exemption that Boskoski could have claimed if, as Section 522(f) commands, the Greek Village lien against his property is disregarded.” Barclay v. Boskoski, WL 16911862 (9th Cir, Nov. 14, 2022).

In doing so, the Ninth Circuit relied on the U.S Supreme Court case of Owen v Owen, 500 US 305 (Supreme Court, 1991). The Owen case involved a 522(f) lien avoidance issue also. In that case, a judgment was entered against debtor. Creditor then recorded a lien against debtor’s property, and then state law changed to better protect debtor with a homestead exemption.

The Supreme Court ruled, “To determine the application of § 522(f) they ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself.” Id. at 310-311. Or put differently, the language of 522f looks to the exemption the debtor would have been entitled but for the judgment lien.

And if there was no “old” judgment lien, the debtor “would be entitled” to today’s (larger) California homestead exemption. And that exemption is large enough where the lien would impair the exemption, and therefore can be avoided by 522(f).

A note about Wolfe v Jacobson

The creditor here, Barclay, argued that the Ninth Circuit was bound by Wolfe v Jacobson, 676 F.3d 1193, 1198 (9th Cir, 2012). It wanted “the entire state law” followed, per Jacobson at 1199. This Jacobson reading would have had the Barclay appellate court “apply all limitations that a state places on its exemptions when conducting the Bankruptcy Code’s lien avoidance calculation—including California’s limitations on the application of its homestead exemption.”

But the Ninth Circuit avoided that, and then pointed back to Owen, quoting the Supreme Court: “the Bankruptcy Code’s policy of permitting state-defined exemptions is not ‘absolute.'” Id. at 313. It found that the Owen case, involving lien avoidance, was a closer match than Jacobson, which doesn’t.

The 9th Circuit continued: “Anticipating the issue we address today, the Court held that ‘it is not inconsistent’ for the Code to allow states to define their own exemptions but ‘to have a policy disfavoring the impingement of certain types of liens upon exemptions, whether federal- or state-created.'”

In doing so, the Ninth Circuit in Barclay distanced itself further from Jacobson. Note that just a few months ago, new California SB1099 law was passed, which contained provisions which some speculate will limit Jacobson in other areas. By going out of its way to distinguish Barclay from it, it seems the Ninth Circuit is eroding the Jacobson holding without overturning it (yet).

The Ninth Circuit Already Ruled on Timing of Exemptions

The In re Barclay ruling is consistent with another case the Ninth Circuit affirmed on a very similar topic.

“It is well-established that the nature and extent of exemptions is determined as of the date that the bankruptcy petition is filed.” In re Chiu, 266 B.R. 743, 751 (9th Cir BAP, 1999), later affirmed, 304 F.3d. 905 (9th Circuit Court of Appeals, 2002), citing White v Stump, 266 U.S. 310, 313 (Supreme Court, 1924).

The Ninth Circuit in Barclay vs Boskoski, without going into much detail, gave a hat tip in passing to Stump above and its “snapshot rule.”

So, everything points in the same direction and lands at the same place. Exemptions are decided at the time of filing, and not the time of the (much) earlier lien attaching. This is consistent with the holdings of the 9th Circuit in Chiu, the Supreme Court in White v Stump, and the Supreme Court in Owen, which got there using different rationale and analysis.

All in all, good news for debtors!

California bankruptcy exemptions can save your house.

New! 2023 California Homestead Exemption Increased by Inflation

2023 California Homestead Exemption, increased by inflation

The 2023 California homestead exemption numbers are already available, and different from last year, and even the original range of $300,000 to $600,000. In fact, in 2023, they top out even higher than $600,000, which helps you save more of your home from creditors than the homestead exemption could in 2022. Why? Because of inflation. The new California homestead exemption is tied to the CPI, or consumer price index. And everyone knows things lately aren’t cheap.

Basics about exemptions

Chapter 7 bankruptcy is liquidation; the bankruptcy trustee can take your stuff. They don’t take the shirt off your back, but at some point they draw the line regarding what you can keep. These are the bankruptcy exemptions, and each state has its own. The California exemptions include a way to protect home equity.

There are two sets of California bankruptcy exemptions. California bankruptcy attorneys call these the 703s and 704s. The California homestead exemption is found in the 704s, at California Code of Civil Procedure 704.730. If you choose this way, you lose other things, including the ability to protect a tax refund. Meet with a bankruptcy attorney to find out what’s best for you.

The Three Homestead Exemptions in California Before 2021

The California homestead exemption can save your house.
Talk to a experienced bankruptcy attorney about the California homestead exemption

In the old days, and by that, I mean prior to 2021, the California homestead exemption was based on the characteristics of the person filing bankruptcy, not the location of the real estate. It was subdivided a few ways. Firstly, there was the bankruptcy exemption that a single homeowner gets. This was in old subsection (a)(1). Most recently, a single person who lived in a house gets to protect $75,000 of home equity under the California exemptions.

Secondly, there was a higher exemption for a married person’s residence. This was in (a)(2). The California homestead exemption for a married person is $100,000 in the last year of this system.

Finally, if you can tick one of three boxes, you would get the superduper $175,000 homestead exemption in California’s bankruptcy exemptions. To level-up and qualify for this, you have to either be:

  • 65 years old;
  • have a disability that prevents gainful employment; or,
  • 55 years old, and make below a certain income level that changes from time to time

This may seem simple, but what exactly is “disabled?” What does “as a result of?” What is the income level, and which time period is measured? Also, a good thing about the $175,000 California homestead exemption is that it would extend to the spouse of the person filing Chapter 7. So if the debtor is, say, 63 years old, but their husband is 67 but really doesn’t want to file bankruptcy, the 63 year old who does file Chapter 7 bankruptcy gets the $175,000 homestead exemption in California anyway.

In the right circumstances, someone filing consumer bankruptcy can protect a lot more house equity under this third option, which is less than the minimum after the law changed in 2021.

The new California Homestead Exemption starting in 2021

Then, in 2021, the California homestead exemption increased dramatically. This provided tremendous relief to California homeowners. What this means to the person contemplating filing bankruptcy is that more of their home equity can be protected. Why? Because they really do take houses in Chapter 7 bankruptcy.

Previously, the amount of home equity which could be protected was inadequate and hardly kept up with the inflated Calif real estate. But then in 2020, COVID-19 struck, and people were suddenly unable to pay their rent and mortgages. Partially in response to the pandemic, the state legislature passed and the governor signed a dramatic increase to the California homestead exemption.

The result is a system which depends upon the location where the house is, and has nothing to do with marital status or age. And this makes sense, as a homeowner in Ventura County probably has a higher home value than someone who owns a home in Lancaster CA. It’s now tied to the median home price for the previous year.

So, starting in 2021, homeowners who’ve lived at a home for 4 years or more get a minimum of $300,000 of home equity protection, and a maximum of $600,000 of California homestead exemption, based on what is, or was, mysterious data. What exactly is the county median home price? In Los Angeles and Orange County, a consensus slowly formed about the amount of the Los Angeles County median home price. And it changes each year (more on that below).

But be warned: if you haven’t lived there that long (and there are other factors which could jeopardize the new massive California homestead exemption), you don’t even get the $300,000 minimum.

Los Angeles County median home price 2023 and Exemption Inflation Calculator

You will want to consult with a qualified bankruptcy attorney before you risk losing your house.

2023 California Homestead Exemption: Updated numbers

The 2023 homestead exemption amount adjusts starting on January 1, 2023. Due to today’s historic inflation, the California homestead exemption in 2023 will be higher than in 2022, which was higher than the the initial range of $300,000 to $600,000.

Why? CCP 704.730 (b) says: “The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.” So let’s walk through the progression.

In 2021, the top limit for the California homestead was $600,000. Then, in June 2021, the CPI was 297.447, a 4.4% increase from the June the previous year. Applying that factor to the homestead amounts, that would increase both ends of the spectrum to $313,200 and $626,400. As inflation in 2022 is higher yet again, 2023 California homestead exemption will be even more than that.

Now, in 2023, we do the same thing all over again. With such high inflation recently at 8.27%, the 2023 California homestead exemption will be a little over $675,000. To be more precise, the 2023 inflation-adjusted range of the California homestead exemption is $339,189 and $678,378. To see how these numbers are reached, check out our own custom calculator for county median home price to reach the homestead exemption after adjusting for inflation. This will be helpful for the many counties whose median home price is between these two numbers.

