Unfortunately, it has become a common misconception that filing for bankruptcy will cause you to lose all of your property. Very seldom is this actually true. In most cases, the people who file bankruptcy in California – also known as “filers,” “debtors,” or “bankruptcy petitioners” – can keep much of their property and protect their assets by using bankruptcy exemptions. Chapter 7 exemptions can potentially protect your home, your car, and other valuable assets and belongings from sale or liquidation by the bankruptcy trustee. Keep reading to hear Sacramento bankruptcy attorneys explain how bankruptcy exemptions work, and see a comparison of the state exemption systems (System 1 and System 2) available to California debtors.
What is an Exempt Property or Asset?
When a debtor files bankruptcy with help from a Sacramento Chapter 7 lawyer, his or her assets and personal belongings become part of what is known as the “bankruptcy estate.” The bankruptcy court which is handling the filer’s case – that typically being the U.S. Bankruptcy Court for the Eastern District of California, Sacramento Division, for residents of the Sacramento area – will appoint a trustee to administer (manage) the bankruptcy estate. In Chapter 7, which is also called “liquidation bankruptcy,” the trustee’s role involves:
- Assessing the value of the debtor’s assets, which must be itemized on the debtor’s bankruptcy forms.
- Selling nonexempt assets to help certain creditors recoup their financial losses.
- Distributing proceeds from the sale amongst creditors.
Nonexempt assets are assets which are not protected by bankruptcy exemptions, whereas exempt assets are assets which are protected by bankruptcy exemptions. A trustee cannot sell or liquidate exempt assets. Moreover, even if the asset is nonexempt, it may still be safe from liquidation if:
- The debtor is able to purchase the nonexempt property from the trustee, who may be amenable to an installment agreement.
- The trustee decides to abandon the nonexempt property. This may occur if the asset or property is upside-down (meaning the loan exceeds the property’s market value), or if proceeds from the sale would be so insubstantial as to render the sale process pointless.
Chapter 7 Federal Exemptions
Speaking broadly, there are two sets of exemptions in bankruptcy:
- Federal bankruptcy exemptions
- State bankruptcy exemptions
There can be wide variations in bankruptcy laws by state, including those pertaining to bankruptcy exemptions. For instance, only some states permit debtors to choose between (though not blend) state and federal exemptions. Unfortunately, California filers are somewhat limited in that California prohibits debtors from using the federal bankruptcy exemptions.
However, California filers still have a choice. Debtors in California may choose between two different sets of California bankruptcy exemptions:
- System 1 Exemptions (also called “704 exemptions”)
- System 2 Exemptions (also called “703 exemptions”)
Exemption amounts are uniform throughout the state of California. In other words, the California Chapter 7 exemptions which are available to Sacramento filers are the same as those available to Roseville filers, Folsom filers, and so on.
Additionally, exemption amounts are the same regardless of whether the debtor files Chapter 7 or Chapter 13, though exemptions play very different roles in each chapter of bankruptcy. While the main purpose of exemptions in Chapter 7 is to protect property from liquidation, the primary function of exemptions in Chapter 13 is determining how much money the debtor will need to pay back as part of his or her reorganization plan. When you contact The Bankruptcy Group for a free consultation, our California Chapter 13 attorneys can help you better understand the complex relationship between Chapter 13 exemptions and monthly payments in reorganization bankruptcy.
Continue reading to see a list of current System 1 and System 2 bankruptcy exemptions in California.
2017 Chapter 7 Exemptions in California: System 1 vs. System 2
Debtors should be advised that bankruptcy exemptions are periodically updated to account for inflation in the economy. The following California Chapter 7 bankruptcy exemptions are current as of 2017. The following list is non-exhaustive, and additional exemptions may be available depending on factors like:
- What types of possessions you own.
- What, if any, benefits you are receiving.
- Which types of insurance you have.
California System 1 Bankruptcy Exemptions
- Homestead Exemption
- If single, not disabled – $75,000
- If family, one member with no interest in homestead – $100,000
- If age 65+ or physically/mentally disabled – $175,000
- Motor Vehicle Exemption – $3,050
- Tools of the Debtor’s Trade – $8,000 to $15,975
- Personal Property Exemptions
- “Health aids reasonably necessary to enable the [filer] to work or sustain health,” including “prosthetic and orthopedic appliances” (California Code of Civil Procedure § 704.050)
- “Household furnishings, appliances, provisions, wearing apparel, and other personal effects” (California Code of Civil Procedure § 704.020(a))
- Home improvement materials – $3,200
- Jewelry, artwork, family heirlooms – $8,000
- Student financial aid (“[F]inancial aid for expenses while attending school provided to a student by an institution of higher education,” California Code of Civil Procedure § 704.190(b))
- Worker’s compensation benefits (“[A] claim for workers’ compensation or workers’ compensation awarded or adjudged,” California Code of Civil Procedure § 704.160(a))
California System 2 Bankruptcy Exemptions
- Homestead Exemption – $26,800
- Motor Vehicle Exemption – $5,350
- Tools of the Debtor’s Trade – $8,000
- Personal Property Exemptions
- “[H]ousehold furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor” (California Code of Civil Procedure § 703.140(b)(3)) – $675 per item
- Health aids
- Jewelry – $1,600
- Wildcard – $1,425
Contact Our Experienced Sacramento Bankruptcy Lawyers
Choosing the right set of exemptions is critical to ensuring that you will be able to keep the maximum amount of valuable or sentimental personal property when filing for bankruptcy. However, it isn’t always obvious which set of exemptions is the “right” choice. Some debtors are better served by System 1, while System 2 is the superior choice for others filing Chapter 7 bankruptcy in Sacramento. Critically, exemptions are unavailable in business bankruptcy, which is one reason it is especially important for business owners to have legal help from a Sacramento business bankruptcy lawyer.
Let the experienced California Chapter 7 attorneys of The Bankruptcy Group help you make an informed decision about which set of exemptions to use, which chapter of bankruptcy to file, when to file bankruptcy, and other crucial bankruptcy considerations. For a free and confidential legal consultation, contact our law offices at (800) 920-5351 today.