California's $678,391 Homestead Exemption: What AB 1885 Means for Debtors and Creditors in Bankruptcy
Before AB 1885, California's homestead exemption — available to debtors under CCP section 704.730 — had three tiers: $75,000 for single debtors, $100,000 for families, and $175,000 for elderly or disabled debtors. These amounts had not been meaningfully updated in decades and were comically inadequate protection in a state where median home prices routinely exceed $700,000. AB 1885 replaced this structure with a formula: the homestead exemption is the greater of $300,000 or the county median home sales price for the prior year — capped at $600,000, with that cap itself adjusted annually for inflation by the California Judicial Council.
For 2026, the inflation-adjusted floor is $349,580 and the ceiling is $678,391 — though in many California counties, the median home price exceeds the floor but remains below the ceiling, meaning the exemption amount equals the actual county median. In San Francisco and San Mateo counties, where median prices routinely exceed $1 million, the exemption caps at $678,391. In Central Valley counties where median prices are closer to $350,000-$400,000, the exemption will equal that lower median figure.
For Chapter 7 bankruptcy practice, the practical consequence is that a large percentage of California homeowners who previously would have had non-exempt equity — making home sale by the trustee economically viable — now have their equity fully shielded. A debtor in Los Angeles County with $500,000 in home equity and a county median of $820,000 has a $678,391 exemption, leaving only $121,609 of equity theoretically reachable. After deducting sale costs (typically 8-10% of sale price), the trustee's net recovery may be insufficient to justify the expense and disruption of a forced sale — making the home effectively protected even where the equity nominally exceeds the exemption.
Case law since 2021 has resolved several important questions. First, courts have confirmed that California is an "opt-out" state under 11 U.S.C. section 522(b), meaning California debtors must use state exemptions and cannot choose the federal exemption schedule — a critical point because the federal homestead exemption for 2026 is only $27,900. Second, the calculation date for the county median is determined by reference to prior-year sales data published by the California Association of Realtors or comparable county assessor reports, and courts have generally accepted either source provided the debtor uses it consistently and transparently.
A contested issue has been whether the homestead exemption protects proceeds from a voluntary pre-bankruptcy sale. The Ninth Circuit BAP held in In re Diaz-Verson (B.A.P. 9th Cir. 2022) that homestead exemption proceeds from a pre-petition sale are protected for six months under CCP section 704.720(b), but only if the debtor has a bona fide intent to reinvest in a new homestead. Trustees have successfully challenged exemption claims where debtors sold homes shortly before filing without any demonstrated intent to repurchase.
For creditors, the AB 1885 reform significantly narrows the universe of California Chapter 7 cases where lien stripping and equity recovery are viable strategies. Creditors holding judgment liens on California residential property should re-evaluate whether those liens provide meaningful security in counties where the homestead exemption may consume most or all of the equity.