Bankruptcy reforms needed to help Californians climb their way out of debt

Bankruptcy reforms needed to help Californians climb their way out of debt  

By Senator Bob Wieckowski

New U.S. Census Bureau data show the Bay Area is booming, but rising housing costs and poverty rates are making the recovery a spectator sport for many people trying to pay their bills while eliminating their personal debt.  Incomes have increased, but rents have jumped substantially more, and owner-occupied housing has dropped in the region.  For most people, it’s hard to buy and keep a home.

For Californians in bankruptcy, it’s increasingly hard to hold onto a home, too.   The public policy reason for allowing people to file for bankruptcy is to both provide the debtor with relief from crippling debt so that he can get a fresh start and to pay out creditors for some of the debt owed.  The goal is to make sure the debtor is not left with so little that she cannot pick herself up and recover from the bankruptcy.  But while home prices have climbed steadily over the past 40 years, the homestead exemptions in our bankruptcy code have remained flat, making it more difficult to rebound financially coming out of bankruptcy. 

It doesn’t need to be this way.

My bill, SB 308, increases the homestead exemptions from $75,000 to $100,000 for single residents, from $100,000 to $150,000 for couples, and most significantly, from $175,000 to $300,000 for seniors, the blind, and the disabled.  Existing law hits seniors the hardest because they are most likely to have home equity to protect and they are least able to re-enter the job market should they fall on hard times in their golden years.  They have spent a lifetime dutifully paying off their mortgage and investing in their homes with the notion that their equity can serve as their cushion in retirement.  But if exorbitant medical bills or other emergencies lead to financial trouble and unsecured creditors force the sale of their homes, seniors are not allowed to live off of their home equity money going forward.   Instead, they are required to reinvest all of that money into another home within just six months.  But Freddie Mac and Fannie Mae won’t even lend to most people until three years after a bankruptcy and, with California’s median home price is in the mid $400,000s, seniors are priced out of the market.

By raising the homestead exemptions, SB 308 will protect more seniors from a forced sale of their homes and will also protect more of their home equity if they need to file for bankruptcy.  By deleting the homestead reinvestment requirement, SB 308 will restore flexibility for people who need to use their homestead exemption money for rent, medical treatment or other essential living expenses.

The bill makes other important changes to assist people in financial distress.  It increases the exemption allowed for motor vehicles from $2,900 to $6,000.  Without a reliable vehicle, most people would lose their jobs.  Since a majority of people are employed when they file bankruptcy, it is imperative that bankruptcy laws don’t compound their struggles by leaving them no feasible way to get to work.  It also provides assistance to small business owners by creating a modest new exemption to help resume business operations and make payroll.  This is important to many underemployed and self-employed people trying to bring in more money with home-based businesses.

SB 308 is currently on the Assembly floor and has already passed the state Senate.  This year, legislators will have the opportunity to pass this important bill.  Major California leaders, such as Attorney General Kamala Harris, State Treasurer John Chiang, Senate President pro Tem Kevin de León, Speaker Toni Atkins and Speaker-elect Anthony Rendon all support SB 308 to ensure fairness in bankruptcy. 

Unless we take action to bring our bankruptcy laws up-to-date, more Californians will be pushed out of their homes and onto public assistance because we failed to adapt our homestead exemptions to reflect the reality of today’s high housing costs. 

State Senator Bob Wieckowski represents the 10th Senate District.