Are There Any Exemptions for Specific Assets in California Bankruptcy Cases?

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There is a lot of misinformation regarding bankruptcy and one of the most prevalent myths is that you will lose everything you own through the process. In truth, US bankruptcy laws are intended to support debtors in getting their lives back by discharging qualifying debt. As such, there are strategies to avoid having assets sold in Chapter 7 bankruptcy. A powerful advantage for your case is exemptions, which protect real estate and designated personal property. While you are making important decisions about your financial future, you should know the exemptions for specific assets in California bankruptcy cases.

California bankruptcy rules are quite complicated because of the two different systems that you might opt to follow for exemption purposes. There are pros and cons depending on your unique circumstances, so it is wise to obtain customized legal advice from a knowledgeable California bankruptcy attorney. Plus, you can read on for some helpful information about the Chapter 7 process and how exemptions work.


Overview of Bankruptcy in California

For individuals and married couples, Chapter 7 is a common bankruptcy option for discharging debt. With these cases, your debt is wiped out at the conclusion of your case. However, there are strict rules to qualify, so:


  • Your paycheck must be under the state median income level, as adjusted for a household of your size; OR,
  • If your earnings are higher, you may be eligible through the Means Test that assesses your income as well as monthly expenses.


The Chapter 7 bankruptcy process does aim to pay back creditors who suffer losses when your debts are discharged. The bankruptcy trustee is authorized to liquidate your assets, which means your real estate and personal property could be sold. This aspect of Chapter 7 is where exemptions enter the picture, as you can apply the laws to protect property from liquidation. In addition, you should keep in mind that the bankruptcy trustee may not always sell your items. In a no-asset case, the trustee might decline to liquidate belongings that would not bring a reasonable profit to pay creditors. 


How Exemptions Work in Chapter 7 Bankruptcy

Bankruptcy laws aim to satisfy debt to creditors, but these goals must be balanced with the debtor’s interests in what is necessary to live and work. Therefore, exemptions can protect the basics, though luxury or unnecessary items are more likely to be liquidated. Under US bankruptcy laws, different states enact rules regarding exemptions. In California, you are required to use the exemptions designed by state law instead of federal exemptions. 


Plus, when filing for bankruptcy in California, you must choose which set of exemptions you intend to use to protect your property. There are two systems, with the biggest difference between them being the amount you want to protect for your home. In addition, it is important to note that exemptions apply to your equity in an asset when there is a loan attached to it. For instance, you can safeguard the amount of your home that you have paid against your mortgage balance. You cannot use an exemption to protect an amount you still owe on the mortgage.


Additional Facts About Exemptions for Specific Assets

It is useful to review some background on exemptions and how assets are treated under the two different systems in California:


  • Section 704: If you opt for System 1 exemptions, you can protect up to $600,000 of the equity in your primary residence. This is an attractive feature for homeowners with considerable value in their property. Under these rules, you have an exemption of $3,625 for a vehicle, as well as exemptions for household items, personal effects, jewelry, and amounts on deposit in bank accounts.


  • Section 703: You may choose System 2 exemptions if you do not own considerable value in real estate, as you are limited to $31,950. However, the rules make up for other exemptions, such as $6,375 for a vehicle, and $1,700 as a wild card that you can apply to any property.


No matter which system you choose, you do have the benefit of exemptions for retirement under the federal Employee Retirement Income Security Act (ERISA). All retirement savings, pensions, and accounts covered by ERISA are exempt from the bankruptcy process.


Avoid Liquidation with Chapter 13 

As you consider options for eliminating debt through bankruptcy, it is also useful to review information regarding another type of case. Chapter 13 is also available for individuals and married couples, and you are able to wipe out qualifying debt at the end of the process. However, the key factor that makes Chapter 13 different is that there is no liquidation to generate funds to pay creditors. With no liquidation, you do not use exemptions to protect property.


There is still an effort to satisfy your debt to creditors through Chapter 13, and you do so through a debt repayment plan. Your debts are first restructured and reduced to a single monthly payment in an amount you can afford. Therefore, the primary eligibility rule is that you must have a job to pay under the plan. You complete the debt repayment plan within 3 to 5 years, at which point debt is discharged.


A California Bankruptcy Attorney Helps with Exemptions

From this summary about bankruptcy and exemptions, you can see that decision making and preparations are essential. You must determine whether you qualify for Chapter 7 and decide if it is the right fit for your needs. Then, you will need to evaluate your assets compared to each exemption under both Section 704 and Section 703. There are clear advantages with System 1 versus System 2 of the California exemptions, so you do not want to put your assets at risk with mistakes. 


A California Chapter 7 lawyer can advise you on these issues to ensure you make informed decisions. Plus, you can count on your attorney to assist with the steps to a bankruptcy case, including:

  • Organizing financial documents;
  • Preparing the bankruptcy petition;
  • Attending the creditor’s meeting; and,
  • Obtaining the Chapter 7 discharge order.


Consult with a California Bankruptcy Lawyer About Exemptions

While you can take advantage of exemptions for specific assets in California bankruptcy cases, it is critical to retain experienced legal counsel for assistance with your case. Without useful advice for your situation, you put your real estate and personal property at risk. At Kostopoulos Bankruptcy Law, our team possesses the knowledge and skills necessary to leverage exemptions to your benefit. To learn more about our services, please contact our firm. We can schedule a consultation with a California bankruptcy attorney who will explain the laws regarding Chapter 7 and Chapter 13 cases.