California's tiered homestead exemption protects a debtor's dwelling to the extent of $75,000, $100,000, or $175,000, depending upon the debtor's status, protects a like amount of proceeds of an execution sale of the homestead for six months following sale, and protects a dwelling acquired with the proceeds within the six-month period. Cal. Code Civ. Pro. §§ 704.710 – 704.730. The short six-month window seriously undermines Chapter 7 relief to a California debtor who would be willing to sacrifice non-exempt equity in a dwelling, such as a surviving spouse, recently widowed, who is burdened with unmanageable unsecured debt and can no longer afford mortgage payments.
In the Ninth Circuit, following a Chapter 7 trustee's sale of a dwelling, the debtor's right to retain the exempt proceeds evaporates, and the right to the proceeds reverts to the trustee, if the debtor fails to reinvest the proceeds in a new dwelling within six months after receiving proceeds of the sale. Wolfe v. Jacobson (In re Jacobson) (9th Cir. 2012). The six-month window assumes a debtor's ability to purchase a replacement dwelling within the specified period. In many locations, including coastal California's urban areas, the amount of protected proceeds will be sufficient, at best, for a down payment. Unless the debtor moves to a less expensive part of the state or country, financing would be essential. But Freddie Mac and Fannie Mae will not purchase mortgage secured loans made within four years of a Chapter 7 discharge (two years with extenuating circumstances) and the FHA will not insure such loans made within two years of a Chapter 7 discharge unless the debtor qualifies under the FHA's back to work program. Some specialized lending programs targeting specific categories of debtors (e.g. veterans) may be more forgiving, but otherwise it is difficult to imagine a lender willing to finance purchase of a dwelling by a recent Chapter 7 debtor if the loan is neither insured nor salable in the secondary market.