As Donald Trump knows, not all debtors are equal

When billionaire candidate Donald Trump was asked during the first GOP presidential debate about the four bankruptcies declared over the years by companies he controlled, Trump didn’t flinch.

“I have used … the laws of this country, the chapter laws, to do a great job for my company, my employees, myself and my family,” he said.

In short, no big deal.

Indeed, those bankruptcy chapter laws work fairly well for corporations such as Trump’s former casinos.

But for ordinary California homeowners, not so much.

For an increasing number of them, the act of declaring bankruptcy can mean losing their homes and all the equity they have built over many years. Not because they fell behind on their mortgage payments, but because they were forced into bankruptcy after being overwhelmed by unsecured debts.

The law designed to protect debtors from losing the roofs over their heads purports to shield modest homes from the reach of bankruptcy creditors, but it is an illusory promise.

The homestead exemption to California bankruptcy rules, designed to allow debtors a fresh start without being driven into destitution, has a Catch-22.

If a bankruptcy trustee forces a debtor to sell her home so that some of the equity can be paid to creditors, the law allows the debtor to keep a certain amount of that equity - $75,000 for a single person, $100,000 for married couples, $175,000 for seniors and the disabled.

But in order to maintain the exemption, the debtor must use that money to purchase new housing within six months. Since no one can qualify for a federally insured mortgage for at least two years after bankruptcy, the money can’t be used as a down payment on a new loan. And it is impossible to make a cash purchase of any home anywhere in California for those amounts.

So here’s what’s been happening in recent years, says Sen. Bob Wieckowski, D-Fremont, a former bankruptcy attorney: “The banks get money in Round One when the house is sold. They keep the bankruptcy open, and then six months and one day later, they go after the rest. People lose everything.”

That tactic, Wieckowski told me, effectively eliminates the homestead exemption established in 1898.

Wieckowski has written legislation, SB 308, to increase the amount of the homestead exemption and eliminate the requirement that the money gleaned from the exemption be used for the purchase a new home.

It is part of a package of three bills that seek to protect Californians from becoming so burdened by debt collectors that they are unable to recover from financial setbacks.

The outcome of those bills will likely be decided by the Assembly this week, and their prospects are uncertain.

The others, SB 501 and SB 641, deal with regulations governing wage garnishment by debt-collection agencies.

The measures are supported by Attorney General Kamala Harris, who says their passage would give consumers “the tools to fight back against predatory practices.”

All three bills are opposed, with vigor, by the banking and debt-collection industries.

“They’re fighting like bloody hell,” Wieckowski said. “They like the status quo.”

Of the three, he says, the bankruptcy bill may be the biggest lift. It would increase the homestead exemption to $175,000 for an individual, $250,000 for couples and $300,000 for seniors and the disabled.

Those representing creditors argue that those proposed limits would benefit only what the California Association of Collectors calls “a special class of higher-income individuals.”

Wieckowski acknowledges that most Californians who go into bankruptcy do not own real property, but asserts that for those who do own homes the current system does not carry out its intended purpose.

With the median home price in the state now in excess of $440,000, Wieckowski argues that the current limits make it impossible for homeowners to use their protected equity to purchase a smaller, less expensive home.

That makes it impossible for the homestead exemption to protect what a state appeals court said in 2005 it was intended to protect: “the sanctity of the family home against a loss caused by a forced sale by creditors, and to ensure that insolvent debtors and their families are not rendered homeless by the sale of the homes they occupy.”

Especially given that medical debt is the most common reason for filing bankruptcy, that seems a modest objective.

It seems so, at least, if the intent of bankruptcy laws is “to do a great job” to protect the interests of people whose circumstances don’t exactly match those of Trump’s former casinos.

Timm Herdt is a columnist for the Ventura County Star.