What You Need to Know About Homestead Protection
Homestead protection helps safeguard a portion of your home’s equity, making it harder for creditors to seize your property. A Los Angeles lawsuits and judgments lawyer can explain the key elements of homestead protection, the different types of homesteads, and how they work to protect homeowners from losing their homes to a lawsuit.
What Is Homestead Protection?
Homestead protection is a legal provision that shields a portion of a homeowner’s equity from creditors. Equity refers to the difference between your home’s market value and the amount you owe on your mortgage. For example, if your home is valued at $950,000 and you owe $400,000, your equity is $550,000. In the event of a lawsuit judgment against you, homestead protection prevents creditors from seizing that $550,000 equity when attempting to collect their debt.
Homestead protection does not cover every scenario—there are limits and conditions—but it can provide significant relief to homeowners who are concerned about losing their homes due to a financial judgment.
Two Types of Homesteads: Automatic and Declared
There are two types of homesteads in California: automatic and declared. Both serve to protect equity, but they work differently and offer varying levels of protection.
1. Automatic Homestead
An automatic homestead applies if you live in the home you own. You don’t need to take any specific steps to benefit from an automatic homestead. This protection is automatically in place and applies to a portion of your home’s equity, making it harder for creditors to force a sale in the event of a judgment.
The automatic homestead stays in effect while you live in your home and protects your equity until you sell it. You do not need to file or sign any paperwork to have an automatic homestead.
2. Declared Homestead
A declared homestead offers additional protection if you decide to sell your home. To create a declared homestead, you must file a legal form with your county’s Registrar-Recorder office. Filing a declared homestead allows you to protect a portion of your home’s equity for up to six months after selling your home, provided you meet the following conditions:
- You sell your home and buy a new one within six months.
- The protected equity amount is used to purchase the new home.
- You file a homestead declaration on the new home.
A declared homestead ensures that even if you sell your current home, some equity is safeguarded to help you buy a new home and avoid losing everything to creditors.
Who Needs a Declared Homestead?
A declared homestead can be especially beneficial if you are facing a lawsuit or have a large judgment against you. If you need to sell your home under these circumstances, the declared homestead protects part of your proceeds for six months, giving you time to reinvest the protected funds into a new property. Without a declared homestead, creditors could potentially claim your entire home equity as part of the judgment collection process.
How Much Does a Homestead Protect?
The amount of equity protected under homestead laws varies based on local and state regulations. In California, the homestead exemption amount is the greater of:
- The countywide median sale price for a single-family home in the calendar year prior to the year the debtor claims the exemption, not exceeding $600,000, or
- $300,000.
These exemption amounts adjust annually for inflation based on the California Consumer Price Index. It’s essential to check the current exemption limits in your county to know exactly how much of your home equity is protected.
Situations Where Homestead Protection Does Not Apply
It’s important to remember that homestead protections have limitations. They do not protect against:
- Foreclosure by your mortgage lender: If you fall behind on mortgage payments, homestead laws will not stop foreclosure.
- Mechanic’s liens: If you fail to pay for work done on your property, contractors can enforce mechanic’s liens despite homestead protection.
- Child or spousal support judgments: If you owe child support or alimony, a creditor can still seek collection from your home equity, even if a homestead is in place.
Understanding these exceptions is key to knowing when and how homestead protection can help you.
Contact Wadhwani & Shanfeld
Homestead protection is a valuable legal safeguard for homeowners facing financial challenges. Whether through an automatic homestead or by declaring one, you can protect a portion of your home’s equity from creditors, ensuring that you don’t lose everything if you are sued and lose a judgment. While homestead laws do not protect against every type of creditor, such as mortgage lenders or support obligations, they provide crucial protection in many other cases.
If you are worried about creditor judgments affecting your home equity, contact Wadhwani & Shanfeld. Our experienced attorneys can help you navigate homestead laws, protect your assets, and safeguard your financial future. Reach out today for a consultation.
Source:
dcba.lacounty.gov/portfolio/homestead-protection/