2023 California homestead exemption chart los-angeles-bankruptcy-net
2023 California homestead exemption chart

Fun fact: Do you have to actually live at the home to get the exemption? For how long? Find out more here.

Be careful in Chapter 7 bankruptcy. It’s not always the best type of bankruptcies.

Read my 12 crucial tips before filing bankruptcy.

Don’t go it alone

You really should consult to a qualified Los Angeles bankruptcy lawyer, as you get what you pay for, and it’s not worth risking your home. If you don’t do this right, you’re literally gambling with your house.

Schedule a Zoom consult with me, and let’s talk.

Figuring the Los Angeles Country median home price size is like trying to calculate the median coin weight when all we have is data about stack size

How to Figure the Los Angeles County Median Home Price (2023)

How to Figure the Los Angeles County Median Home Price (2023)

The Los Angeles County median home price in 2022 and 2023 can be tricky to determine. There are different sources that say different things. It’s not clear which of the many options will be relied upon by courts and trustees for the California homestead exemption. Also, while bankruptcy may seem to be “just forms,” make sure you check out my list of 12 crucial tips to do or avoid before filing bankruptcy.

2022-2023 update: there seems to be a consensus among local bankruptcy attorneys as to what the Los Angeles County median home price is. More than that, this L.A. median price changes each year. While it’s still untested in court, a lot of the initial uncertainty has cleared up. Read on!

Warning: This is provided as information only, and is not legal advice. If you are thinking of filing bankruptcy, do not rely upon any information on this webpage. You are assuming all risk and are literally gambling with your home. You will have only yourself to blame if you use the wrong numbers for the Los Angeles County median home value.

See a bankruptcy attorney for more updated information before you file, because there are ways you can lose the exemption.

Average is not Median

los angeles county median home value
The Los Angeles County median home value is not the mean

Before we can determine what the Los Angeles County median home price is, we’ll need to know what it’s not. A median is not the same as the average. This takes us back to high school math, but a quick couple of definitions:

  • Average (or mean): this is where you add up the data, and then divide by the number of data points
  • Median: this is where you list all the data, and then take the number which is at the midpoint

So, as you can see, the median is not the same as the L.A. County average home value.

The Median Changes Over Time

Because the median is the midpoint of all the data, each time there’s another home sale, the median changes and moves. You may figure with a random distribution of data, there would be an equal likelihood that future sales will be about half above and half below the median, keeping the median the same. But home prices change over time and are not static, and particularly during a virus pandemic like the COVID-19 coronavirus we had in 2020 and 2021.

For example, you might find some data sources that list the median home prices for last year, but only through December. Can you assume that houses would sell for the same prices in December around the holidays as they do during the summer when people move a lot and kids are usually out of school?

Read Our Means Test Guide on Median Income Limits.

The Los Angeles County median home price is not the same as that for the L.A. area

Los Angeles County is one of the largest counties in the United States, with over 4,000 square miles. While you may find data for the metropolitan area, that’s very different than the numbers for Los Angeles County. Why? Because L.A County goes from South Bay all the way up to the Antelope Valley and Lancaster. The Los Angeles County median home price is pulling together data from all these.

Los Angeles County is home to about 10,000,000 people, while the city of L.A. has “only” 4,000,000. If you use only city data, you’re missing out on home values in remote areas in LA County like Littlerock and Pearblossom on the 138 and on the way to Vegas.

The Median Home Value is not the same as Median Home Sales Price

You can find some sites which average the values of the homes in the L.A. area, or even Los Angeles County. The problem with that is this: you’re using their own estimate about the Los Angeles county median home values, even those that didn’t sell, when what you’re really needing is the sales price of homes that actually sold.

After reviewing all the above, you can see that we’re looking for a very specific thing here, and no one website reports the Los Angeles County median home price, or has information that in 2022 is depended upon reliably as the “go to” source for Los Angeles County median home value information. Over time, maybe one place will emerge, but for now there’s just a few “almost there” entries.

Some Data Sources Which are Close

which data source can provide the los angeles county median home price
Which of the various data sources is the right one?

With all that being said, you can understand the challenge of finding the Los Angeles County median home price. Most websites are using averages, some have only the L.A. area, and none of them let you have access to the data of all the home sales so you can calculate the median yourself.

Zillow: this company is famous for using its proprietary “Zestimate” to approximate home values. For example, if you go here, you can find what Zillow calls “the typical home value of homes in Los Angeles.”

But that number isn’t clear…. What does “typical” mean – average or median? Remember, they’re different. Home value or home price? There’s no indication this is relying on sales data. And for what time period? Now, at this snapshot in time, last month, this year, or last year?

The website doesn’t say what the Los Angeles County median home price is. It also doesn’t say if it includes single-family homes, is only single-family homes, or something else.

Realtor: This website features real estate, but if you dig down deep enough, you can find market data, research, and trends. It provides data by month, not year, and appears to be providing listing prices, not sales prices.

Redfin: Redfin is another national real estate website, which tracks listings and sales, and helps connect home buyers to realtors. It has market dataand trends, but seems to be restricted to only Los Angeles city, not all of Los Angeles county median home price info.

CAR: The California Association of Realtors also has some market data. But it cautions that the data which it is using comes from over 90 associations and counts “single family detached homes only” and “median price changes may exhibit unusual fluctuation.”

Trulia: Similarly, Trulia is a real estate website that tracks home sales and house prices. It has a way to filter for L.A. and show market information at the bottom of the page, but doesn’t show Los Angeles county median home price or value info. It appears to list home values the way Zillow does, but it doesn’t appear to be relying on sales data.

News reports: You may find news reports from Los Angeles-based newspapers that report data on home sales prices.

how to calculate the inflation-adjusted county median home price
When calculating the inflation-adjusted county median home price, the median coin isn’t the median stack.

Note: you may find some websites that provide spreadsheets of Los Angeles County median home price data, and lists medians by month. Taking the median of the medians isn’t the same as the median of all the sales data. It’s just creating garbage data. To find the true Los Angeles County median, you’d have to have access to all the sales data. This is something very few people have.

And that’s the problem: no one person has the data, and different places which are close report different numbers for the Los Angeles county median home value.

While some of these are close, none of these seem to provide “the” number. Not one can be relied upon, especially for something which involves risking your home.

Summing up the initial Los Angeles County median home price

Is there one bottom line source? Not yet, not until it’s litigated, and honestly, a lot of us in 2021 are trying to sift through all this information to make sense of it. Maybe in the months ahead, one choice will crystalize as the one we all rely upon.

This will likely be after litigation and people guess wrong. Sadly, they will lose their homes in some cases because they guessed wrong on home value. Currently, there is not one number that we can reliably “bet the house” is the median home price in Los Angeles County.

2022-2023 update: with all that said, it is generally agreed upon that the 2021 and initial Los Angeles County median home price is $600,000, adjusted for inflation.

But wait, there’s more!

California homestead exemption, county median price adjusted for inflation

Recall that the California homestead exemption is the county median price adjusted for inflation. So, each year, each county’s exemption amount is different. Section (b) of the new California homestead says:

The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.

We don’t know exactly where the county median number comes from, (though the Central District of Calif court seems to endorse CAR but that may or may not be valid evidence in a trustee challenge). Further, the inflation percentage is a different number whose source is similarly mysterious.

Here is how the inflation adjustment of section (b) would work.

The California fiscal year ends in June. Therefore, we take the difference between the old June CPI number and compare it to the most recent new June CPI number. What is that percentage?

CPI and inflation-adjusted California homestead exemption
CPI and inflation-adjusted figures to use in calculating the California homestead exemption, chart from ca.gov showing increases from June 2020 to June 2022

For 2022, the difference between the June 2022 number (297.447) and the June 2021 number (284.835) represents a 4.43% increase. Therefore, for counties capped by statute at the $600,000 maximum, the maximum 2022 median home price and homestead exemption would be $626,566.96. This number will change again in 2023, and “will adjust annually, beginning on January 1, 2022.”

I made a calculator so you can figure out this year’s California homestead exemption amount for any county in California (assuming you have the median sale price number), adjusted for inflation. Better yet, we can calculate next year’s inflation-adjusted homestead exemption if we have June’s CPI numbers already. So bookmark this page and return every few months or so.

