Why a homestead matters
If you are a homeowner and a little bit worried about being sued, there is a useful new law in California. The law will materially affect the advice I will give to Islamic Estate Planning clients I have in the state.
California is historically a “creditor friendly state.” Other states that are “debtor friendly.” What that means is that it is easier to collect on a judgment in California. Otherwise, what would be the point of lawsuits if you can’t get anything out of them?
A “homestead” idea is that it is a bad policy to allow the civil justice system to make people homeless. Texas and Florida are known to have generous homestead laws. They allow people to own large tracts of land that judgment creditors cannot take away. California had a stingy homestead exemption tied to the equity in the home, not necessarily the equity itself. The exemption was typically small when compared to the relatively high prices of homes.
The homestead exemption in California is:
(a) the median value of the home in the county you live up to $600,000, or
(b) a minimum of $300,000.
The new law allows a meaningful amount of equity for everyone, even those who live in the San Francisco Bay area.
Example:
Sumaiya is an anesthesiologist with a home worth $3,000,000 in Los Gatos, California. Sumaiya lost a malpractice case after a patent was permanently disabled. Her insurance was unable to cover all the damages. Sumaiya must pay $8,000,000. Sumaiya could lose her brokerage account and most assets in her bank account. She is likely to keep her retirement account (protected under federal law). While she will lose her home in Los Gatos, she will be able to take $600,000 in equity from this home, which would be available for her to purchase another home.
There is more Sumaiya could have done for asset protection, which I have previously written about here.
Many people are unlikely to lose their home because of the homestead protection, so long as the equity is under $600,000. For many middle-class families, this should be a relief. It’s not as good as Texas or Florida, but it may well be good enough for many.
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