If you sell your home, can the cash proceeds be exempted using the homeowner’s equity exemption? That was the subject of two questions that a fellow bankruptcy attorney recently asked me. I found the exchange interesting, so I am posting it for your edification.
If the proceeds from the sale of the domicile are held in escrow or my client trust account — and the Debtor is required to seek further court approval before being allowed to touch them, would that mean the Debtor never “actually received” them in the sense of Cal. Civ. Proc. Code § 704.720, so that the statutory time did not begin to run?
I. Exempt Status If Debtor Did Not Have Immediate Access To The Proceeds
We first turn to the statute (with emphasis added):
If a homestead is sold . . . the proceeds of sale . . . are exempt in the amount of the homestead exemption provided in Section 704.730. The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor, except that, if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.
Based on this language, the California Supreme Court’s holding in Thorsby v. Babcock, 36 Cal. 2d 202 (Cal. 1950) answers the question.
Babcock was the judgment debtor in this case, and Thorsby was the judgment creditor. Babcock sold his home on which he had a homestead exemption. However, due to the litigation with Thorsby the sale proceeds were placed in an escrow account for eight months. Thus, Babcock didn’t have access to the sale proceeds for eight months, so he couldn’t reinvest the proceeds in a new domicile during the six-month postsale period. Thorsby challenged the legitimacy of the exemption based on the fact that the proceeds hadn’t been reinvested in a domicile during the six-month postsale period.
The Court held (with emphasis added):
Clearly, the Legislature has not required a purchase of other property immediately. Rather it has given the seller the reasonable time of six months within which to complete the transaction. However, the legislative purpose is thwarted if the proceeds from the sale of the homestead cannot be obtained by the owner, through no fault of his own, during the six months’ period. In the present case, Babcock had no control over or use of the money derived from the sale of his homestead until approximately eight months after the sale. During that time it was impossible for him to reinvest in a new home for his family and obtain exemption of it. In effect, he did not have the statutory right to hold the proceeds of the voluntary sale of his homestead for six months, free from levy by his creditors, and the opportunity to have the exemption continue by investing the money in a new home. He was not responsible for the circumstances which prevented him from obtaining the proceeds from the sale of his homestead. Within three weeks after the sale he filed suit to quiet title to the money and there is no suggestion that he, in any way, hindered or delayed the progress of the litigation. However, final determination of the matter required the not unusual time of eight months. Giving full effect to the purposes of sections 1265 and 1265a of the Civil Code, it would be unreasonable to hold that Babcock should be penalized because litigation required by the escrow holder’s refusal to recognize his rights has consumed more than six months. Under the circumstances shown by this record, his homestead rights have not been concluded by this lapse of time.
Thorsby v. Babcock, 36 Cal. 2d at 206.
In sum, in keeping with the wording of § 704.720(b) (“The proceeds are exempt for a period of six months after the time the proceeds are actually received by the judgment debtor”), the six-month postsale reinvestment period begins when the debtor actually receives the funds. Therefore, if the funds are held in an escrow account and are unavailable to the debtor, the six-month clock is tolled.
Reading 704.720(b), on its face it says that “. . . if a homestead exemption is applied to other property of the judgment debtor or the judgment debtor’s spouse during that period, the proceeds thereafter are not exempt.” What proceeds is this referring to?
II. The Meaning Of “The Proceeds Thereafter Are Not Exempt”
There was a time when the California legislature intended to exempt postsale proceeds (up to the relevant statutory amount) for the statutory six-month period, but not the new homestead purchased with the proceeds (with emphasis added):
Under AB 707 such proceeds would be exempt from execution for six months in order to provide the debtor an opportunity to purchase a new home. Notwithstanding, the judgment debtor with exempted proceeds from the sale of a former dwelling would face a precarious choice. On the one hand, if he reinvested the proceeds in a new dwelling, it would not be eligible for a dwelling exemption, and would be subject to levy and execution if there was a prior recorded lien on file. On the other hand, if he did not reinvest the proceeds within six months, the proceeds would become subject to levy and execution.” (Cal. Law Revision Com., analysis of Assem. Bill No. 707 (1981-1982 Reg. Sess.) as amended Feb. 25, 1982, prepared for the Sen. Com. on Judiciary (Mar. 2, 1982) p. 9.) This report indicates that the Legislature omitted after-acquired dwellings from the exemption, which raised concerns about the protection of proceeds from the sale of a debtor’s former homestead.
However (italics in original, underlined emphasis added),
Assembly Bill 707 was again amended on April 19, 1982, so that subdivision (c) of section 704.710 would provide that “[h]omestead means the principal dwelling (1) in which the judgment debtor or the judgment debtor’s spouse actually resided on the date the judgment creditor’s lien attached to the dwelling, and (2) in which the judgment debtor or the judgment debtor’s spouse actually resided continuously thereafter until the date of the court determination that the dwelling is a homestead. Where exempt proceeds from the sale or damage or destruction of a homestead are used toward the acquisition of a dwelling within the six-month period provided by section 704.720, `homestead’ also means the dwelling so acquired if it is the principal dwelling in which the judgment debtor or the judgment debtor’s spouse actually resided continuously from the date of acquisition until the date of the court determination that the dwelling is a homestead, whether or not an abstract or certified copy of a judgment was recorded to create a judgment lien before the dwelling was acquired.” (Assem. Bill 707, as amended April 19, 1982, pp. 122-123.) This amendment added the italicized provision, resolving the concern raised in the California Law Revision Commission’s report by allowing debtors a homestead exemption on an after-acquired dwelling purchased with exempt proceeds despite a prior recorded judgment. This became the final version as passed by the Legislature and signed by the Governor.
Consequently, any primary residence acquired by the debtor using exempt postsale proceeds during the relevant six-month period has a homestead exemption up to the relevant statutory amount. Therefore, the “proceeds thereafter” referred to in § 704.720(b) must be property other than the exempt portion of the new home.
The whole point of the homestead exemption is to prevent a judgment debtor from becoming homeless (with emphasis added):
The homestead exemption ensures that insolvent debtors and their families are not rendered homeless by virtue of an involuntary sale of the residential property they occupy. Thus, the homestead law is not designed to protect creditors, but protects the home against creditors of the declarant, thereby preserving the home for the family.
The postsale proceeds exemption is thus limited to use in buying a new home; not in buying something else. This comports with the inclusion of the phrase “other property” in the statute. It must refer to anything other than the homestead property. Therefore, if the debtor doesn’t use all of the postsale proceeds to buy a new homestead, the unused portion is not exempt — whether it is kept as cash on hand, or used to buy wine, or clothes, or a car — because it has not been used to preserve the home for the family.
In sum, the “proceeds thereafter” refers to any of the money (and its offspring) that was not used to buy a new home.
If you are facing insurmountable debt and are concerned about protecting your home, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.