Last updated Nov. 15, 2018.
California Bankruptcy Exemptions: Will I Lose My Property if I File for Bankruptcy?
One major concern of those facing bankruptcy stems from uncertainty over the effect it will have on the property they own. This is certainly a valid concern. However, as a practical matter, we find that most of the clients we serve in the Los Angeles area are able to file bankruptcy and keep all of their property thanks to the flexibility of the California bankruptcy exemptions, which allow debtors to choose from two competing systems of exemptions depending on the value of their assets.
But before we delve into the specifics about the California bankruptcy exemptions, let’s first address a few basic points about how property is treated in bankruptcy.
Article at a Glance
- Debtors who file for bankruptcy in California can choose from two sets (or “systems”) of California bankruptcy exemptions.
- System 1 is also called the Homestead Exemption, because it protects more equity in a person’s home.
- System 2 is also called the Wildcard Exemption, because it includes a generous exemption for miscellaneous personal property chosen by the debtor.
- Which set of California bankruptcy exemptions is best when filing bankruptcy depends on the circumstances and varies from case to case.
Background: The Bankruptcy Estate
The minute a bankruptcy case is filed, all of your property becomes part of what is known as a bankruptcy estate. In exchange for shedding debt in bankruptcy, you agree to give the court temporary oversight over your stuff. In a Chapter 7 Bankruptcy, a trustee evaluates your assets to determine whether there is any non-exempt property to distribute to creditors. In a Chapter 13 Bankruptcy, your monthly plan payment is dictated in part by the amount of non-exempt property you own.
The California bankruptcy exemptions tell you what property you may keep in a Chapter 7 bankruptcy, and they also help determine the amount of your monthly Chapter 13 plan payment. Exempt property is anything that the trustee may not sell to pay off creditors. The goal of exemption laws is to leave the debtor with some property at the end of the bankruptcy. Thus, any property falling under an exemption is yours to keep even after the bankruptcy is over.
California’s bankruptcy exemptions apply to the equity that someone has in an asset. The equity in an asset represents the true ownership value, or “liquidation value,” of the asset. It is the value of the asset that would belong to the owner if the asset were sold, after paying off any liens. For example, if a vehicle is worth $5,000, and there is a lien against the vehicle for $5,000, there is no equity to exempt because the total value of the vehicle is offset by the debt against it.
Unlike many states, debtors filing for bankruptcy in California do not have the option of utilizing the federal bankruptcy exemptions. If a person has resided in California for at least two years, only the California bankruptcy exemptions may be used. If you’ve recently moved to California and are confused which set of exemptions will apply to your case, go back in time two years. Your place of residence for the 180 days preceding that two year period will supply the bankruptcy laws for your case.
California’s Two Bankruptcy Exemption Systems
California has two systems of bankruptcy exemptions, either of which is available to anyone facing insolvency. Which system is best for you will depend on the type of property that you own.
For example, those with a large amount of home equity will typically prefer the first system, while those with more value tied to other forms of property are more likely to take advantage of the second system. Under either system, any type of property listed may be protected so long as the owner’s equity in it is no more than the dollar amount listed.
California Bankruptcy Exemptions: System 1
This first system may also be referred to as the “Homestead Exemption,” because it is the system most commonly used by those seeking to protect the equity in their home. The California Code of Civil Procedure simply provides a list of what assets are exempt under the first system (C.C.P. § 704).
Note that under this first system married couples have the option of “doubling” some exemptions. This means that spouses who file jointly are each entitled to exempt up to the maximum dollar amount permitted by the exemption.
- Homestead: Equity in a residence up to $75,000 for a single person under the age of 65; equity in a home for a married couple of up to $100,000; and equity in a home up to $175,000 for those over 65, disabled, or low-income persons over the age of 55.
- Motor Vehicle: Up to $3,050 total may be applied to motor vehicles.
- Building Materials or Home Maintenance: Up to $3,200 in materials that, in good faith, are about to be applied to the repair or improvement of a residence.
- Jewelry, Heirlooms, and Art: Up to $8,000, but doubling is not permitted in a joint bankruptcy.
- Health Aids: Health aids reasonably necessary to enable the debtor or his or her spouse or dependent to work or sustain health, as well as prosthetic and orthopedic appliances, are totally exempt.
- Food, Clothing, Appliances, and Furnishings: These items are exempt if they are ordinarily and reasonably necessary to, and personally used by, the debtor or members of his or her family. However, if any such item has “extraordinary value,” it may not be exempt.
- Wages: Up to 75% of wages earned 30 days prior to filing for bankruptcy.
- Pensions: Private and public retirement accounts are exempt.
- Public Benefits: Disability and unemployment benefits, workers’ compensation, public assistance benefits, and student financial aid are totally exempt.
- Tools of Trade: Tools, implements, instruments, materials, uniforms, furnishings, books, equipment, one commercial motor vehicle, one vessel, and other personal property used in a trade or business are exempt to $8,000. In a joint bankruptcy, if both spouses are in the same occupation, the limit is $15,975. (The commercial motor vehicle is limited to $4,850, or $9,700 if both spouses are in the same occupation.)
- Insurance: Unmatured life insurance policies are totally exempt, but the loan value of such policies is exempt only to $12,800.
California Bankruptcy Exemptions: System 2
This system, referred to as either the “703 System,” or the “Wildcard Exemption,” is the more common route for those with less home equity. (It can be found in C.C.P. § 703). The term “Wildcard” refers to the flexibility this system has in allowing a debtor to protect miscellaneous forms of property up to a specified dollar amount.
This system only applies in bankruptcy, however, meaning that this system cannot be used to protect your property in another form of judgment. Moreover, doubling is not permitted under this system.
- Homestead: The debtor’s equity in his or her residence up to $26,800.
- Miscellaneous Property (“Wildcard Exemption”): The wildcard exemption can be used for any property. It is limited to $1,425, plus any unused amount from the homestead exemption (for a total of $28,225 if the homestead exemption is not used at all).
- Motor Vehicles: Up to $5,350 total may be applied to one or more motor vehicles.
- Jewelry: Up to $1,600 for jewelry used primarily for personal, family, or household use.
- Pensions: Tax-exempt retirement savings accounts (e.g., 401(k)s, 403(b)s) are completely exempt under federal non-bankruptcy law (i.e., notwithstanding the unavailability of federal bankruptcy exemptions in California); IRAs and Roth IRAs are exempt under federal non-bankruptcy law up to $1,283,025.
- Public Benefits: Disability and unemployment benefits, workers’ compensation, veterans’ benefits, aid to the elderly or disabled, and crime victims’ reparations are totally exempt.
- Tools of Trade: Implements, professional books, or tools of the trade are exempt up to $8,000.
- Insurance: Any unmatured life insurance contract owned by the debtor is totally exempt, other than a credit life insurance contract. However, any accrued dividend or interest under, or loan value of, an unmatured life insurance contract is exempt only up to $14,325.
How Do I Decide Which Bankruptcy System is Best for Me?
While there are similarities between these two systems, which route is best for you will depend on your individual circumstances. Not every form of exemption, or every detail regarding each exemption is listed here. This article provides insight on only some of the most common exemptions utilized.
If you are considering bankruptcy in California, it is recommended that you discuss your situation with an experienced bankruptcy attorney before taking any action.