Chapter 7 bankruptcy exemptions exist for specific assets you own individually or jointly. An exemption allows you to protect your property to some degree and you do not need to worry about selling your assets to receive a discharge. Below is a guideline regarding what assets creditors in Sacramento (and California in whole) cannot seize to collect for a judgment.
California Bankruptcy Exemption law
Unlike other states, California has two types of exemptions, making bankruptcy laws more complicated. California is also an “opt-out” state, and federal exemptions do not apply. When you complete the paperwork, you should highlight all properties and exemptions you can claim for every item. If the exemption covers your asset, you will keep it. If the exemption does not cover a property, the assigned bankruptcy trustee will sell it and use its proceeds to pay the creditors.
Suppose you have been a California resident for at least two years. In that case, you should choose between the bankruptcy exemptions in the 703 section and section 704 of the California Code of Civil Procedure. If you have resided in more than one state in the last two years, seek legal assistance in filing and maximizing the exemptions.
You claim an asset as exempt means claiming its equity as exempt. For instance, if your car’s value is $20,000 but has a debt of $35,000, you are underwater and have nothing to exempt. Creditors and trustees cannot claim negative equity. The asset is vulnerable to the degree its value is above the outstanding loans.
A vulnerable property means the trustee can sell the asset in the liquidation sale.
A Chapter 13 bankruptcy case differs from Chapter 7 because the trustee will not sell the non-exempt property. Instead, you will clear the non-exempt value to your lenders through a repayment plan.
704 Exemptions (Exemption System 1)
704 exemption is a better option for persons with significant home equity.
California Homestead Exemption
Homestead exemption applies to a specific equity amount in the primary residence. System 1 allows you to exempt personal or real property you live in when filing your bankruptcy case. It can include your boat, community apartment, stock cooperative, mobile home, condominium, or planned development up to six hundred thousand dollars.
California 704 Car Exemption
California car exemption under Code of Civil Procedure 704.010 protects equity in vehicles like motorcycles, trucks, and cars up to $7,500.
Items for Your Trade, Profession, or Business
Items like uniforms, furnishings, equipment, books, materials, implements, instruments, tools, vessels, and commercial cars are exempt up to $9,700, provided:
- they are essential to, and
- you use them to exercise your profession, business, or trade by which you make a living.
The exemption is $19,050 if you and your partner are in the same occupation, business, or trade and require these items.
Your Wages
You can exempt 75% of wages paid to you within thirty days of filing for a bankruptcy case.
More than 75% of your public employee vacation credits will also be exempted if you receive installment payments.
Personal Property
Some of the exempted personal property include the following:
- Your household furnishings and apparel that are ordinarily and reasonably vital to and used by you and your family members in your residence. Under California Code of Civil Procedure 704.020, any item not ordinary found in your household or with extraordinary value is not exempted.
- Material purchased intending to be used to maintain, improve, or repair your place of residence.
- Jewelry, artwork, and heirlooms — $9,525.
- Health aids and prosthetic appliances are exempted if they are essential to enable you, your spouse, or your dependent to sustain health or work.
- Bank deposits of $1,826 or a degree required for support.
- Bank deposits stemming from Social Security Benefits payments are exempted to $5,725 and $3,825 for spouse and single payees, respectively. There is no limit if the money is not commingled.
- Bank deposits originating from other public benefit payments — $1,900.
- Wrongful death and personal injury lawsuits and recoveries required for support.
- Burial plot and cemetery.
Retirement and Pensions
Pensions and private and public retirement accounts are exempt. They include:
- Retirement accounts like profit-sharing, 401(k)s.
- IRAS.
- Roth IRAs.
- County firefighters.
- County employees.
- Public employees.
Public Benefits
Public benefits that qualify for exemption include:
- Public assistance benefits.
- Relocation benefits.
- Workers’ compensation benefits.
Insurance Plans and Benefits
Insurance plans and benefits exempted include:
- Unmatured life insurance policy or matured life insurance benefits required for unlimited value support — $15,250.
- Health or disability insurance benefits.
- Fidelity bonds.
Exemption System 2 (Section 703)
Section 703 is commonly used by debtors who do not own real property or have little home equity. It is because it offers significant protection for your property.
Below are 703 exemptions:
- Homestead exemption for personal and real property. This is commonly known as the “Wildcard” Exemption — $31,950.
- Motor vehicle — $6,375.
- Books, clothing, furnishings, appliances, crops, household goods, and musical instruments — $800 per item.
- Jewelry — S1,900.
- Health aids.
- Wrong death compensation required for support.
- Personal injury recovery —$31,950.
- Benefits essential for support and annuities.
- Public benefits.
- Tools of trade.
- Child support and alimony.
- Insurance policy and plans.
Wildcard Exemption
Per Section 703, the exemption allows debtors to exempt $1,700 in an item they want to keep in the bankruptcy case alongside any unused homestead or burial exemption.
You can increase your wildcard exemption when you do not use your homestead protection to protect your home equity. The current wildcard exemption is $31,950 if you do not use your homestead exemption.
A Bankruptcy Attorney Can Abandon a Property You Cannot Exempt
If the trustee decides that liquidating a given property in your bankruptcy estate will not yield enough proceeds to pay your creditors, they can abandon the asset. Moreover, the trustee can abandon the asset if it is difficult to sell.
It happens if, after subtracting your sale costs, the trustee’s commission, amounts due to creditors with liens against your property, and an exemption owed to you, there is little or nothing left to distribute among your creditors. If the bankruptcy trustee abandons your property, you can keep it regardless of whether it is nonexempt.