Remember, these Calif CPI figures — and the resulting percentage increase — also impact the inflation-adjusted homestead exemption in counties where the minimum was $300,000, or counties in between that and the max, like Riverside and San Bernardino County.

Be cautious, use this information at your own risk, as you’re literally gambling with your (or your client’s) house. Thanks for reading.

Contact us

If you’re in Los Angeles County, contact us to request a case evaluation, or go ahead and schedule it for free right now.

The 1215-day rule is unsettled about residency vs ownership in California

1215-day rule: Is Residency Needed, or Merely Ownership in Calif

1215-day rule: Is Residency Needed, or Merely Ownership in California?

A look at how closing the Mansion Loophole could lose your home in bankruptcy

Does the 1215-day rule for the homestead require occupancy as a domicile, or merely ownership? This is a new issue here for bankruptcy attorneys in California. It matters to you, too, if you own a home in California and are thinking of filing bankruptcy. This is because the homestead exemption amount until 1/2021 was always below the 522 number. Let’s break this apart in plain English a little bit so we can understand what’s at stake.

New California Homestead Exemption and the Mansion Loophole

Homestead Increased in California

As you may have heard, the California homestead exemption increased recently. For years, it protected a maximum of $100,000 in home equity for a typical married couple. Suddenly in 2021, the California homestead was increased to a minimum of $300,000, and probably more than that where you live.

Great news, right? But there’s a catch. Well a few catches. But let’s focus on just one: the mansion loophole.

The Mansion Loophole, Federal Exemptions, and 522(p)

What is the Mansion Loophole?

What is the mansion loophole, you ask? It’s the kind of concept that allowed OJ Simpson to go buy a big fancy house in Florida and then move to that state and immediately exempt tons of equity in that home so that his creditors couldn’t get their hands on it.

Congress decided that’s not fair to parachute in and just take advantage of a state’s generous exemptions. Or for scoundrels such as Enron executives like Kenneth Lay to shield millions in equity after harming so many people. To benefit from a state’s laws and protections, Congress said you need to acquire the property for a period beforehand, and not merely a domicile.

The Federal Exemptions, 1215 days, and 522(p)

Federal exemptions are bankruptcy protections available in some states, and fallback numbers for other states. They are figures published and updated by the federal government. The federal exemptions increase periodically. The 1215-day number used in here is valid for 2022, but may adjust in the future.

Which brings us to 11 USC 522(p).

to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
(B) a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence;
(C) a burial plot for the debtor or a dependent of the debtor; or
(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.

The gist of all that is that you need to have acquired an interest in the property over 1215 days prior to claiming the homestead exemption for it. OJ would now need to wait over three years after acquiring the property before his assets would be safe from creditors. Mansion loophole closed.

The 1215-day rule is unsettled about residency vs ownership in California bankruptcy law
Joyful household members establishing their domicile in an effort to comply with 522(p)

Why this matters

“Great,” you say, “but what does this have to do with me?”

This means that if you file bankruptcy and you have a house, you don’t get the gargantuan California homestead exemption of a minimum of $300,000 if you acquired the interest in the last three years. You lose it, and “only” get the federal homestead exemption of $189,050.

Maybe that’s enough. Maybe you lose your home in bankruptcy. The 1215 days matter to debtors in California. It can make the difference between keeping your house in Chapter 7 bankruptcy, or losing it.

They never used to matter. Why? Because before 2021, we could never “lose” the exemption down to $189,050. This is because we were already capped at $100,000. The 522 limitations were never a factor in California. Until now. Suddenly, a $600,000 homestead can be slashed to less than a third. It matters that all of 11 USC 522 is paid attention to very closely now for California bankruptcy lawyers.

But wait, there’s more.

1215 days: Ownership or Residency?

The issue

Do you have to live in the place for 1215 days, or just own it? Let’s say you have a rental property in Santa Barbara which you acquired and have owned for over four years. It’s had renters living in it while you live elsewhere, and you’ve had title all that time. Then a month before you file bankruptcy, the renters leave and you move in. You live there a month, but have owned it for over 1215 days. Do you get the big massive California homestead exemption, or the shrimpy 522(p) reduction?

It’s not as clear as you might think.

Looking back at 11 USC 522(p), the words “amount” and “interest” and “acquire” are not defined in the Bankruptcy Code. So, like most things in life, it’s settled in court.

The Ninth Circuit ruling on the 1215-day rule

The Greene Case Looks Like a Win

The issue was looked at by the Ninth Circuit Court of Appeals in 2009 (in the context of Nevada state law and its exemption). There, the 9th Circuit ruled:

We hold that “any amount of interest that was acquired,” as used in Section 522(p)(1), means the acquisition of ownership of real property and that the monetary cap in Section 522(p) does not apply to property to which a debtor acquired title more than 1215 days before she or he filed a bankruptcy petition. That language does not include a homestead claim for the underlying property interest, which claim was recorded within the 1215-day period.

In re Greene, 583 F.3d. 614, 624 (9th Cir, 2009).

Boiling all that legal jargon down, the Ninth Circuit is saying that the smaller cap of 522(p) doesn’t apply if the acquisition of ownership of the property was more than 1215 days ago. The 9th Circuit Court of Appeals ruled that it can’t limit a homestead property interest that started in the 1215-days period.

Or more simply, the court in Greene said that as long as ownership is more than 1215 days, the shorter homestead doesn’t matter. But remember, it was ruling on Nevada law and its exemptions.

But The State Law Must be Interpreted

Before we celebrate here in California, note that there’s a way this may not be applied here. In other words, state law must be looked at, and each state has its own meaning and reasoning for its homestead exemptions. Is it intended to create a property interest? Or is it just privileges?

The 9th Circuit reached the Greene ruling after a review of state law (both Nevada and Texas) regarding the purpose of the exemption, and concluded that Nevada exemption law created a property interest, and not merely exemptions and privileges. (Id. at 621-622, citing the review of Texas in In re Rogers, 513 F.3d. 212, 225 (5th Cir, 2008).

But What About California’s Homestead Exemption: Privilege or Property Right?

In California, remember, this is all new because the 1215-day cap of 522p never mattered before 2021. The 9th Circuit has not ruled on this recently, that I’m aware of, in the context of California’s homestead exemption.

However, a long time ago, when Pat Brown was governor, it did rule on the issue, in a case which would distinguish it from Greene and Rogers. The Ninth Circuit Court of Appeals ruled that California’s homestead laws do not create property rights, but merely exemptions.

“…the California state courts have repeatedly held that the filing of a homestead declaration in that state creates merely a privilege or exemption attached to but not otherwise affecting title.”

Shaw v United States, 331 F.2d. 493, 497 (9th Cir, 1964).

That would distinguish it from the good news of the Greene case, and means that you have to live there for the 1215 days to get the California homestead exemption, even if you owned it for over four years.

In closing

Best I can tell, Shaw is still good law, at least until someone tests it in the years to come. This means the safe bet is residency is required for 1215 days at the property to “acquire” it, and not merely ownership.

Perhaps with the new broadening of the homestead exemption in 2021 and the importance it underscores, the 9th Circuit may now reach a different conclusion, but it’s not something I’d knowingly bet a client’s house on.

California Homestead and Reside Away from Home and State presents challenges

California Homestead: Intent to Reside and the Out-of-State Home

California Homestead: Intent to Reside and the Out-of-State Home

A bankruptcy attorney colleague recently asked, does the California homestead exemption protect you if you don’t reside in the house? Are you required to live in the home? For how long? Who qualifies? Does the homestead exemption protect the home if the house isn’t in California? The answer, like most things in law, is: “it depends.”

Dual residency in two states and and claim homestead in both?

No, there is no dual residency in multiple states for the purposes of homestead. As you’ll read below, a homestead is the place in which you primarily live. You can’t primarily live in two places. So, the determination is where you primarily reside, which state law applies, and is the house protected by the California homestead exemption.

Let’s look at these “away from home” situations one at a time.

The California homestead and intent to reside

california homestead away from home
California homestead is challenged if away from home, and the intent to actually live there is unclear

First, can someone claim the California homestead exemption if they live in the house on the date the petition is filed, but move out after? What if they move out after the Chapter 7 bankruptcy is filed, but it’s just a temporary relocation? Or what if the debtor who filed bankruptcy really has no intention to return?

The result is very fact-specific, and has had bankruptcy courts and appellate courts carefully examining the particulars for the debtor before filed, on the date the case was filed, and then after the case was filed. Let’s review a few significant cases in the Ninth Circuit to see how the courts have ruled.

