It is unfortunate to work hard for years only to lose your hard-earned assets through bankruptcy. If you plan on declaring bankruptcy or have already done so, you are wondering what will become of your assets. Chapter 7, also known as liquidation, is the bankruptcy type that affects your assets heavily and involves selling your assets to pay debtors. Therefore, if you are considering filing, you want to know what your vehicles, real estate, or property will become. The answer to this question hinges on exemption laws that inform you of the assets to protect.
Forms of Assets in Bankruptcy
In California, an asset is any valuable item you own, including vehicles, bank accounts, pets, furniture, jewelry, guns, or investment accounts. Besides, assets include possessions you lack physical control over, like security deposits, loaned property, or book royalties. Assets fall under three categories in bankruptcy. These are:
- Personal property refers to material goods like motor vehicles, clothing, and furniture
- Real property consisting of land, and any value addition on it
- Intangible property like retirement savings, child support, and alimony
Overview of Bankruptcy Exemptions
A common myth is that you lose all your assets when you file for bankruptcy. Contrary to this, you can retain some of your property even after bankruptcy. The law protects your basic necessities and a few other valuables to prevent you from being instantly penniless. The government does not want you to become homeless and dependent on them for financial support, which is why they provide various exemptions that dictate the number of assets or equity you can retain after insolvency.
All your property or assets become part of the bankruptcy estate and are entrusted to a court-appointed trustee who consolidates and sells them off to pay the debt. The law allows you to exempt part of your property from liquidation in California. Per Chapter 7, exempt assets cannot be liquidated to settle debts, including clothing and items you need for health or work-related reasons. Under Chapter 13, you retain all your assets, although the non-exempt asset value will be the amount you pay the creditors for your unsecured loans.
Exempt Vs. Non-Exempt Assets
Many Californians associate bankruptcy with losing all your assets and starting from scratch. The assumption is not far from reality because most of the filings leave you with very few assets. However, the California and federal government highlight the types of assets you can retain and their effects on bankruptcy.
Exempt laws tell you the property you can retain under the liquidation code, while under Chapter 13, exempt assets help you estimate what you owe in unsecured debts. On the other hand, nonexempt assets are those that you hand over to the trustee. State and federal laws have their definitions of exempt assets, so you must talk to a bankruptcy attorney before filing to help you understand the kind that best fits your needs.
California Bankruptcy Exemptions Schemes
If you are a debtor in California, you must understand that the state offers you two forms of exemptions; scheme 703 and 704. Each of these systems has its merits and demerits, hence the need to analyze each for an informed decision. It would help if you had a bankruptcy attorney that understands the benefits of the two schemes and their effects on your assets so that you can pick the scheme that will place you in a better financial position at the end of the automatic stay.
You must understand that when filing for bankruptcy in California, you use either of these schemes, unlike in other states where you can opt to use state or federal exemptions. Again, you cannot double California's exemption amounts when you jointly file for insolvency. However, other states allow for a doubling of exemptions when filing jointly.
Fundamentally, scheme 704 works best when you have significant home equity to protect, while the 703 scheme is recommended for individuals with no home equity. However, there are exemptions to this rule of thumb, which is why you must consult with your attorney to choose a scheme wisely.
704 Exemptions
Also known as system one, 704 exemptions allow you to retain a significant share of your primary residence or homestead equity. The scheme does not only help you keep the conventional home but also condos, mobile homes, community apartments, and livable boats. If you are yet to be married, you will obtain a homestead exemption of $75,000 under this scheme. However, when you are filing jointly, disabled, or over sixty-five years of age, you will receive a primary residence exemption of $175,000.
If you have equity in motor vehicles, trucks, or motorcycles, system one provides a car exemption of no more than $4,800, regardless of whether you own an expensive auto. Although the exemption is smaller than your homestead's, you are better off protecting your primary residence than a car.
Also, system one offers exemptions for personal property, which include:
- Personal effects
- Building materials for home improvement
- Jewelry and artwork of no more than $9,525
- Bank deposits amounting to $1,826
- Bank deposits stemming from social security payments of at most $3,825 for an unmarried payee and $5,725 for marital payees. The bank deposits for payments from public benefits are no more than $1,900 and $2,825 for married couples.
