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How Exemptions Help You Keep Your Property in Bankruptcy

One of the most persistent misunderstandings in bankruptcy is that you have to give up your assets to gain a discharge from debt under Chapter 7. The truth is, most Californians who file in Chapter 7 get to keep most of their property. Remember, the goal of bankruptcy is to help you get a fresh financial start. Holding on to important assets like your home, car, clothing and household effects is a key part of making that happen.

The way you retain property in Chapter 7 bankruptcy is by using exemptions provided for in California law. You and your attorney take inventory of all your assets and then declare certain items as exempt from liquidation — that is, conversion to cash to pay off creditors. If an asset is exempt, you get to keep it.

California has two different exemption systems and you must choose one. System 1, called “704 exemptions,” is usually the right choice if you own a home and have a good deal of equity built up in it. System 2, called “703 exemptions,” is usually a better fit for people who may not own real estate but do have a reasonable amount of personal property they want to keep.

You and your bankruptcy attorney should discuss which exemption system to use. The difference between them is the amount of value you get to keep for various assets. System 1 allows you to protect more home equity than System 2, while System 2 is more generous for certain personal property. For example:

  • Under System 1, a single filer can keep $75,000 of home equity while System 2 only allows up to $29,275 of home equity.
  • Under System 2, you can exempt up to $5,850 worth of motor vehicles, while System 1 only allows up to $3,325.

The other difference is that System 2 contains a “wildcard” exemption. This allows you to protect property that is either:

  • Over the maximum allowable amount of another exemption; or
  • Doesn’t seem to fall into any other exemption category.

As of mid-2020, the wildcard allows you to protect $1,550 worth of any property, plus you can use the value of any home equity exemption left over. So, if you do not own a home, your wildcard exemption would be $30,825 ($1,550 plus the entire $29,275 homestead exemption).

You can use your wildcard to protect various items. Let’s say you have a car that’s worth $10,000. The motor vehicle exemption is only $5,850. But you can use part of your wildcard exemption to protect the remaining value and keep your car.

At the Law Offices of Michael Jay Berger, we can help you decide which exemption system is best in your situation. Our Beverly Hills attorneys can explain the exemption process, the wildcard and help you use bankruptcy to rebuild your finances. Call 310-271-6223 or contact us online to schedule a free initial consultation.


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