Not residing in the house on date of filing

First, let’s look at the case of Andy Diaz. He owned and lived at a home in Orange County, Calif. He then suffered two brain aneurysms. Those required many surgeries, and left Mr. Diaz in a coma. After weeks, he awoke from the coma, but couldn’t walk or speak, and the symptoms were similar to a stroke.

Mr. Diaz got better, and to rehabilitate, moved into his mother’s house, which was across the street from his own home, six houses down. Diaz then filed bankruptcy, claiming the homestead exemption in his home where he wasn’t living.

The Chapter 7 trustee challenged, and won in bankruptcy court. Diaz appealed. Nobody disputed that the debtor didn’t live in the house when the bankruptcy was filed.

The 9th Circuit Bankruptcy Appellate Panel (BAP) ruled that, “California courts have long held that a lack of physical occupancy does not preclude a party from establishing actual residency and claiming the homestead, if the claimant intends to return.” In re Diaz, 547 BR 329, 335 (9th Cir BAP, 2016). It went on: “Physical occupancy on the petition date is therefore neither a necessary nor sufficient condition of residency.” Id. at 336.

Residing in the home at filing, but intent to move

Next, let’s look at the case of Kevin Gilman. He did live in his house on the date of filing. Residency established, slam dunk on the homestead exemption, right? Not so fast.

Not an actual photo of Gilman on the date of his bankruptcy petition was filed and the home in escrow

It turns out that Mr. Gilman also had his home in escrow at the time of filing. Creditor challenged. The bankruptcy court agreed with the debtor. The creditor appealed.

The appellate court found that, unlike Diaz, it was undisputed that Mr. Gilman had occupancy of the premises, and was a continuous resident of the property.

However, it also ruled: “To determine whether a debtor resides in a property for homestead purposes, courts consider the debtor’s physical occupancy of the property and the intent to reside there.” In re Gilman, 887 F.3d 956, 965 (9th Cir, 2018).

It then cited the case of Mr. Diaz when it wrote: “Physical occupancy on the filing date without the requisite intent to live there, is not sufficient to establish residency.” Gilman at 966, citing Diaz at 336.

After all that, the bottom line after Gilman to successfully claim a California homestead exemption is that, among other things, regardless of where the debtor lives on the date the bankruptcy petition is filed, there has to be evidence to show that the debtor intends to live at the residence.

california homestead residence intent extraterritorial
California homestead exemption is dependent if you’re moving away from home, or just going for a temporary walk

Intent to reside but only equitable interest

What if the person filing bankruptcy claiming the homestead exemption in California doesn’t even have title to the house? That brings up the case of Steve Nolan. There, Mr. Nolan claimed an exemption for a property in Corona, California. Like Gilman, he lived at the property, and intended to continue living there. Unlike Gilman or Diaz, he didn’t have legal title to the house.

Instead, he was both trustee and partial beneficiary of a trust, which held title to the property. The bankruptcy court ruled that Mr. Nolan did not have an interest in the property subject to an enforcement lien and not even bare legal title.

However, because he was 50% beneficiary of the trust, that portion is property of the estate per 11 USC 541(a)(1) and (c)(2). The Court then reviewed applicable case law that allows homesteading based on an equitable interest, and ruled in debtor’s favor. In re Nolan, 618 BR 860 (Bankr Ct CDCA 2020).

The California homestead exemption for the out-of-state house

Occupancy, future intent, but home outside California

Next, we ask if someone claim a California homestead exemption if the California debtor lives in the house, intends to reside there so it’s his residence and domicile, but the house isn’t in California? The Ninth Circuit Court of Appeals considered this and ruled: yes.

This is the case of Robert Arrol. He bought a house in Michigan. Then, without selling that home, he moved to California for two years. He then moved back to his Michigan house, and within 90 days of moving, he filed bankruptcy in California.

He used California’s homestead exemption to protect his Michigan residence. You guessed it: the bankruptcy trustee objected to the homestead exemption. The bankruptcy court ruled in favor of Mr. Arrol, and the trustee appealed, and lost again. The trustee appealed yet again, this time to the Ninth Circuit.

The Ninth Circuit’s ruling on an out-of-state California homestead

The appellate court examined 11 USC 522(b)(2)(A), which pointed to state exemption law. Given that Mr. Arrol lived in California for the greater part of 180 days before filing, California law applied. Looking at CCP 704.730 and 704.710(c), the appellate court determined whether the state law allowed this. The Ninth Circuit found that California state law didn’t limit the homestead exemption to dwellings in California, and concluded,

We find nothing in the California exemption statutory scheme, its legislative history, or its interpretation in California case law to limit the application of the homestead exemption to dwellings within California.

In re Arrol, 170 F3d 934, 937 (9th Cir, 1999).

California homestead exemption for out-of-state property with no intent

Mike Showalter owned an interest in a Florida house. He had lived at the Florida property for some time over decades. For the twelve years prior to filing bankruptcy, he lived in California in a rental property. After filing bankruptcy, he moved to a different rental property in California. A month before filing bankruptcy, while living in California, he signed a declaration that the Florida house is his principal dwelling, and it’s his homestead.

The appellate court determined that the declaration was “patently untrue” and by Mr Showalter’s own testimony, he hadn’t lived at the Florida property for about twenty years, he didn’t live in Florida, and no credible intention to return to live at the Florida property, and the claim of California homestead is invalid. In re Showalter, (12-22720, 9th Cir BAP, 2013).

Residency and the California Homestead: Piecing it all together

As of this writing, it seems the current law on the California homestead exemption for a home where you maybe don’t live which may be in a different state is the following. You can claim the California homestead exemption if it’s your residence, California law applies, and you intend to live in that residence as your future home, even if it’s not in California.

ride-through california bankruptcy

Ride-Through Back in Calif Bankruptcy

Ride-Through Back in California Bankruptcy

Ride-through is back in California bankruptcy. This is big news for 2022. It restores the right of someone in bankruptcy to be free of personal liability on a car loan in the event of a future default. To be clear, you don’t get a free car in bankruptcy. But if you don’t reaffirm the car debt, and stop paying the car after the bankruptcy discharge resulting in a repo, you won’t owe the deficiency balance.

The change is part of SB1099, a bill the governor recently signed into law. The new law includes other protections or exemptions, for people filing bankruptcy. The changes take effect on January 1, 2023. Caution: it is likely that this may be challenged by lenders or trustees in court, so rely on this new law at your own risk. More on that below.

Meaning of Ride-Through Doctrine in Bankruptcy

ride-through doctrine meaning
Meaning of Ride-through doctrine: car loan goes thru without adding dirt

The meaning of the ride-through doctrine in bankruptcy is this: a vehicle can go through Chapter 7 bankruptcy without the debtor being on the hook for the car loan in case of future default after the bankruptcy is done.

In my ultimate guide on Chapter 7 bankruptcy, I use a car wash as a metaphor for the process as a simple way to explain it. While the bankruptcy carwash is intended to remove much dirt, the ride-through doctrine means that the car owner isn’t forced to add the new road tar to his vehicle when it comes out the other side.

You’d think that it would be common sense that all debts that existed at the time the debtor files bankruptcy would be discharged in the successful case. With credit cards, that’s certainly true (in most cases). However, a secured debt like that for a car or a house is treated differently. If you want to keep the car, you must stay current on the payments for life of the car loan.

If, after the bankruptcy, the debtor and car owner loses his or her job and they need to turn in the car or have it get repossessed, what happens with the balance of the car loan? With the ride-through doctrine, the “old” bankruptcy reaches into the future and eliminates the new leftover debt. This is huge, as it can be thousands of dollars for something which was completely unplanned or unforeseen.

2005-2022: Congress & BAPCPA End Ride-through

It wasn’t always this way. During the dark years of 2005 through 2022, the ride-through doctrine was dead all throughout the nation. This is because back in 2005, Congress passed major bankruptcy reform called BAPCPA. As part of the sweeping changes, in a huge favor to big banks, Congress ended ride-through for all the people in the land.

In its place, Congress compelled debtors seeking a new start by filing bankruptcy to sign reaffirmation agreements if they wanted to keep their cars. A reaffirmation agreement is where a debtor (you guessed it) reaffirms their debt in a bankruptcy.

