We are frequently asked by clients if filing for bankruptcy means that they will lose everything. This is a common fear that facing bankruptcy means losing all or most of your property. In our experience, this fear is often the reason why individuals will choose to delay bankruptcy for far longer than they actually should. Some would rather continue their financial decline as long as they still have ownership of their personal and real property. Although this apprehension is certainly understandable, fortunately for residents of California, the State has enacted favorable bankruptcy exemptions which make it possible for the majority of our clients to keep their property. That’s right, filing for bankruptcy means that you are most likely to keep most if not all of your property and you can discharge your debts and begin to work towards rebuilding your financial health. Thanks to California’s bankruptcy exemptions, debtors that are deciding to file for Chapter 7 or Chapter 13 bankruptcy have the flexibility to choose from two different sets of exemptions. Although similar, each set of exemptions do differ and our experienced attorneys at Modesto Bankruptcy Attorneys will be able to review your matter and determine which set will offer you the best relief. In order to better understand how the exemptions work, it is important to first understand how property is treated in both Chapter 7 and Chapter 13 bankruptcy.
Understanding the Bankruptcy Estate
Immediately upon filing your bankruptcy case with the court, all of your property becomes a part of what is referred to as your bankruptcy estate. The court has authority to temporarily oversee your property until your bankruptcy case is closed. If you are filing for Chapter 7 Bankruptcy, your assets are going to be subject to evaluation by a trustee. The role of the trustee will be to make the determination as to whether you have any non-exempt property that should be apportioned to your creditors and after selling off those non-exempt assets, determining how much your creditors will be paid. If you are filing for Chapter 13 Bankruptcy, your non-exempt property will be evaluated by the trustee in order to help to determine your monthly payment plan that will be used to repay your creditors under your approved repayment plan.
What is exempt property and why is it important?
Exempt property refers to any and all property that the bankruptcy trustee will not be allowed to sell or liquidate and use the proceeds in order to pay off your creditors. California’s bankruptcy exemptions dictate what property you are allowed to keep in a Chapter 7 bankruptcy and factors in what your Chapter 13 bankruptcy monthly payment plan will be. It is California’s intention that exemptions exist so that you as the debtor are able to come out of bankruptcy while still retaining ownership to some, if not all, of your property. Upon the completion and closing of your bankruptcy case, your debts will have been discharged and you will still retain ownership of all your exempted property.
The exemptions are applicable to the equity that you have in an asset. Equity refers to the “liquidation value” in an asset when it is sold and any liabilities such as liens are paid off from the sale proceeds. For example, let's say that you own a vehicle that has a fair market value of $7,500 and your current loan balance on the vehicle is also for $7,500. The value of the vehicle and the outstanding loan offset each other and there is no equity in the property to be exempt. Thus, since the calculation results in zero equity, the asset is fully exempt and the trustee cannot sell it to pay your creditors.
Lastly, if you have been a resident in the state of California for at least two years prior to filing your bankruptcy case, you are required to utilize California’s bankruptcy exemptions. Although this requirement is mandatory, if you are an individual who does not meet the residency requirement, you will need to look back two years from the point of filing, and then determine your place of residency 180-days before that two-year timeline. This will determine which laws apply to your bankruptcy case. You will either use your former state’s law or federal law as applicable.
How Do I Determine Which California Bankruptcy Exemption System is Right For Me?
As a debtor, you will be able to determine which one of the two California exemption systems works best for you based on the type of property that you own. Generally, those debtors that have a significant amount of equity in their home will choose the California Bankruptcy Exemption System 1, also known as “704” exemptions. Alternatively, debtors who have more value tied to other types of property will choose the California Bankruptcy Exemption System 2, also known as “703” exemptions. Irrespective of which system you choose, as long as your equity in the property is less than the dollar amount listed, it will be exempt. It is best to provide a clear picture of all your finances to ensure that your bankruptcy attorney is able to recommend that exemption system that will allow you to maintain the maximum amount of your property while achieving debt relief.
Overview of California System 1 Exemptions
Commonly referred to as the “Homestead Exemption,” the first system is most often utilized and effective for those debtors who are looking to protect the equity that they have worked so hard to build up in their home. Under this first system, married couples are given the option of doubling some, but not all of the exemptions should both spouses decide to file for bankruptcy. California Code of Civil Procedure Section 704 (C.C.P. §704) provides a list of all assets that are exempt under the first system. Below are some of the most common exemptions utilized by debtors in bankruptcy.
