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The Homesteading Myth : Some legal experts say homesteading is a waste of time because California's title companies will not recognize time-honored protection that state law grants to homeowners.

September 12, 1993|TODD STEIN | SPECIAL TO THE TIMES; Stein is a Sacramento free-lance writer. and

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.

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