This means that the person signing the contract is promising to owe the debt and undo the bankruptcy with regard to it. Instead of discharging a debt, a reaffirmation is promising to owe the debt, no matter what. Promising to owe debt is bad, and the opposite of the goal of a successful bankruptcy. Millions of people seeking to be released from bondage to debt were forced to sign contracts owing it, or face losing their car anyway. These were dark times, indeed.

2023: California restores Ride-Through in Bankruptcy

But California changed that. In September 2022, a new law was completed which becomes effective in 2023, As part of the wide-ranging changes, California restored ride-through in bankruptcy. With Calif bankruptcy ride-through, failing to sign the reaffirmation agreement isn’t considered a default.

The pertinent “ride-through” bankruptcy part from the new CA law:

(2) Neither the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the borrower or other person liable on the loan nor the status of either of those persons as a debtor in bankruptcy constitutes a default in the performance of any of the borrower’s obligations under the loan, and neither may be used as a basis for accelerating the maturity of any part or all of the amount due under the loan or for repossessing the motor vehicle. A provision of a contract that states that the act of filing a petition commencing a case for bankruptcy under Title 11 of the United States Code by the buyer or other individual liable on the contract or the status of either of those persons as a debtor in bankruptcy is a default is void and unenforceable.

There it is: a person using Title 11 (which is the Bankruptcy Code) cannot be said to be in default, and any contract that says a person is liable on their car loan in case of default is void and unenforceable. This means there is no more repossession for failure to reaffirm or refusal to sign a reaffirmation agreement. This is how, during 2005-2022, some car lenders repossessed vehicles even if the borrower was current on the loan. The infraction? Failing to sign a reaffirmation agreement. So now you ask: after 1/1/2023, do I have to reaffirm a car loan in California bankruptcy and stay personally liable on the debt? The answer appears to be, “no.”

Preemption: Supremacy Clause, federal law, and California’s ride-through

Can a state change, or carve out an exception, to federal law? It remains to be seen whether this portion of the law will be challenged by creditors and car lenders. The strongest argument to challenge California’s bankruptcy ride-through is the Constitution’s Supremacy Clause of Art VI, Sec 2. This would state that the federal bankruptcy laws of 11 USC 521(a)(2) and 11 USC 524 are “supreme” to and therefore preempts California state law, and by applying the Supremacy Clause, the part of the state law which conflicts with federal law is void.

A rebuttal to this would be that California’s bankruptcy ride-through is not in direct conflict with the Bankruptcy Code or of Article 1, Section 8 of the Constitution’s enumerated powers. California is not making laws about bankruptcy. Instead, the state can claim it is merely clarifying state law, as is its right. It can assert that a state has the right to define what is and is not a “default” in California, and a bankruptcy is not a default. Or whether or not car lienholders can repossess a vehicle, or make debtors owe the leftover deficiency balance on a debt after repo from an old bankruptcy case now closed. It remains to be seen if creditors or trustees act on this, and if so, which is more persuasive to a court of law.

California’s Ride-Through is a New Day Dawning for Debtors

new dawn of ride-through is back
There is a new dawn: Ride-through is back in California

The dark days of forced reaffirmation are behind us. No longer will a person seeking to become debt-free be coerced to sign a contract promising to owe on a potential future default. No more will hopeful Californians be saddled with thousands of dollars of debt after completing their bankruptcy, unable to file again for a number of years. Never again will people finishing a bankruptcy lose their car even though they were current on payments.

A new dawn is emerging in California. A radiant era where people filing bankruptcy won’t have to worry about having an old debt survive and burden them as a future liability. A glorious future where someone can seek a new start without compulsion, and have the freedom of a clear conscience, free of worry, and without having old debt burden them.

Yes, ride-through is back in California bankruptcy!

sb1099 new california exemptions good news

SB1099: New 2023 California Bankruptcy Exemptions Increase

SB1099: New California Bankruptcy Exemptions Increase for 2023 | 5 Major Wins

SB1099, the new California exemptions increase which gives debtors in bankruptcy more protections, is now law. The new California exemptions for 2023 help people in bankruptcy keep more of their assets, including their cars, their home, money, support pay, and sick leave. The bill was signed by the governor yesterday, and takes effect 1/1/2023.

Note that SB 1099 and the 2023 California exemptions are different from the 2021 increase in the California homestead exemption which is tied to Los Angeles County median home prices. Last year’s homestead exemption boost strictly involved homes. In contrast, the 2023 exemption hikes for California improves protections for homes, cars, savings, support, and accrued leave and wages.

Caution: as the new law has been in effect for just a few days, it’s likely that creditors and trustees will challenge key portions of it in court. As such, reliance on it and its changes should be done with caution until it’s established with some history and caselaw.

While the changes in the new California exemptions of SB 1099 are many and wide-ranging, below are some key highlights.

Home equity appreciation now goes to debtor, not the estate

The provision

A key provision of the new California exemptions law is that postpetition appreciation in the home equity of debtors cannot be taken to repay debts. Section 2 of the SB 1099 says:

[I]n a case where the debtor’s equity in a residence is less than or equal to the amount of the debtor’s allowed homestead exemption as of the date the bankruptcy petition is filed, any appreciation in the value of the debtor’s interest in the property during the pendency of the case is exempt.

This has the possibility to addressing the horrible, terrible, no-good decision of In re Jacobson, 676 F.3d 1193 (9th Cir, 2012) which provided the perverse result that debtors had a contingent homestead exemption.

New California exemptions provide more protection for home and appreciation
New California exemptions provide more protection for homes and their appreciation

There, the Ninth Circuit ruled, “That right was contingent on their reinvesting the proceeds in a new homestead within six months of receipt. Cal.Civ.Proc.Code § 704.720(b). The Jacobsons did not abide by that condition and thus forfeited the exemption.” Jacobson at 1199.

Now, with SB1099 becoming law, regardless which way the housing market goes after homeowners file bankruptcy, appreciation in their house is theirs, and not that of the trustee who previously could take it to pay their debts. However, there is a countering argument that the legislature here says exemptions are not fixed on the filing date, which agrees with Jacobson, and thus, perhaps the case and its ruling are still valid. We’ll have to see how that plays out in the courts.

November 2022 update: Did the Ninth Circuit just chip into Jacobson, in a gradual erosion towards the ruling’s demise?

A Note on Preemption and SB1099

Section 541(a)(6) says that the estate is entitled to postpetition appreciation. The Ninth Circuit BAP has held that to be the case, even if there is no equity on the date of filing. In re Viet Vu, 245 BR 644, 649 (9th Cir BAP, 2000). Creditors can challenge the new state law of SB1099 (or at least this portion of it) as being preempted by federal law, and even 9th Circuit authority on the point. It remains to be seen what courts would do.

Also, 11 USC 521(a)(2) says that a debtor must perform his or her stated intention about the collateral and secured debt with the filed petition. The options in the federal statute are: reaffirm, redeem, or surrender. Lenders can assert that state law SB1099 is preempted by federal law of Section 521. One counter to this is that, by and large, debtors in California have not been reaffirming mortgages, which are also secured debts that fall under 521. Perhaps treating vehicles the same way, pursuant to California statute, will be similarly allowed.

Ride-through for Cars is Back in California

Bankruptcy ride-through is where debtors can have their car loan “ride through” their bankruptcy without having to sign a new contact. In 2005, the bankruptcy reform known as BAPCPA required debtors in Chapter 7 bankruptcy to sign reaffirmation agreements if their lender provided one. This meant that the debtor owed the car loan, even if they lost the car to repossession after bankruptcy. With SB 1099, the debtor doesn’t need to sign the reaffirmation agreement, and the car loan can “ride-through” the bankruptcy case. Ridethrough was the norm before BAPCPA, and now in California, it has returned. The ride-through policy protects debtors from being liable for a big debt if they eventually default on the car loan.

The “ride-through” bankruptcy part from the new CA law helps debtors. In short, no longer is the person in bankruptcy gambling that they won’t suffer some future hardship and lose the car, and still be stuck post-bankruptcy with thousands of dollars in a car loan they can’t afford. Ride-through in bankruptcy for cars is back in California.

Car Exemption is Increased to $7,500

The new SB1099 law also increases the car exemption amount to $7500, regardless of which exemption scheme is chosen. The California exemptions have two tracks: in the 703 and 704 sections of the California Code of Civil Procedure. Each section previously has a different amount for protecting equity in a vehicle. Now, regardless which scheme debtors choose, they can protect $7,500 of equity. This is crucially important in this era of record prices for used cars.