The California 704 Homestead Exemption
The homestead exemption allows a debtor to protect a set amount of equity in their principal residence. Under System 1 (also known as §704 exemptions), a debtor is given the ability to exempt real or personal property that they reside in at the time that they choose to file their bankruptcy petition with the court. Principal residence is defined to include a mobile home, boat, community apartment, stock cooperative, condominium or planned development. The exemption amount, in the past, was $75,000 if the debtor is single and not disabled; $100,000 if the debtor and at least one family member have an interest in homestead; $175,000 if the debtor is age 65 or older or if they are physically or mentally disabled; $175,000 if the creditor is attempting to force the sale of the home and the debtor is either age 55 or older, married and make under $35,000 per year, or age 55 or older, single and earn under $25,000 per year.
A drastic change to the above numbers occurred and were signed into law by Governor Gavin Newsom in September 2020. This change increases the homestead exemption drastically. The amount a debtor is now able to exempt in their home is the greater of (1) the median sales price of homes during the prior calendar year in the county the debtor resides in than when they file their bankruptcy, capped at $600,000.00 and (2) $300,000.00. Thus, the homestead, irrespective if they are married, single, etc., is between $300,000.00 and $600,000.00.
The California 704 Motor Vehicle Exemption
Pursuant to System 1, a debtor is given the ability to protect and exempt up to $3,325 worth of equity in their car, truck, motorcycle, or another vehicle.
Personal Property under the 704 Exemptions
Below is a list of the most common 704 exemptions pertaining to a debtor’s personal property:
- A debtor is able to exempt up to a maximum of $3,500 in residential building materials that they need to repair or improve their home.
- A debtor is able to exempt jewelry, heirlooms and works of art up to a maximum value of $8,725.
- A debtor is able to exempt their household and personal effects.
- A debtor is able to exempt any of their required health aids.
- A debtor is able to exempt their Social Security payments up to a maximum value of $3,500 for a single payee ($5,250 for a married couple payees) and an unlimited amount if the debtor does not commingle the funds. Additionally, a debtor is able to exempt payments from other public benefits up to a maximum value of $1,750 ($2,600 for married couples who are designated as joint payees).
- A debtor is able to exempt their pre-paid cemetery and burial plot.
- A debtor is able to exempt any personal injury and wrongful death causes of actions and recoveries that are required for the debtor’s support.
704 Wage Exemptions
- A debtor is able to exempt up to 75% of their wages that have been paid to them 30 days prior to filing their bankruptcy case.
- A debtor who is a public employee is able to exempt earned vacation credits.
704 Public Benefits Exemptions
- A debtor is able to exempt earned workers compensation benefits.
- A debtor is able to exempt any applicable public assistance benefits.
- A debtor’s unemployment and disability benefits, and union benefits from labor
disputes are exempted.
- A debtor’s relocation benefits are exempted.
- A debtor’s student financial aid is exempted.
704 Retirement Plans and Pensions Exemptions
- A debtor’s IRAS and ROTH IRAs, subject to federal limits are exempted.
- A debtor’s tax-exempt retirement accounts including but not limited to 401(k)s, 403(b)s, SEP and Simple IRAs, profit-sharing, money purchase plans and defined benefits plans are exempted.
- A debtor’s public retirement benefits are exempted.
- A debtor’s private retirement plans and benefits are exempted.
- Retirement plans for a debtor who is a public employee are exempted.
- Retirement plans for a debtor who is a county employee are exempted.
- Retirement plans for a debtor who is a peace officer are exempted.
- Retirement plans for a debtor who is a county firefighter are exempted.
704 Insurance Exemptions
- A debtor is able to exempt disability or health insurance benefits.
- A debtor is able to exempt their homeowners’ insurance proceeds for six months after receipt, up to the amount of the homestead exemption.
- A debtor is able to exempt life insurance proceeds if the policy restricts the ability to use the proceeds to pay creditors.
- A debtor is able to exempt an unlimited value for life insurance benefits that have already matured and the benefits are required for support, or an unmatured life insurance policy up to a maximum value of $13,975.
Overview of California System 2 Exemptions
The California 703 Homestead Exemption
Pursuant to California’s System 2, a debtor is allotted a homestead exemption up to a maximum value of $29,275 for their real and personal property that is used as their personal residence.
