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A lawsuit does not have to end in financial devastation. California law offers some protections for homeowners, but those protections are limited, technical, and often misunderstood. Many high-earning individuals do not realize how quickly personal assets can become targets in civil litigation. Learning how to protect your home from a lawsuit is not about hiding assets. It is about using lawful, well-established strategies to preserve what you have worked hard to build.
The short answer is yes, homeowners in California could face losing their homes in a lawsuit. Creditors are given broad discretion to seek compensation from a range of assets. This includes real property, such as a home. However, there are exceptions when a home cannot be sought to satisfy a judgment. There are also a variety of methods for protecting a home to shield it from being included in the lawsuit.
The best way to protect your home is by being proactive. Don’t wait until you are named in a lawsuit to seek protection.
In some states, the homestead exemption completely protects your home. This is not the case in California. As a partial homestead state, a portion of your primary residence is protected. California Civil Procedure Code §704.730 sets the minimum protection at $371,840 and a maximum of $743,681.
The amount your home is protected will depend on the median sale price of a single-family home in your county for the previous calendar year. This is important to know because the real estate market fluctuates, resulting in significant changes in the amount of protection your home has. If the median home price is below $300,000, your protection default rises to the $371,840 minimum. Homes valued above the maximum are capped at $743,681.
The homestead exemption does not protect against all judgments. Certain debts, like tax liens and family law obligations, can override the exemption. It’s also important to mention that judgments in California last for 20 years. So it’s common for creditors to wait for a home to appreciate in value above the upper limit. Once that happens, a portion of the home’s equity is unprotected under the homestead exemption. The creditor will then seek recovery of their judgment.
A popular method for protecting property is to place it in an LLC or a corporation. This separates ownership liability from personal liability. There is also an increased level of privacy. If the property is in your name, your name will appear in public records. If it is owned by an LLC, then the LLC’s name is listed as the owner, not yours. While LLCs can be effective for rental properties, there are major drawbacks when using this method for your primary home. You lose homeowner tax exemptions, the capital gains exclusion, and insurance rates could be higher.
Self-settled trusts are not effective to protect your property in California. These are trusts that you set up and name yourself as the beneficiary. California law allows creditors to name the property held in these trusts.
One option to protect your property is an irrevocable trust. However, it must be set up properly. Working with a lawyer can help ensure the correct setup. An irrevocable trust names a beneficiary other than yourself. Another common choice is to create an offshore trust. While places like the Cook Islands do not recognize U.S. court Judgments, there are drawbacks to this setup. These trusts are expensive and come with strict IRS rules.
One form of protection discussed is equity stripping. The method involves placing legitimate secured liens on the home to effectively reduce the net equity. It makes the property look unattractive to creditors.
This method is controversial at best. It must be done well in advance of the lawsuit, or you risk additional legal liability. If the court determines your liens are a sham transaction, it can void them, making the property’s equity readily available. It also creates a complicated financial situation that needs careful management.
Instead of trying to protect the home directly, another option is to buy insurance coverage. Instead of the creditor going after the home’s equity, the insurance policy would pay the judgment.
Your home represents more than a financial investment. It is often the foundation of long-term stability. Asset protection is most effective when it is intentional, compliant, and established well in advance. White and Bright, LLP works closely with clients to identify risks and implement asset protection strategies that reflect their priorities and circumstances.
If you are ready to take steps to protect your real estate, contact White and Bright, LLP or call (760) 747-3200 to discuss how to protect your home from a lawsuit.
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