Homestead Filing Can Protect Equity, but It Has Limits
You’ve just moved into your first home.
After signing about two dozen legal documents, acquiring fire, hazard and perhaps even mortgage insurance, you suddenly find a letter in the mail advising you to get homestead protection for your property.
Homestead? Although the word probably conjures up visions of frontiersmen staking claims, we’re not talking about the Wild West but rather a law that can protect the equity in your home from unsecured creditors.
Although some homestead protection is automatic under a state law passed in 1983, many lawyers advise that it’s best to file a formal Declaration of Homestead with a county recorder’s office. For a nominal recording fee of $5, the homestead declaration may protect your home from forced sale to pay a judgment. The document protects the equity in your primary residence from being tapped by a creditor who either wants to force the sale of your home or who wants to collect the profits made on the sale of your home.
Before rushing to fill out a homestead declaration, however, a homeowner should know that it won’t always stop the forced sale of a home. A homestead only protects an owner’s equity up to certain dollar amounts. Equally important, creditors with a secured interest in the property--such as a first or second mortgage--can force a sale despite the homestead declaration.
Homestead protection for single people is $50,000. For a husband and wife the protection is $75,000. And, for homeowners who are over 65, disabled or low-income earners over 55, the protection totals $100,000.
A homestead declaration also will not protect against claims for child support, alimony, taxes and mechanics’ liens on a home. If you lose a lawsuit, a judgment lien on real estate, however, will usually not attach to a homestead declaration if it was recorded before the judgment. A homestead declaration won’t protect your equity in a boat, mobile home or other property that doesn’t qualify as real estate.
Even homeowners who don’t expect problems with creditors may at some point avail themselves of homestead protection. If you’re not adequately insured, a court could award a slip-and-fall victim a part of your personal assets. The same is true if you own a small business that isn’t incorporated.
Debtor-creditor battles are rarely simple, said Arthur A. Greenberg, partner at the Encino law firm of Greenberg & Bass. For example, a single owner who has more than $50,000 in equity can be forced to sell by a creditor. It isn’t always easy to determine how much equity an owner has, however, until there’s actually a sale. “It can definitely be a battle of appraisers,” Greenberg said.
Since California’s automatic homestead protection came into law, “only the scholars can now tell us the difference between recorded and unrecorded homesteads,” Greenberg said. But, he still advises every homeowner to file a declaration.
Other attorneys say don’t bother. Who do you believe?
“What I advise clients is that it’s a waste of time,” said Alan Kheel, partner in the Sherman Oaks law firm of Reznik and Reznik. “People get this in the mail and call me up to ask if they should do it,” Kheel said, referring to companies that offer by mail to file a declaration on behalf of homeowners for a $25 to $50 fee. “I would never bother to take the time to do it,” he said, because the state’s automatic homestead law is enough protection.
Homeowners should record a homestead because “there is a greater protection if you file a homestead than if you don’t,” countered Steven Sokol, associate general counsel for the California Assn. of Realtors. “A recorded homestead provides the additional protection that if you voluntarily sell your home, proceeds from that sale will be protected from creditors if you find another home within six months.”
It’s worth noting that these protections also carry over into bankruptcy. The federal bankruptcy code allows debtors to opt for state law, so the state homestead protections would apply even if you filed for personal bankruptcy.
Should you file a homestead declaration on your own or pay a company to do it? “The vast majority of people don’t need to pay someone,” said Alex Fried, partner in the Encino law firm of Grayson, Givner, Booke, Silver & Wolfe. It only takes about 10 minutes to fill in the correct form, which is sold in most legal bookstores and stationers. As for the companies offering to fill out the paperwork for a fee, Fried said, “I would tend to think they’re scams.”
Homeowners who want to fill out a declaration themselves should be sure that they use the form appropriate to their family status or age or both, so they get the right exemption amount. Also, local attorneys say, mail the county recorder two copies of the declaration and request one stamped copy back by mail to confirm that the declaration has been properly filed.
The California Business and Professions Code tries to protect consumers from unscrupulous homestead filing services by making it illegal to make misleading statements in connection with an offering to perform a homestead filing on behalf of homeowners for a fee. That law specifically provides that a homestead filing service must disclose in boldface print that the service is not associated with any government agency. Some private companies have very public-sounding names--like County Recording Services.
More information is available in a book titled “Homestead Your House,” published by Nolo Press of Berkeley. This self-help primer was updated in March and is available for $9.95 by calling Nolo at (510) 549-1976.
