Individuals in California who file for bankruptcy are often given a second chance at building a strong credit record. This does not come without a compromise, though. When Chapter 7 bankruptcy is involved, a person must often hand over a substantial amount of their estate in the process. A bankruptcy trustee then manages the estate and sells the assets to raise money to pay off a debtor’s creditors. It is common for people to end up wondering exactly what property they will be allowed to keep and what must be given up when they navigate the bankruptcy process. 

Differences Between Chapter 7 and 13 Bankruptcy

Chapter 13 bankruptcy is sometimes described as a safer process than Chapter 7 bankruptcy. During Chapter 7 bankruptcy, a trustee sells any assets that a person cannot exempt. These funds are then used to pay off unsecured debts. In Chapter 13 bankruptcy, however, a trustee does not sell a person’s nonexempt property. Instead, the debtor keeps these assets and pays on their value through a repayment plan.

How Bankruptcy Exemptions Work

Bankruptcy law allows debts to retain certain “exempt” amounts of property in the bankruptcy proceedings. On the other hand, there is some “non-exempt” property, which a person must hand over during bankruptcy. While bankruptcy law is focused on helping people escaping mountainous debt, the law also realizes that taking everything from someone who files for bankruptcy does more harm than good. People in California are often allowed to keep various necessities that they depend on in daily life. 

California offers debtors two types of exemptions. One of these provides a substantial exemption for a person’s home while the other offers an exemption for a person’s smaller items. 

Based on a person’s long term plans, one exemption method is often preferable to the other. It is often the case that people with substantial home equity utilize Scheme 1. Scheme 2, however, is often viewed as a more attractive option for people who have valuable property other than home equity. 

Scheme # 1 – 704 Exemptions

The first exemption scheme (which is referred to as 704 exemptions) takes the following approach to various assets:

 

• Homestead. The homestead exemption protects equity in a person’s principal residence. A person under this scheme can exempt real or personal property where the person lives at the time of filing for bankruptcy. While this exemption includes a traditional house, it also includes things like condominiums, community apartments, and mobile homes. If a person files for bankruptcy as a single individual and is not disabled, that person can exempt up to $75,000 in equity. A person can exempt $100,000 if it is a family homestead and at least one family member has no interest in the homestead. If a person is 65 or older or disabled, he or she can exempt up to $175,000. A person can also exempt up to $175,000 if creditors are attempting to force the sale of a home and a person is either 55 or older, single, and earns less than $25,000 a year or if the person is 55 years old or older, married, and earns under $35,000 a year.

• Motor vehicles. Under the 704 scheme, a person can protect up to $3,325 of equity in a vehicle.

• Personal property. This category includes certain personal items a person owns and can exempt from bankruptcy. Under the first scheme, some types of personal property that can be exempted from bankruptcy include household items and personal effects, up to $3,500 of residential building materials used to repair or improve a home, up to $8,725 in jewelry, heirlooms and works of art, health aids, and burial plots.

• Wages. Under the first scheme, a person can exempt from bankruptcy 75% of wages paid within 30 days before filing for bankruptcy.

• Retirement and pensions. The first scheme allows debtors to exempt some types of retirement accounts including tax-exempt retirement accounts as well as IRAs and Roth IRAs, although some exemptions still apply.

• Public retirement benefits. Some public retirement benefits are exempted under the 704 scheme including private retirement plans, county peace officer benefits, county employee benefits, and county firefighter benefits. 

• Public benefits. Some public benefits are exempt under 704 including public assistance benefits, relocation benefits, and student financial aid.

• Tools of Trade. Some things like materials, tools, instruments, commercial vehicles, and equipment used in a person’s occupation can be exempted. This limit applies on up to $8,725 of tools of trade.

• Insurance. Certain types of insurance are also exempted under the first scheme including disability or health insurance benefits, up to $13,975 of unmatured life insurance policies, and fidelity bonds.

• Miscellaneous. Various other assets can be excluded under 704 including business or professional licenses, inmate trust funds up to $1,600, and property of a business partnership.

 

Scheme # 2 – 703 Exemptions

California’s second system is referred to as § 703.140(b) or 703 exemptions. Due to the “Wildcard” acknowledged under this scheme, this method is the best for people who want to protect miscellaneous types of property.  

In some situations in which a person files for bankruptcy outside of California, there is a risk that the court might not let the individual use 703 Exemptions. Consider how 703 treats the following assets:

 

• Homestead. 703 allows a person to exempt up to $29,275 for real or personal property that is used as a residence. This is less than what a person can exempt under 704. 

• Motor vehicles. A person can exempt up to $5,850 of equity in a motor vehicle under 703. This is a bigger exemption than 704.

• Personal assets. Some assets that can be excluded under this category include burial plots of up to $29,275 (which must be taken instead of the homestead exemption), a maximum of $725 for individual household and clothing items, and jewelry of up to $1,750.

• Retirements and pensions. A person under 703 can exempt tax-exempt retirement accounts, IRAs, Roth IRAs, and ERISA-qualified pension.

• Public benefits. Some of the public benefits that can be exempted under 703 include unemployment compensation, Veterans’ benefits, Social Security, and public assistance.

• Tools of Trade. The same threshold of up to $8,725 applies to tools of the trades that are exempted under 703.

• Alimony and child support. 703 allows a person to exempt alimony and child support necessary for support.

• Insurance. Under the second scheme, a person can exempt unmatured life insurance policies and disability benefits.

• Wildcard. A person under 703 is allowed to use $1,550 plus any unused amount of burial or homestead exemption to any property that the individual owns. While there is not a miscellaneous category of exempt assets under 703, the wildcard operates similarly.

 

Other Issues to Understand About the Exemption Process

Besides understanding what property can be exempted under both schemes, there are many other questions that people have about the exemption process during Chapter 7. Consider the following:

 

• California law does not allow “doubled” marital exemptions. In many states, married couples who jointly file for bankruptcy can double their exemption amount. This is not true in California, though. Couples in California cannot double their exemption amount.

• Exemptions are Not Automatic. Unfortunately, bankruptcy exemptions are not automatic. What this means is that you must select a California exemption scheme and list what assets you can protect on bankruptcy form Schedule C before you can use this exemption. The trustee will then be tasked with reviewing Schedule C to make sure that you can protect the claimed property. A trustee who does not agree with your exemption will then file an objection in a court, which means a judge will be tasked with deciding whether you can keep the property.

• Mistakes during the exemption process. No one is perfect and it is possible to make small errors during the exemption process. Many trustees, fortunately, do not file an objection unless it is clear that a debtor is intentionally attempting to fool the court. If you make a minor exemption error, a trustee will likely work with you to directly resolve these issues.

• How nonexempt property is treated. Some people can keep all of their assets as a result of these exemptions, but this is not always the case. As a result, it helps to understand how nonexempt property is treated. In Chapter 7 bankruptcy, the trustee appointed to handle a debtor’s case will sell nonexempt property and distribute the proceeds to creditors. This is different from Chapter 13 bankruptcy, which allows a person to keep everything that he or she owns assuming that the person completes the terms of a repayment plan.

 

Speak With a Knowledgeable Bankruptcy Attorney

While navigating the bankruptcy process is not always easy, many people end up discovering that the results make the process worth it. If you need the assistance of a skilled attorney during this difficult time, do not hesitate to contact Melanie Tavare today.