The California 703 Motor Vehicle Exemption
Under System 2, a debtor is able to exempt up to a maximum value of $5,850 of equity in motor vehicles.
Personal Property 703 Exemptions
- A debtor is able to exempt their clothing, appliances, household goods, furnishings, animals, instruments, books and crops up to a maximum value of $725 per item.
- A debtor is able to exempt up to a maximum value of $1,750 in jewelry.
- A debtor’s burial plot up to a maximum value of $29,275 may be exempt if the debtor decides not to choose the homestead exemption.
- A debtor is able to exempt up to a maximum value of $29,275 from personal injury awards.
- A debtor is able to exempt any applicable wrongful death awards that are required for the debtor’s support.
703 Public Benefits Exemptions
- A debtor’s unemployment compensation, Social Security, VA benefits and public assistance are exempt.
- Any reparation benefits from being a crime victim are exempt.
703 Retirement and Pension Exemptions
- A debtor is permitted to exempt IRAs and ROTH IRAs, however, the amounts are subject to Federal Limits.
- A debtor is permitted to exempt tax-exempt retirement accounts including, but not limited to 401(k)s, 403(b)s, SEP and Simple IRAs, profit-sharing, money purchase plans and defined benefits plans.
- Any ERISA-qualified pension plans, annuities and benefits necessary for support are permitted for the debtor to exempt.
703 Public Benefits Exemptions
- Any unemployment compensation, Social Security, VA benefits and public assistance that the debtor has a right to receive are able to be exempt.
- Crime Victims’ reparations benefits that the debtor received are able to be exempt.
703 Tools of Trade Exemptions
A debtor is able to exempt up to a maximum value of $8,725 worth of tools, books and implements of trade. This is an aggregate amount, and not an individual amount. For example, a debtor who is an electrician would be able to exempt up to a maximum value of $8,725 worth tools and equipment.
703 Insurance Exemptions
- Any unmatured life insurance policy, other than credit owned by the debtor is exempt.
- Unmatured life insurance accrued interest, dividends, loan, cash, or surrender value up to a maximum value of $15,650 can be exempt.
- Debtor’s disability benefits are exempt.
- Any loss of future earnings payments required for debtor’s support may be exempt.
The 703 Wildcard Exemption
System 2 offers a flexible umbrella exemption which is referred to the Wildcard Exemption. This Wild Card Exemption does not exist under System 1. Under the Wild Card exemption, a debtor has the ability to exempt up to a maximum value of $1,550 in any type of property that the debtor has an interest, plus any remaining unused amount of the burial or homestead exemption. In a scenario where none of the homestead or burial exemption is used, a debtor is able to exempt up to a maximum value of $30,825 in property that otherwise may not qualify to be exempt in bankruptcy. If they debtor has used a portion of the homestead or burial exemption, the total wild card exemption will be reduced accordingly. This wildcard exemption can be used to exempt property such as:
- Tax refunds
- Equity in vehicles
- Real estate equity
Which Exemption System is Right for You?
As detailed above, both California Exemption System one and two appear rather similar. This can make it quite confusing when trying to determine what system is best for you. However, an individual’s specific circumstance must be carefully evaluated in order to properly determine which system will provide you with the best results. In addition to the most frequently used exemptions detailed above, there are numerous other exemptions that may apply to your specific situation. Only after a careful analysis of your entire financial records will it be possible to determine which exemption system will offer you the maximum relief in terms of property that you are able to keep after your debts have been discharged and your bankruptcy case closed.
In order to better understand your options and ultimately decide which system is right for you, we highly recommend that you consider discussing your specific situation with a qualified and experienced bankruptcy attorney. When choosing a bankruptcy attorney, you want to feel confident that not only is your bankruptcy matter being handled correctly, but that you are receiving the maximum amount of benefit and relief as possible. Our attorneys at Modesto Bankruptcy Attorneys have the legal skills, knowledge, experience and results to review and evaluate your individual financial situation in order to determine the most effective way to handle your bankruptcy needs. At Modesto Bankruptcy Attorneys, our goal is to help each one of our clients regain control over their financial health and work towards building a better financial future.
We help clients in the following areas: Modesto, Stockton, Turlock, Ceres, Empire, Escalon, Hughson, Lathrop, Linden, Manteca, Oakdale, Patterson, Ripon, Riverbank, Salida, Tracy, Waterford.