How Exemptions Work in a California 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, 98 percent of Californians who file Chapter 7 get to keep all 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 can take inventory of all your assets and then declare certain items as exempt from being sold to pay off creditors. If an asset is exempt, you get to keep it.
California has two different exemption systems, each of which has benefits suitable to different circumstances. You and your bankruptcy attorney should discuss which is the optimal exemption system to use.
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. The homestead exemption — the amount of home equity that can be shielded from creditors in a Chapter 7 or Chapter 13 — is typically a minimum of $300,000 and a maximum of $699,426 as of January 1, 2024. The homestead exemption is based on the median sales price of homes in the county where a debtor lives in a given year, indexed for inflation. Calculating the homestead exemption can be tricky because it is dependent on how long you have lived in your home, what county you live in, and whether or not the debts that you are seeking to discharge were obtained by fraud, deceit or manipulation in a fiduciary capacity.
System 2, called “703 exemptions,” is usually a better fit for people who do not own real estate but have a reasonable amount of personal property they want to keep. This system allows you to keep only up to $31,950 of home equity but offers $5,850 exemption for motor vehicles.
System 2 also includes a “wildcard” exemption. This allows you to protect property that is either above the maximum value allowable amount of another exemption or that doesn’t seem to fall into any other exemption category. 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 $33,500 ($1,550 plus the entire $31,950 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 $5,850. But you can use part of your wildcard exemption to protect the remaining value and keep your car.
There are also exemptions for retirement accounts and pension plans, household items, jewelry, health aids, bank deposits, personal injury causes of action, burial plots and tools of the trade.
At the Law Offices of Michael Jay Berger, we can help you decide which exemption system is best in your situation and be sure that you take full advantage of all exemptions that you are entitled to. 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.
