A wee primer on exemptions (in the context of chapter 7 bankruptcy)

Asaph O. Abrams

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Chapter 7 Bankruptcy Attorney

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Posted over 2 years ago. 1 helpful vote

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I'm filing a chapter 7... will I keep all my property?

Answer: Maybe.

Federal and state bankruptcy laws describe what property is exempt, meaning what you get to protect from creditors and keep to yourself. In a chapter 7 bankruptcy, none of your exempt (protected) property can be liquidated (sold) for the purpose of repaying creditors.

If you’ve been domiciled (basically means resided) in California for at least 2 years, then California’s bankruptcy exemption statutes apply. Otherwise the Federal bankruptcy exemption laws or your former state’s bankruptcy laws apply. Other states may have more or less generous provisions than California. In California, you’ll choose from two sets of exemptions. Under both systems, normal household goods, from clothing to furniture, TVs, etc. are generally protected. Under both systems, retirement accounts are generally exempt. However, there are differences between the systems. System 1 emphasizes protection of home equity. System 2 gives you more freedom to protect a great variety of personal property. When we consider values, we’re looking at used values or what the items would fetch at auction. Here are some highlights that distinguish the two sets of exemptions available in California:

California’s “System 1" derives from the Code of Civil Procedure §704. That funny-lookin’ S means “section." For verbose people, lawyers sure like their abbreviations. System 1 has a large protection for equity in your residence: the amount depends on the type of ownership, your age, family situation and other variables. The range is $37.5K to $175K. For motor vehicles, System 1 lets you protect $2,725 in equity. So, let’s say you owe Ford $20,000 on your Mustang, and the pony’s worth $22,725. You have $2,725 of equity in the sports car, which is all exempt from liquidation. Under System 1, jewelry, heirlooms and art are covered up to a value of $7,175 total. Equity in goods used in your occupation are covered up to $7,175 or twice that amount if you work with your spouse.

California’s second exemption system derives from the Code of Civil Procedure §703. This system is designed primarily for debtors with minimal or no home equity. There are some limited specific exemptions, such as $3,525 of equity in a vehicle, $1,425 in jewelry and $2,200 in tools of trade. However, System 2 also gives you an allowance of $22,075 to protect any type of personal property, from cash to that first edition, first printing of Harry Potter and the Sorceror’s Stone signed by J.K. herself. Let’s say you have a limited Dark Highland Green Mustang GT Bullitt, worth $25,600 and you own it free and clear. Well, you can apply the $3,525 vehicle exemption AND the $23,250 “wildcard" allowance and thus protect the car, (if not your gas costs at 15 mpg in the city).

Here is the primary or official source for these exemptions, however the amounts therein are not current. Beware: a lot of secondary sources also don’t update the amounts (Web sites are a pain to upate). But no worries, we keep apprised and will keep you covered.

What happens if my property is liquidated in a chapter 7 bankruptcy?

The bankruptcy exemption protections still apply. If a property is sold in bankruptcy, you’re still entitled to the exemption amount taken from the sale proceeds.

What if my equity is right near the bankruptcy exemption limit?

In weighing whether to sell the property, the bankruptcy trustee will consider the sale costs and the trustee’s own commission. Those factors essentially increase the amount of equity. This is particularly significant when it comes to the high sales and closing costs for homes. Also, a non-exempt property may have no market and not be readily sold. The bankruptcy trustee might then abandon the property and let you keep it, even though technically, it’s not exempt.

This legal guide by San Diego bankruptcy attorney, Asaph Abrams doesn’t address all facts & implications; it’s general info, not legal advice to be relied upon. It creates no attorney-client relationship; it may be pertinent to CA and/or its Southern District Bankruptcy Court only, and it’s independent of other materials published herein. It may be time sensitive, as in past the “Use by" date: laws and case law change. Hire legal counsel before acting or refraining from bankruptcy/legal action.

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