Your credit card debt shouldn’t cost you your homeThursday, May 7, 2020
Did you know that your credit card could cost you your home? Unpaid credit card, medical, or other consumer debt can result in a court order to sell your home, even if you pay your mortgage. As consumer debts and defaults accumulate due to COVID-19, thousands of Californians may find themselves at risk of losing their homes. It is therefore high time we passed AB 2463 (authored by Assemblywoman Buffy Wicks, D-Oakland) and end the practice of forced home sales — outside of bankruptcy and foreclosure — to pay off consumer debt.
To see how such a forced sale can happen, consider a family that has lost a job or business and defaulted on their credit card debt. The lender can obtain a default judgment, record a lien on the home, and petition a court to order a sale. The court will then determine whether the market value of the home exceeds the amount owed on any mortgages plus the homestead exemption. The homestead exemption is the amount of money that a homeowner gets to keep before non-mortgage creditors get paid.
In California, this amount is $100,000 for families. If the market value of the home is high enough, the court will order a sale. For example, suppose the mortgage on the property is $400,000. The court will order a sale if the home is worth more than $500,000, which is well below the state median.
There are a number of reasons we should take this right of forced sale — outside of bankruptcy and foreclosure — away from consumer creditors. First, very few consumers are aware of this right. Second, the rights of mortgage holders and other secured creditors would be unaffected, as would the rights of unsecured creditors in foreclosure and bankruptcy. Third, taking away the right from consumer creditors preserves the right for other, more-deserving creditors such as guardians seeking child support and accident victims.
Finally, the current system is broken. A study of forced home sales by the East Bay Community Law Center revealed a stark pattern of small, zombie debts brought to life by debt purchasers and inflated by years of interest and fees; lack of adequate notice; mistaken identity; and disproportionate harm to low-income communities of color. It also chronicled the courage of Californians like Ingrid, who fought her mother Laura’s case after she suffered a stroke, and Julio, an immigrant driver who battled for three years to defeat a mistaken claim based on medical debt.
Of course, the likely response from lenders will be that limiting forced sales would be bad for consumers because it will raise interest rates for credit cards and other unsecured loans. But this is a one-sided view because it looks at credit supply while ignoring demand. Protection against a forced sale is like financial disaster insurance. If offered at a fair price, borrowers will be more than willing to pay for it. In fact, the evidence shows that when a state raises its homestead exemption it actually increases the total amount of unsecured credit with no effect on delinquencies. One should expect similar but smaller effects from limiting forced sales.