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.