People have long valued land over other forms of wealth, finding in its permanence a haven against disaster. Today, the equity in our homes is what keeps some of us from jumping off bridges when the Visa bill comes due.
But what happens when the unexpected does hit? Say a door-to-door salesman slips on your front doorstep, breaks a hip and sues for half a mil. Or the business you own is slapped with a $1-million judgment to pay an unsecured creditor.
If you aren’t adequately insured--and few of us can afford to be insured against all possibilities, you could end up being forced to sell your house to pay the piper. Goodby equity. Goodby security.
The most common form of protection from such financial crises is homesteading. A time-honored legal process, homesteading is a guarantee from the state of California to homeowners that a chunk of their equity--between $50,000 and $100,000 depending on age, marital status and other factors--will be free from seizure by unsecured creditors when they sell their home.
There are two kinds of homestead: automatic, which all homeowners have by law, and declared, which homeowners must file to receive and which offers expanded protection.
But homesteading of either type is a guarantee that no longer protects. In fact, some legal experts think homesteading is a waste of time.
Among the skeptics is attorney Steve Elias of Berkeley’s Nolo Press, publisher of “Homestead Your House,” the only consumer guidebook on the subject.
“The reason for the declared homestead just doesn’t exist anymore,” said Elias, associate publisher of the self-help law book firm. “We have debated whether we should even continue publishing the book because there’s now a private system that simply chooses not to recognize what’s been created by statute to protect homeowners.”
Elias is talking about the state’s land title companies.
When a house is sold, the title company guarantees that the seller has clear title to the property, free of such encumbrances as tax liens and court judgments favoring creditors. Without a green light from the title company, the sale will fall through.
It used to be that title companies would ignore a court order to pay a creditor from the proceeds of a home sale. In issuing title despite a lien or court judgment, the title officer was honoring the homeowner’s statutory right to a homestead--equity protected from creditors’ claims.
But a 1982 amendment to the homestead law changed that. After it took effect in 1983, news of the modification spread slowly among title companies. But a decade later, title companies in California now routinely deny clear title if there’s a creditor judgment or lien against the owners of a house. No appeals. No loopholes. No sale.
That’s the case even if the homeowner has filed a declaration of homestead with the county clerk--a precaution taken last year by 31,667 Los Angeles County homeowners and uncounted thousands more in Orange County.
The homesteading homeowners were probably advised by their lawyers, financial advisers or friends--or lured by mail solicitations from companies that offer to file a declaration for a fee--that filing a homestead would further guarantee the equity protections already extended automatically to all homeowners by the state. But they were misled.
“It used to be, some years ago, that a homestead actually offered genuine protection, but now that’s not the case,” said Bill Arkwright, a title officer with Investors Title Co. in Los Angeles. “If the court has said you must pay a creditor, as far as we’re concerned, you have to pay the money.”
Title companies’ refusal to honor the homestead law irks many who believe the law should take precedence.
“Homesteading is a fairness law, biblical in nature,” said Arthur A. Greenberg, an Encino real estate attorney. “It goes back to the concept that everyone should have the chance for a fresh start and a roof over their head when trouble strikes.”
Nolo’s Elias added: “The primary reason to file a declaration is to avoid paying a judgment, and what title companies are saying is, ‘You won’t get our help.’ ”
Still, court decisions on the issue support the title companies. Essentially, the courts have ruled that title officers cannot be expected to know what they’re not trained to know. The 1982 change to the homestead law makes a decision on a homestead’s validity contingent on the amount of equity in a house--whether or not there is enough equity to pay a creditor without tapping into the guaranteed homestead amount. And since title officers are not appraisers trained in determining property values, the courts say, they’re off the hook.
“The title companies don’t feel they’re in a position to make the decisions as to whether equity exists in the property,” said Lawrence Green, executive vice president of the California Land Title Assn., a trade group representing 130 title companies in California and Nevada. “It’s not our decision. We don’t want to be put in the middle of these two competing claimants with us making the decision. That’s not the proper role for us.”
By choosing not to make a decision, title companies throw homestead cases into the courts, where creditors often have more leverage.
Which makes one wonder if filing a homestead is worth the trouble. As it turns out, though, even without the cooperation of title companies, there are advantages to filing a homestead.
For instance, homeowners who rent or own another house can extend homestead protection to whichever property they like. So if you move to Phoenix before your house here sells, then get slapped with a judgment, you can still claim the homestead-protected equity. Under California’s automatic homestead law, only an owner-occupied residence may be protected--so by renting in Phoenix you forfeit your homestead.
And even if the title company refuses to honor your homestead, you can seek a “quiet title” ruling by asking a judge to rule that your homestead is valid and that you’re entitled to the cash it guarantees. Title companies are obligated to honor such a judgment, provided it comes prior to a creditor’s judgment.
Another advantage: In the event of a court battle, a declared homestead shifts the burden of proof in determining if the house is indeed your homestead from you to the creditor. If that sounds like a technical point of law, consider that the additional burden may be enough to keep creditors from attempting to force a sale to collect what they’re owed.
In fact, where homesteads are concerned, many creditors are court-shy to begin with.
“Major creditors can only get their cash when you sell your house or if they force you to sell your house,” said attorney Greenberg. “Which they can only do if they get a judge to say that, by fair appraisal, there’s enough money after the sale to pay the liens and the homestead.”
In trying to determine how much cash is in the house, court cases often get bogged down in what attorneys call the “battle of the appraisers.” The creditor’s appraiser says the house is worth this much, the homeowner’s appraiser says it’s worth less, and pretty soon, no one knows which is right. The upshot is, creditor and homeowner usually strike an out-of-court deal giving the creditor part of what he’s owed in return for dropping the lien.
None of this matters, however, if a creditor has a secured interest in the home, such as the bank holding the mortgage. Secured creditors are legally entitled to force a sale despite the homestead declaration. A filed homestead will also not protect against claims for child support, alimony, taxes and mechanics’ liens.
And a homestead won’t protect your equity in a boat, mobile home or other property that doesn’t qualify as real estate.
So, again, is it worthwhile to file a homestead? The answer depends on who you’re asking.
“I’m right on the edge of whether it makes sense to file one of these things,” said Nolo Press’s Elias.
Countered Greenberg: “You can’t raise for me one downside to declaring a homestead.”
Russell Rapoport, an Encino bankruptcy attorney, may have the best answer. “It’s arguable that the homestead law can be interpreted at least two different ways,” Rapoport said. “There are no absolute black-and-white answers on this issue.”
Since filing a homestead is a relatively simple matter--most counties charge a $5 filing fee--it may still be wise to hedge your bets, Rapoport said. The forms are sold in most stationers and legal bookstores and take about 10 minutes to fill out.
Homeowners who decide to fill out a declaration should be sure that they use the form appropriate to their family status or age or both, so they get the right exemption amount. Under homestead protection, single people can keep $50,000 of their equity; married couples get $75,000. Homeowners who are over 65, or disabled, or who are low-income earners and over 55, receive total protection of $100,000.
Local attorneys advise that you 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. And for more detailed information, a copy of “Homestead Your House” costs $9.95 at bookstores or through Nolo Press (800) 992-6656.