PAGA + COVID = More Business Closures and Bankruptcies
As readers of this blog know, California’s unique and complex employment laws can, if violated, trigger an avalanche of back-due wages, penalties, liquidated damages, attorneys’ fees, and interest. As a result, well-counseled California employers – and particularly California small business employers – who get hit with large wage-and-hour class actions or PAGA lawsuits sometimes consider strategic bankruptcy as a possible last-ditch effort to avoid financial ruin.
Already facing this existential threat, employers in California now must navigate a new one: a once-in-a-century pandemic that is forcing office closures, business lockdowns, stay-at-home orders, and curfews. Federal and state officials have tried to blunt COVID’s economic wreckage with increased unemployment benefits, mortgage forbearance, eviction protections, cash stimulus payments, and other relief. But that relief has ended. With a lame-duck Congress mired in bitter post-election gridlock, and the President focused more on golfing and litigating voter fraud claims than managing our nation’s deadly COVID surge, few expect any more assistance from Washington.
The result will almost certainly be more business closures and bankruptcies. Indeed, bankruptcy attorneys across the country are predicting a “tidal wave” of new bankruptcy filings. According to bankruptcy lawyer Ike Shulman, who is also the co-founder of the National Association of Consumer Bankruptcy Attorneys (NACBA), “All of us in the field are expecting bankruptcies to spike up dramatically, probably later this year and even more so into the New Year as the longer-lasting effects of the pandemic hit people in the wallet.” You can read Mr. Shulman’s comments in a recent Forbes article here.
AB 1885 Increases the Homestead Exemption for Californians
Against this backdrop, California recently enacted AB 1885, a new law that increases the homestead exemption for Californians who file for bankruptcy. The homestead exemption is the amount of equity in your home that you are legally allowed to shield from your creditors. Under AB 1885, which becomes effective on January 1, 2021, the California homestead exemption increases from $75,000 (or $100,000 if you are married) to the greater of either (a) $300,000, or (b) the county-wide median sales price for a single-family home in the calendar year prior to the bankruptcy filing, up to a maximum of $600,000.
This is a huge increase in the homestead exemption for California residents filing for bankruptcy. Under the old $75,000/$100,000 limits, many California homeowners who filed for bankruptcy ended up having their homes seized and sold by the Bankruptcy Trustee. That’s because house values in California are the among the highest in the nation, which meant that there was often a substantial amount of home equity in excess of the $75,000/$100,000 limit. That usually resulted in the home being forcibly sold during the bankruptcy proceeding to pay off creditors.
Bankruptcy as a More Viable Strategic Option Now for California Employers?
Now, however, with higher $300,000/$600,000 limits, Californians who are considering bankruptcy can worry less about losing their homes in the process. This impacts employers by making strategic bankruptcy a potentially more appealing option. Now, thanks to AB 1885, a California employer facing a huge class-action or PAGA lawsuit/judgement can explore bankruptcy as an option without the fear of losing their home. This impacts employees, too, because with fewer homes being sold in bankruptcy, there will be less money available with which to pay creditors – like employees with unpaid wage claims.
Note that there is one notable exception to California’s new AB 1885 law – that is, for anyone who files for bankruptcy after January 1, 2021 and claims the increased California homestead exemption under the new state law, federal bankruptcy law will preempt the new state law and limit the amount of the exemption to $170,350 if the bankrupt filer’s interest in the homestead was acquired within the past 40 months (or 1,215 days). See 11 U.S.C. §522(p), as modified by 11 U.S.C. §104(a).
You can read the full text of AB 1885 here.