Sick leave & family leave time protected up to $7500

Family leave, sick leave, and vacation credits are now exempted up to $7,500, as these terms are defined in Section 200 of the Labor Code.

Alimony and support

Pre-existing law included an alternative exemption for the debtor’s right to receive alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. This new California exemption adds a general exemption matching the existing alternative exemption.

And there are more.

New California Exemptions of SB1099 help debtors … a lot.

While the list goes on and on, these are the key provisions. It amends Section 2983.3 of the Civil Code, Sections 703.140, 704.010, 704.050, and 704.113 of, and to add Section 704.111 to, the Code of Civil Procedure, and amends Section 22329 of the Financial Code, which relates to bankruptcy. The bottom line is the newly-enacted SB 1099 California exemptions protect homeowners, car owners, people receiving support, and sick pay. It’s a win for Californians, and those who lose out are the credit card companies. Rejoice, California!

fraudulent transfer California

Fraudulent Transfer California: Top Keys

Fraudulent Transfer in California: Top Keys

Fraudulent transfers. Voidable or fraudulent conveyances. They go with these 17 words: “Have you sold, transferred, or given away anything worth more than $3,000 in the last four years?” It’s a 341(a) question bankruptcy attorneys can recite in their sleep, and one that can cause our debtor clients to have nightmares. The reason is the trap known as fraudulent transfers, voidable transfers, fraudulent conveyances, and the like.

Fraudulent transfer in California comes up typically here in Chapter 7 bankruptcy. Also known as a fraudulent conveyance, it can get your friends and family in hot water. It’s one of the top tips recommended to do or avoid before filing bankruptcy. Fraudulent transfer grief can even include the recipient being taken to court in a lawsuit, and forced to give up something they own. It’s terrifying and a nightmare. Worst of all, it can all happen with the purest of intentions.

That’s right: fraudulent conveyance doesn’t even require fraud. More on that in a bit.

What is a Fraudulent Transfer?

With all this talk about voidable transfers or fraudulent conveyances, we should probably define the terms. What’s a transfer? The Bankruptcy Code defines a transfer, for our purposes, as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property, or an interest in property.” 11 USC 101(54D).

voidable transfers
Transfers in bankruptcy are defined as broadly as possible

You can’t get more all-inclusive of a definition than that. Direct or indirect. Definitely or maybe. Voluntary or not. Parting with property, or even just an potential stake in property. It “literally encompasses every mode of parting with an interest in property.” Matter of Besing, 981 F2d 1488 (5th Cir, 1993). Basically, if there’s something you had or could have had (or even had the possibility of maybe one day having), and… now you don’t, that’s a transfer.

So that’s a transfer. Now, what’s a fraudulent transfer?

Fraudulent conveyance or transfer isn’t defined in the Bankruptcy Code. However, case law defines fraudulent transfer in California (and the Ninth Circuit) as a transfer of “some property interest with the object or effect of preventing creditors from reaching that interest to satisfy their claims” or “an act which has the effect of improperly placing assets beyond the reach of creditors.” In re First Alliance Mortgage Company, 471 F3d 977, 1008 (9th Cir, 2006).

A fraudulent transfer as defined by the Ninth Circuit Court of Appeals is some act that stops your debts from getting something that would satisfy their claims. Note that the action can have either the “object or effect.” That means what you did has was to stop the creditors from getting it as the intended goal (object), or even just the unintended impact (effect). But the appellate court went on. In the alternative, an act of putting something where the creditors can’t get it, and here the 9th Circuit adds the term “improperly.” Again, there’s talk of effect, which means you didn’t even have to do the act on purpose.

Summing that up, a transfer is pretty much anything you had but now don’t. A fraudulent transfer in the 9th Circuit is a transfer which had the goal or even just the unintended effect of making it so your creditors couldn’t get to the thing. When you step back, this seems super broad and a trap that pretty much anyone can fall into without even meaning to, just because they sold their paid-off pickup truck a few years ago. And it can be, but for some limitations in the state and federal law.

The Law on California Fraudulent Transfer

Fraudulent transfers in California are governed by the Uniform Voidable Transactions Act (UVTA). The UVTA is Calif Civil Code 3439.04. Notice the name: voidable transactions. This should get your attention, because it implies that someone can void, that is, undo or erase the transaction or conveyance. And that is exactly what can happen. Let’s look at what the law says.

What California UVTA says about Fraudulent Transfers

The text of the fraudulent conveyance law in California:

(a) A transfer made or obligation incurred by a debtor is voidableas to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that the debtorwould incur, debts beyondthe debtor’sability to pay as they became due.

There are a couple of things to point out about this.

First, with California voidable transfers, the transfer is voidable. That is, it can be made as though it never happened, if some conditions are met. Second, actual intent has to be shown the giver tried to hinder or defraud a creditor. This sounds like a high bar, which can be a good thing for debtors. Third, the debtor didn’t get equivalent value in return, and either was in a business or transaction and got in return something small in exchange, or intended to get debt or reasonably should have believed he’d have to get debts he’d be unable to repay.

That last sentence, number three, is a mouthful. It combines (2) and (A) or (B) from the UVTA statute. The gist of it is this: no intent needs to be shown, only that the debtor gave away or sold something for less than its value, and couldn’t pay his debts he was about to get.

So, using the California fraudulent transfer law, actual intent to hinder doesn’t have to be shown. The trustee or creditor needs to demonstrate that the debtor believed, or should have believed debtor would be unable to pay the debts.

(Note that the statute used to be called the UFTA or California Uniform Fraudulent Transfer Act. The old UFTA applies to transfers before 12/31/2015. With the new UVTA, the standard of proof became lower, and there’s no need to prove actual intent, as we’re about to see. But look to the date of the transfer; if you’re in California, and it’s before 1/1/2016, debtor may have an easier road utilizing the old UFTA.)

Let’s now turn to how they prove actual intent. It helps to have a smoking gun letter that states, “I declare that I actually intend to defraud this creditor.” But that doesn’t come up very much.

California Badges of Fraud under UVTA (Civil Code 3439.04)

Badges of Fraud for California Voidable Transfers

To prove actual intent, the California fraudulent conveyance law says the following

In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:

(1) Whether the transfer or obligation was to an insider
(2) Whether the debtor retained possession or control of the property transferred after the transfer
(3) Whether the transfer or obligation was disclosed or concealed
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded
(7) Whether the debtor removed or concealed assets
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor

A few thoughts about all those badges of fraud. Some badges of fraud clearly show someone had bad intentions: absconding sounds pretty guilty, as does concealing, or even keeping control after you supposedly give something away.

However, other California badges of fraud some a bit more innocent: being insolvent at the time or even after the transfer, or was sued or even threatened with a lawsuit, and whether the value received was reasonably equivalent.

How many Badges of Fraud are Needed

In 2021, Bankruptcy Judge William Lafferty wrote in In re Fox Ortega Enterprises, 631 B.R. 425 (NDCA, 2021) that “only one or two badges of fraud may suffice to find a transfer was made with actual fraudulent intent. In re Ezra, 537 B.R. 924, 931 (9th Cir BAP, 2015); Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834 (2005).” The Ninth Circuit BAP earlier found that the “UFTA list of ‘badges of fraud’ provides neither a counting rule, nor a mathematical formula. No minimum number of factors tips the scales toward actual intent. A trier of fact is entitled to find actual intent based on the evidence in the case, even if no ‘badges of fraud’ are present.” In re Beverly, 374 BR 221 (9th Cir BAP, 2007). Depending how these fraud badges are weighed, insolvency pretty much covers everyone in Chapter 7 bankruptcy, and doesn’t really require actual intent.

Proving insolvency under UVTA

Insolvency is proved under the UVTA using the “balance sheet test.” The balance sheet test is traditionally “whether debts are greater than assets, at a fair evaluation, exclusive of exempted property.” In re Koubourlis, 869 F. 2d 1319 (9th Cir 1989), citing 11 USC 101 (now subsection 32A). Therefore, a homeowner with equity and maybe $20,000 of credit card debt may pass the balance sheet test.

However, while we’re here discussing the UVTA state law, there’s also a rebuttable presumption against the debtor. See California Civil Code 3439.02: “A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent.” Because of this statutory “cash flow test” on the books, it’s on the debtor to show that he or she was paying their debts at the time of the transfer to get it back to the potentially more favorable balance sheet test.

