What Can Your Creditors Take if You File for Bankruptcy?
For those in financial distress, bankruptcy provides a means of eliminating overwhelming debt and starting fresh. One question people considering bankruptcy protection often ask is: will I lose all my possessions? The short answer is no. There are limits to what creditors can take, since certain property may be declared exempt from their claims.
There are two exemption schemes in California, designated as System 1 and System 2. Depending upon which system you choose, the same types of possessions can be given different dollar exemptions.
System 1 is a better option if you own a home with significant equity value. It provides a homestead exemption of a minimum of $300,000 and a maximum of $600,000 in equity. The amount of the exemption is based on the median sales price of homes in the county where you live. The System 1 homestead exemption also is indexed to inflation.
Other property exempt from creditors under System 1 includes:
- Household items and personal effects
- Residential building materials to repair or improve home up to $3,500
- A motor vehicle up to $3,050 in equity
- Jewelry, heirlooms and artwork up to $8,725 in value
- Tools of trade, including business vehicles, up to $8,000 in value
- Health aids
- Business of professional licenses
There are also exemptions for retirement accounts, public benefits and certain other financial assets.
System 1 exemptions will sometimes prove ineffective in keeping certain property. For example, if a debtor owns a car with a current value of $10,000, the bankruptcy trustee may force the sale of the car, paying the debtor $3,050 and making the balance of the sales proceeds available to creditors.
System 2 exemptions may prove more beneficial for people who have little home equity but wish to maximize retention of other assets. The dollar amounts of System 2 exemptions are greater for certain types of property. For instance, the exemption for autos is $5,850. In addition, System 2 includes a “wildcard exemption” that covers property of any type up to $30,825.
It’s also important to know that exemptions are generally not automatic. You must select the exemption system you want to use and designate which assets you want to protect. This points to the need for an experienced California bankruptcy attorney, who not only can counsel you on the best choice of system but also can make sure your exemptions avoid objections by the bankruptcy trustee.
When you are in dire financial straits, you need a bankruptcy attorney who knows the law and the court system and who can analyze your particular needs and goals. Based in downtown Beverly Hills, I provide a wide range of services for individuals and families suffering from the weight of excessive debt. Call the Law Offices of Michael Jay Berger at 310-271-6223 or contact me online to schedule a free consultation.