California’s recent amendments to its statutory exemptions in accordance with California Code of Civil Procedure §704.220 and §704.225 are material changes to the exemptions available to bankruptcy debtors and significantly enhance the ability of debtors claiming §704 exemptions to protect their property from creditors of the estate.
In response to the Covid-19 pandemic, the California legislature substantially expanded the amount of homestead exemption available to bankruptcy debtors claiming exemptions under §704 of California’s Code of Civil Procedure. Cal. Civ. Proc. Code §704.730(a) (2025). At the time of this writing, the allowed homestead exemption under §704.730(a) available for bankruptcy debtors in California varies based on location. For example, in the San Francisco Bay Area where Nova Law Group represents clients, many clients can claim a homestead exemption of up to $699,421, which adjusts over time based on the Consumer Price Index (CPI).
The amount of available homestead exemption under §704 is significantly greater than the exemption that could be claimed under §703 of the California Code of Civil Procedure, and accordingly, many homeowners with equity in their residences generally opt to claim exemptions under §704. However, prior to the amendments to §704, bankruptcy debtors claiming §704 exemptions to protect equity in a primary residence always had to confront one substantial downside—claiming §704 exemptions generally did not allow for much exemption of any funds the debtor had available when filing. In fact, with some narrow exceptions, no exemption for available funds of the debtor claiming §704 exemptions was provided at all.
The new amendments to §704 seek to address this problem and provide bankruptcy debtors with exemptions for funds available. Cal. Civ. Proc. Code §§704.220, 704.225 (2025). These new exemptions include a $2,170 fixed amount for deposit account funds (§704.220), and an additional exemption in a variable amount for deposit account funds to the “extent necessary for the support of the judgment debtor and the spouse and the dependents of the judgment debtor.” (§704.225). The new amendments to §704 create options for clients who need to utilize §704 exemptions to protect equity in a homestead, but who also seek to protect some amount of available funds from creditors. The new amendments also create strategic options for a skilled bankruptcy attorney to argue that any funds left available, after any exemption amount in accordance with §704.220 has been claimed, are nevertheless exempt as “necessary for the support” of the debtor, the spouse, and any dependents, in accordance with §704.225.
The variable amount of the exemption provided by §704.225 might appear ripe for litigation between bankruptcy debtors, bankruptcy trustees, and creditors of the estate, as interested parties seek a determination of what funds are “necessary for the support” of the debtor, the spouse, and any dependents. The amount “necessary for the support” is subject to interpretation and is impacted by the specific facts of the debtor’s lifestyle, financial capacity, and other factors. This analysis would almost certainly require an evidentiary hearing for the court to determine the proper amount of the exemption in an individual bankruptcy debtor’s circumstances, if such matters became contested.
While the general parameters of what is considered “necessary for the support” will continue to be developed in the courts, at the time of this writing (January, 2025), there appears to be only one case with potential precedential authority in the 9th Circuit describing the process a court might undertake to determine the appropriate amount of a claimed exemption in accordance with §704.225. Zhu v. Li, 19-cv-02534-JSW (TSH), 2024 WL 1122422 (N.D. Cal. 2024). Regrettably, the court’s discussion in Zhu v. Li is not particularly enlightening regarding the standards utilized by a court to determine the parameters of the §704.225 exemption, because the district court readily found that the debtors in Zhu were not entitled to the exemption they had claimed, “given their high income” of $286,296 per annum, relative to the comparatively miniscule, claimed exemption of $6,492.07. Id. at *3. The Zhu v. Li court did indicate that “necessary for the support [of the debtor]” was not limited in its application to merely what is “essential barely to support life, but that it includes many of the conveniences of a refined society.” Id. However, the approximate extent to which the lifestyle and financial capacity of the debtor, his or her spouse, and any dependents, contributes to defining the appropriate amount of the exemption, is not further illuminated.
Due to the ambiguity present in §704.225, and its applicability to a wide variety of cases in which a bankruptcy debtor claims exemptions in accordance with §704, effective representation by a bankruptcy attorney for a client considering such exemption options can result in superior outcomes for a bankruptcy client. This is particularly true when the amount of the claimed exemption may be contested, either due to the amount claimed exempt, or other factors that might cause a party to question the claimed exemption.
As part of the superior level of legal advocacy we provide at Nova Law Group, we regularly advise clients regarding their exemption options and litigate such exemption disputes on behalf of our clients when necessary. Nova Law Group represents bankruptcy clients throughout the San Francisco Bay Area.
If you are considering bankruptcy and would like information regarding your options or have other questions, contact a Nova Law Group attorney today and we will be happy to discuss your needs with you.