So all of that is fraudulent transfers in California. Let’s turn to the federal standard.

Federal Fraudulent Transfer Law

The Bankruptcy Code’s fraudulent transfer provisions are in Section 548, which is its own version of the UFTA. Section 548 is titled “Fraudulent Transfers and Obligations.” The Bankruptcy Code, at Section 544, gives a bankruptcy trustee the power to avoid transfers made with actual intent to defraud and transfers made without reasonably equivalent value.

The key provision is in subsection (a), which is presented here:

The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily [either]

  • made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; OR
  • received less than a reasonably equivalent value in exchange for such transfer or obligation; AND [one of the following]
      • was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
      • was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
      • intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
      • made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

In short, the trustee has to show either actual intent to hinder, or less than value along with either insolvency, giving away most of debtor’s stuff, about to incur debts, or helped an insider (family member).

Actual Intent of Section 548 Fraudulent Transfers

We see, then, from the first part of Section 548, that there has to be actual intent to hinder, delay, or defraud. This is hard to prove, as the 9th Circuit pointed out in Kupetz v Wolf, 845 F2d 842 (9th Cir, 1988). In that case, the circuit court analyze the leveraged buyout (LBO) of a mannequin company. It went back on a history trip to the Statute of 13 Elizabeth passed by Parliament in 1571. Then, the appellate court explained how, for four centuries, courts relied on badges of fraud to try to infer intent. It then concluded that absent proof of actual intent, one can “assume fraudulent intent when an insolvent debtor makes a transfer and gets nothing or very little in return.” Kupetz at 846.

Constructive fraud alternative: No proof of actual intent

The other part of Section 548 provides a path for a trustee if actual intent can’t be shown, relying on “constructively fraudulent transfers.” The trustee would have to show debtor got less than value, along with one of four factors. Note that not all four are needed. The typical way to get here in a bankruptcy is where less than full value is received by a debtor who is insolvent. (see discussion on insolvency standards elsewhere on this page).

Some fraudulent conveyance examples

1. Selling a vehicle for value

Let’s say debtor a year ago prepetition was struggling to pay their debts as they came due. To make ends meet, debtor sold a vehicle by placing an ad while insolvent. They haggled and finally sold the vehicle to a stranger. Voidable transfer? Probably not, because while debtor was insolvent, didn’t receive less than the reasonably equivalent value.

2. Selling the asset to a family member

Now assume the debtor sold the item prepetition to a family member, and was even insolvent while doing so. Ah, we’re missing information: was there a sweetheart deal or was there reasonably equivalent value? Let’s go with less than value, because heck, it’s family. Voidable conveyance, because less than value and transferred to an insider. The fact that debtor was insolvent, while not necessary in the 548 UFTA constructive fraud variables, actually hurts his argument. If he was struggling to pay his bills and insolvent, it makes one wonder why he’d settle for less than value and sure looks like a sweetheart deal and fraudulent transfer.

3. Divorce agreement transfers can be troublesome

Husband is debtor and has judgments against him. He structures his divorce’s marriage settlement agreement (MSA) to transfer basically all the assets to his soon-to-be ex-wife. He can’t later say there was a “good faith for reasonably equivalent value.” Further, moving assets beyond the reach of creditors was explicitly part of the MSA negotiations as an actually fraudulent transfer. In re Beverly, 374 BR 221 (9th Cir BAP, 2007)

4. Quitclaiming half of debtor’s home to their adult child for estate planning

Debtor is advanced in age, has a home with some equity, and wants to put her adult child on title as a joint owner. The purpose is innocent: for estate planning, when debtor passes away, the child gets the other half of the real estate without having to create a will or trust. Debtor then quitclaims half of her home to the child, and files bankruptcy a year later. Fraudulent transfer, as it was for the benefit of a family member (insider), without receiving reasonably equivalent value in return.

That last example is interesting. What if the equity could have been exempted before the transfer? The California homestead exemption is now very generous. Let’s say the entire equity or even the transfer amount was smaller than the broad exemption coverage for the homestead. In California, the fraudulent transfer can still be avoided even if exempt. Read on for why.

Exemption status irrelevant

But wait, you might say. If debtor still had the asset, it could have been exempted! That sounds persuasive, and in some states it would be. However, with fraudulent transfers in California in the Ninth Circuit, that’s not the case. In fact, the transfer of property waives the right to exempt it. Further, the recipient can’t claim it exempt for debtor, either. Gladstone v US Bancorp, 811 F3d 1133 (9th Cir, 2016).

Reachback period for fraudulent transfers and voidable conveyances

What’s the reachback period for fraudulent transfers or voidable conveyances in California? Like most things, it depends. For California fraudulent transfers, it helps to understand how far back in time the trustee can go, since when it happened can make all the difference between avoiding the transfer and getting the asset or it being safe.

The fraudulent transfer reachback time period varies, depending on which statute (the Calif UVTA or 548) is being used, when the transfer happened, and the type of asset it was.

  • 1 year: for cases commenced before 4/21/2006 per Section 548
  • 2 years: Section 548, for current cases and California’s UFTA for transfers before 2016
  • 4 years : using California fraudulent transfer statute 3439.09(b) for transfers after 12/31/2015
  • 7 years: using Section 544(b) and California 3439.09(c), but note 546(a) in bankruptcy, so maybe longer than 7 years, as equitable tolling applies In re EPD Inv Co, 523 BR 680, 691 (9th Cir BAP, 2015). Los Angeles Bankruptcy Judge Robert Kwan has an interesting discussion of this in In re Art & Architecture Books, 2:13-bk-14135-RK, Adv 2:15-ap-01679-RK, opinion dated May 5, 2021.
  • 10 years for Self-settled trusts (SST) using Section 548(e)

The 341(a) question asking have you sold, transferred or given away anything of value in the past four years isn’t really the end of the story. Even if it’s been five or six years, there may still be ways for the trustee to avoid the California fraudulent transfer and sell the asset. Is the voidable transfer reachback period clear as mud? You bet.

Burden of Proof for Fraudulent Transfers

After reviewing the reachback periods for fraudulent conveyances, you get a sense that it makes a difference whether the trustee is relying on the federal section 548 or California state 3439.04. Not only do they have different time frames, the burden of proof is different.

A creditor making a claim for relief under 548 subdivision (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence. Under California’s UFTA (or UVTA), the burden of proof can be on the debtor if they weren’t paying debts as they became due. Calf CC 3439.02.

In short

A transfer is something you had before and don’t have anymore. If you file Chapter 7 bankruptcy, you will almost certainly be asked about it. This also applies to cash apps Zelle and Venmo with transfers of cash in and out of your bank account. The Chapter 7 trustee, using one of the above tools, can go after the person or people who received the transfer and force them to give up the thing or money, even subjecting them to a lawsuit to force it to happen. With fraudulent transfers in California, consider all your options, including Chapter 13 bankruptcy, as Chapter 7 can be a risky bet where assets have gone away.

    bankruptcy dos and don'ts

    12 Crucial Tips Before Filing Bankruptcy

    12 Crucial Tips to Do (and Avoid) Before Filing Bankruptcy

    Los Angeles Bankruptcy lawyer explains what to do and don’t before seeking a fresh start

    If you’re thinking about filing bankruptcy, what you do you beforehand has more of a bearing on the success of your case than how well the papers are completed. As a longtime Los Angeles bankruptcy attorney, I must make the best of the circumstances that are presented to me. Sometimes these situations are, shall we say, less than ideal.

    What follows, in no particular order, are just some of the things I wish the people I meet with had done, or avoided doing, before we met for the consultation.

    Do disclose all your income, asset, and debts

    Just before we meet, in the brief questionnaire I send you, disclose to me all the various income streams you have, all the things you own, and all the people and companies you owe. All means all. Tell me about that small online business. Share me with me that 1967 classic car in showroom condition. Inform me about that embarrassing gambling debt. This way, I can give you the best advice. This prevents before us both being surprised when the vast investigative power of the government finds it and brings it to our attention at your 341(a) Meeting of Creditors. Then it’s too late (ask Boris Becker). Tell me now so I can help you strategize and navigate, honestly and ethically.

