How Does Homesteading Your House in California Affect You?

Debt robs a person of the sense of security needed for peaceful living. In California, homestead laws help protect debtors from losing everything to creditors. The same laws protect creditors and other interested parties. How the laws affect a person or entity depends on the type of homestead law applied and the personal circumstances and characteristics of the homeowner/debtor.

Homeowner

California law provides homeowners with an automatic homestead exemption for their primary place of residence. The exemption applies to traditional homes, mobile homes, trailers, condos or boats. A homestead exemption protects the homeowner from total loss in the event the home is sold to pay off debts. Alternatively, the homeowner can file for a declared homestead. A declared homestead requires an application that is prepared, signed, notarized and then filed at the county recorder's office. It increases the number of protections afforded to the homeowner. For example, a homeowner in debt can sell his home and use the proceeds from the protected equity to purchase a new home. If the new home purchase is made within six months, the investment is protected from creditors.

Personal Circumstances

The amount of homeowner equity protected is dependent on family status and other personal factors. A married homeowner living with his spouse in the home is eligible for $75,000 in homestead protection. The same amount applies if the homeowner cares for a minor child or grandchild living in the home. The amount of protection decreases to $50,000 for a single person and increases to $125,000 for homeowners who are 65 or older. Other factors that increase the amount of protection for debtors include physical ability to work and income level.

Heirs

A declared homestead provides protections for heirs in certain circumstances. California law says an heir of the declared homestead property owner is protected against creditor liens if the property served as the heir's principal place of residence. This includes the spouse and other surviving family members. The rule applies regardless of whether the deceased was the sole owner or co-owner of the property.

Judgment Creditor

The judgment creditor who sues a homeowner for unpaid debts and wins is entitled to sell the homeowners' property to satisfy the debt obligation. When a home is forced into sale, the proceeds obtained from the sale are used to pay the mortgage holder first, the homeowner second (up to the amount of the homestead exemption) and the judgment creditor last. If there is no money left over after the first two are paid, the judgment creditor recovers nothing despite winning in court. In the event the homeowner voluntarily sales the property and there is no declared homestead, the judgment creditor is paid second and the homeowner/debtor is paid last.