Typically, the bankruptcy trustee will bring a Notice of Abandonment notifying your creditors of their intent to liquidate your assets from the estate to satisfy their debt obligations. By filing the notice, the bankruptcy trustee restores the asset’s control to you and any creditor with interest in your property. It also alerts the creditors to their standing and what to expect from bankruptcy.
California’s Homestead Exemption
System 1 homestead exemption applies to any asset where you live and proceeds to a forced sale of the house six (6) months before filing for bankruptcy.
According to System 2, this exemption applies to an asset you or your dependents use as your primary residence. It also includes your burial plot or cooperative. If you do not require your total exemption to protect your home’s equity, you can take advantage of your unused portion to keep your preferred property under wildcard exemption. The amount is alongside the $1,700 wildcard amount.
To claim your maximum homestead exemption, you should have possessed the asset for more than 1,215 days before filing for bankruptcy.
Unlike in other states, you cannot double your exemption amount as a couple.
Please note that California’s homestead exemption is automatic; you do not require to declare your homestead when bringing your bankruptcy case. Instead, you claim the exemption when filing your paperwork by highlighting it on Schedule C: The Property You Claim as Exempt.
Determining Whether You Can Keep Your Car Using Motor Vehicle Exemption
The following steps can help you know whether you can keep your vehicle after filing for Chapter 7:
1. Check California’s Bankruptcy Exemption Amount
The state exemption statutes tell the amount of equity a debtor can protect. The debtor should also consider the wildcard exemption they can use on their preferred property.
2. Determine Your Motor Vehicle’s Value
The bankruptcy paperwork will highlight the amount you would sell the car for, or its fair market value, considering the current condition and age.
3. Calculating the Car’s Equity
The car's equity is its value if you do not have an auto loan.
If you have an auto loan, the car’s equity is the remaining amount after selling your motor vehicle and clearing your loan. For example, if you sold your vehicle for $9,500 and cleared your $4,050 outstanding loan, you will have $5,450 of equity. However, you have zero equity if you owe more than your car’s worth.
4. Comparing the Vehicle’s Equity to Your Exemptions
If the exemption covers all the equity, you can file for bankruptcy and keep your motor vehicle.
Chapter 7 Eligibility
Bankruptcy offers people with a lot of debts a fresh financial start. That means you can eliminate specific unsecured debts without fully repaying them. However, you should pass a means test to be eligible for a bankruptcy discharge.
California’s bankruptcy means test comes in two parts, namely:
- The median income test.
- The full means test.
If you pass the median income test, you do not have to do the full means test.
Typically, the median income test compares the household income to California’s median income for your household size to determine if you earn enough money to bring your Chapter 7 case. If a debtor earns more than their median income, they will not pass this first median income test.
Income for a means test is determined by first adding the gross income for every household member for the last six months. You should also include alimony payments, unemployment benefits, retirement income, and child support. Do not include your Social Security benefits. Then double the figure to get an estimate of your annual household income.
Next, determine the number of individuals in the household (living in the home). If the household income is below California's median income for your family size, you pass the median income test. However, if the income exceeds the median, you would then move on to the full means test.
California’s full means test will review your income and monthly expenses. It gives a comprehensive image of whether you can repay your lenders and have adequate funds available to cater to your basic household bills. The expenses they allow in this full means test are a variation of the actual expenses you incur (i.e. your actual mortgage payment) or a standardized expense based on your household size (i.e. a certain allotment is given for utilities and gas/maintenance on a vehicle).
Since different people spend money differently, the court will ensure specific expenses are realistic. Some costs will be determined by what you spend, while the court will stipulate amounts like monthly grocery costs. The amount the court stipulates varies depending on your household size and where you reside.
After calculating the living expenses, you should compare the amount to the income. If the expenses exceed your income, you pass the full means test and can file Chapter 7. If the estimated living expenses are less than the income, you should file for Chapter 13 bankruptcy. It is because you have adequate income to clear at least a certain amount of debts after catering for living expenses.
Mistakes to Avoid When Filing Your Chapter 7 Case
If you want to keep your property under California Chapter 7 exemption laws, you want to avoid accidental or innocent mistakes. Avoiding errors also preempts trustee and creditor challenges, ensuring your case runs smoothly.
They include:
- Transferring your asset before filing for bankruptcy.
- Depositing unusual amounts before filing your bankruptcy case.
- Making a credit card purchase before the filing.
- Filing for bankruptcy when you expect future payments.
- Suing individuals before the filing.
- Failing to complete the bankruptcy education requirements.
- Failing to comply with bankruptcy procedures and rules.
- Filing incorrect bankruptcy forms.
- Using incorrect bankruptcy exemptions.
- Failing to attend the 341 meeting of creditors.
Find an Experienced Bankruptcy Attorney Near Me
While Chapter 7 offers a fresh start, the process is undoubtedly complicated. Determining what you are legally entitled to keep using Chapter 7 exemptions takes time and effort. You should also list every property you want to exempt. Otherwise, you will lose it. Consulting a seasoned bankruptcy attorney is the most effective way to ensure you follow the appropriate steps and keep your property.
The legal team at Sacramento Bankruptcy Lawyer can analyze the facts and circumstances of your bankruptcy case and offer guidance and advice regarding Chapter 7 bankruptcy exemptions. We can also answer your questions regarding bankruptcy in general. To schedule your confidential and free consultation, contact us at 916-800-7690.