    Dos and Don'ts

    Don’t repay loans to your family

    Look, we all get it. You don’t want to hurt your loved ones, and bankruptcy will wipe out that debt to your Aunt Gertrude. But taking care of family and not repaying your other debts sure seems a lot like playing favorites. Which it is. And the Bankruptcy Code has a fancy word for that: insider. When you repay the debt owed to a relative in the months before you file bankruptcy, it creates a situation where the Chapter 7 trustee can go after the money and spread it out more fairly.

    File all your tax returns

    If you’re going to benefit from bankruptcy, you need to show you’ve been satisfying your obligations to the federal government, including reporting your income. It’s understandable that you’ve been falling behind on filing your tax returns each year. Maybe you’re a year behind. Maybe you’re four. It’s easy to get into avoidance, and then you feel guilty, because you know if you submit your 1040s it’ll just say you have even more debt you can’t pay. But file them. All the returns. If you owe, you don’t need to send a check in with the return. But let’s find out what you owe. And this also prevents the very bad situation of the IRS filing a return for you (called a substitute for return or SFR). Just do it, let’s find out what you owe, and craft a strategy.

    No spending sprees

    This one is simple: don’t run up your credit cards. The fact that you still have thousands of dollars left under your credit limit is irrelevant. Just say no. Avoid large purchases. Stop luxury spending. No cash advances. You don’t get a spending spree. In fact, using your credit cards prior to filing bankruptcy is evidence of fraud, particularly if the credit card files a lawsuit in the bankruptcy. Fraud doesn’t go away with the Chapter 7 bankruptcy discharge; it remains your debt after the case is closed. So, don’t use your credit cards before you file bankruptcy.

    Read my Ultimate Chapter 7 Bankruptcy Guide.

    Don’t give away, sell, or transfer anything to anyone

    Fraudulent transfer sounds pretty scary — and it is — and it doesn’t even require fraud or bad intent. Because most bankruptcy cases focus on assets, making an asset go away in the months and years prior to filing bankruptcy gets a lot of scrutiny. The trustee has the power to go after the person you gave or sold the thing to and take it away and sell it for your debts. The sad irony is in many cases, the asset could’ve been protected had it stayed in your name. In short, don’t try to game the system: the system has been around for centuries, most trustees for decades, and they have the investigative power of the government behind them. Tell me about the asset, don’t move anything around before filing, and let’s see if I can use a bankruptcy exemption to protect it.

    Stay away from Zelle, Venmo, and cash apps

    Here in the 2020s, cash apps like Venmo and Zelle are common. They’re convenient, and make it super easy to transfer money to and from your bank accounts. That’s also the downside: all that money flowing in and out and being exchanged with your friends and relatives at the very least looks like extra income & unnecessary expenses, and at worst, like transfers. And what did we just learn about transfers in the last paragraph? That’s right, they’re bad. You don’t want to explain each and every transfer on your bank statements to your lawyer, and then, to the trustee. You’re better off using your debit card to pay for things, or even a personal check like a primitive cave-dweller.

    Think twice about buying a car before you file bankruptcy

    A car debt is different from the spending spree tip, in a few ways. It’s just one purchase, though it’s a big one. Also, it’s a secured debt attached to a collateral (the vehicle). And, in bankruptcy, you don’t get a free car, or house. If you want to keep the thing, you need to stay current on the payments. However, some courts or trustees may look at a brand new car payment from a contract entered into on the eve of bankruptcy with a suspicious eye. It lowers the amount you have available to repay your debt. The Supreme Court in Milavetz weighed this very issue (examining 526a4). You’re at a bankruptcy website, so you’re clearly thinking about filing. So, before getting a vehicle loan, you probably should meet with a bankruptcy attorney.

    Don’t make the big chunk of money disappear

    Few things can complicate a bankruptcy more than a massive sum of cash you had two years ago being completely spent. It could be that pandemic relief PPP or SBA loan. Maybe you cashed out a home refinance, or a 401k or other retirement account. Or perhaps you sold a house and put the proceeds in the bank. Or got a recovery from a car accident. The issue is that you didn’t use this money to repay debt, but instead, funded a luxurious lifestyle and now you want to wipe out debt you chose not to repay. When asked where the cash sum went, the guaranteed answer: “it’s all gone.” The Office of the United States Trustee (OUST) will be very interested where the all-gone money went, and you should be prepared to provide a line-item analysis showing how every dollar was spent, using bank statements as supporting evidence.

    Documents: get your ducks in a row

    In bankruptcy, you’ll be testifying under oath. However, documents can be used as evidence. So, you should have ready (or be prepared to get ready), a year’s worth of bank statements, a Zillow printout to see if your home is over the median home price, a credit report (they can be obtained for free), at least two years of tax returns, and at least six months of pay stubs for the means test. Sure, we can sit down at your consultation and rip open all your untouched credit card statements you bring to us in a crumpled paper bag in one big cathartic unsealing ceremony. But the more efficient option is to have all these documents downloaded or saved as PDF files.

    Scan documents or use a free phone scanning app

    Speaking of which, your bankruptcy lawyer will love you if you can scan documents in PDF format to email to them as attachments. This is not the same thing as taking a picture of each page of your tax return. This also does not mean a screenshot of your bank balance. And, for the love of all things holy, don’t use the cell phone to take a picture of the computer monitor showing the credit report. Instead, either invest in a scanner, or, more affordably, a free PDF scanning app for your Android or Apple device. With these free PDF scanning programs, you can use the camera to capture pages of a document, and then make it a PDF for your bankruptcy attorney. A little bit of effort here will make you your bankruptcy attorney’s favorite client.

    Don’t bank where you owe, and avoid Wells Fargo

    Don’t have a checking or savings bank account at the same bank where you have a debt. Why? Because you have already or will soon start missing credit card payments to that bank’s credit card. When that happens, they likely have the right or authorization to take your money from the bank account to pay the debt in a bank setoff. You don’t necessarily need to close the account, but just don’t keep money in there you’d be upset about if they took it.

    Also, do you know what bankruptcy attorneys talk about when we socialize? Our agreed-upon and utter dislike for Wells Fargo Bank. Why do some of us bankruptcy lawyers hate Wells Fargo with the fire of a thousand suns? Because they’re one of the very few banks that will freeze our clients’ money, even if there’s no WF credit card with them. They don’t take it, only freeze it. But that distinction is unimportant when you need to pay rent or buy food and you can’t get at your own money because Wells Fargo has has a policy which amounts to punishing you for filing bankruptcy. Wells Fargo and bankruptcy don’t mix.

    Do meet with an experienced bankruptcy attorney

    Get a consultation from a skilled bankruptcy lawyer. Most will charge a reduced rate to meet with you, and it’s worth every penny given the hazards you face if you don’t. It’s true you can file your own bankruptcy, and do not need to retain counsel. However, given all the risks and dangers you face, the time spent completing a bankruptcy attorney’s intake questionnaire and then answering their questions while they advise you is worth 1,000 times what you give. They’ll tell you if a Chapter 13 bankruptcy is a better option, what you could lose in a 7, or if waiting is best. You’re not under any obligation to hire that lawyer, but when you feel the relief and peace of mind, I’m pretty confident you just might want to. If you’re in the greater Los Angeles area, give me a call or send me a message; I’ll be happy to help.

      Woman Facing Jail

      Woman Facing Jail for Bankruptcy Fraud

      A woman in Michigan recently pled guilty to bankruptcy fraud. Wait, jail? Bankruptcy is just forms, right? Just before filing bankruptcy, she had received a $12,000 workers’ compensation award. She, then made it disappear. After that, she lied about the whole thing. Now she faces five years in prison, $250,000 fine, or both.

      When you file bankruptcy, you’re signing a stack of papers under oath. You’ll then be asked, under penalty of perjury, whether they list all your assets, income, and about any recent transfers. The wrong answer, a lie, could land you in jail for bankruptcy fraud.

      The sad kicker is this: in California, this likely could’ve been avoided. All she has to do was everything disclosed everything. With a good bankruptcy attorney, it could then properly exempted. She’d be free today, enjoying her discharge and money.

      She only had to tell the truth to her bankruptcy lawyer. Then, she needed to be honest in the bankruptcy papers. a good Los Angeles bankruptcy attorney could have exempted the award, and she’d have it to spend when the bankruptcy is over.

      By trying to save a few bucks on maybe the best bankruptcy lawyer, she’ll not only lose $12,000, but maybe twenty times that, and her freedom.

      Contact me today for a consultation, and let’s guide you to a honest fresh start.