- Wrongful injury or death reimbursement funds
- Any money reserved for your cemetery or burial plot
Again, 704 exemptions allow you to retain 75% or three-quarters of your wages earned 30 days after filing.
Another crucial 704 exemption is the retirement and pension account for public workers, county workers, county firefighters, and county peace officers. Your public benefits, including student financial aid, unemployment, relocation, workers’ comp, and FEMA, are retained after bankruptcy under this scheme.
Your trade tools like books, instruments, implements, furnishings, and one commercial car are exempt at most $9,700 total or no more than $19,050 when owned jointly by couples in the same trade. Other 704 exemptions include life insurance policies with accumulated value and miscellaneous items.
It is challenging to estimate the number of assets, their fair market value, and how you will best protect them from liquidation. A bankruptcy attorney will come in handy during these difficulties and help you navigate and obtain a clean financial start. The attorney will give you a vivid picture of how your exemption decisions will impact your case later for a wise decision.
703 Exemptions
The 703 exemptions, also known as the system two scheme, have many asset categories that are similar to those in scheme one. The only distinction is that for 703, less money is allotted to each category than for 704 scheme categories.
If your home is your primary residence, you may be able to exclude $31,950 from your real estate property under the plan. You should opt for this scheme if your homestead is a low-value property like a camper, because the exemption will not be a bother.
Regarding your motor car, the system two scheme exempts at most $6,375 of equity on your auto.
Regarding personal property, you will be given a jewelry exemption of $1,600, which is much less than the 704 exemptions, which are worth more than $8,000. However, other personal assets, like:
- Health aids
- Personal injury damages
- Wrongful death reimbursement
- Clothing, musical instruments, animals, crops, household items, and appliances
- Burial plot
These personal assets have similar exemption amounts.
If you buy expensive tools for your work or are self-employed, you will obtain tools of trade exemptions of no more than $8,000.
With assets like child support, alimony, disability, and public benefits, the exemptions are like the 704 plan.
The key distinction between the system one and system two exemption plans is that under system two, you are entitled to an additional $1,400 for any unoccupied burial ground or unoccupied homestead, for a total of up to $25,000 in wildcard exemptions.
The total amount of your wildcard exemptions can be used for practically anything. Therefore, if you love your expensive car, whose vehicle exemption is $8,000, and you only have $5,000 in exemptions, you can remove exemptions worth $3,000 from the wildcard and save your auto from the trustee. Alternatively, you can use the wildcard to increase your personal property or residence exemptions. Besides, the balance in the wildcard exemptions can be used to cover your bank accounts to save you from drained or depleted reserves.
The downside of a wildcard is that it will not protect your assets forever, even though it makes scheme two more attractive than scheme one. So, if you wish to protect your valuable assets or homestead, opt for the 704 exemption plan but miss out on the attractive wildcard exemptions.
Talk to your bankruptcy attorney for guidance if you are torn between the 704 and 703 exemptions.
What Happens to Non-exempt Assets?
Your nonexempt property is gathered by the bankruptcy trustee appointed by the court, who then sells it and applies the proceeds to your unsecured debts. These debts include uncollateralized personal loans, credit card balances, and medical bills. pay
Similarly, the exemptions highlighted above will not protect particular luxury items like fur coats. Therefore, if you are an art lover, it is less likely to be covered by bankruptcy exemptions. Nonetheless, you can retain your nonexempt assets under the following circumstances:
- When the trustee abandons the assets
- When you buy back the assets from the trustee
- The trustee agrees to a different exempt asset in return for the nonexempt
These scenarios are further discussed below:
- Bankruptcy Trustee Abandons the Asset
Under the liquidation form of bankruptcy, a trustee cannot take and sell your exempt property. Nonetheless, you can sell a nonexempt property and use the money to pay off unsecured debts. Also, if the nonexempt assets have no value to the trustee, they can abandon them. A trustee will leave your property if it is upside-down, meaning the loan value secured by the property is higher than the asset’s market value. Trustees abandon these assets because, after repaying secured creditors, there is no money to pay the unsecured ones.
- Buying Nonexempt Assets from the Trustee
When a trustee does not want you to retain an asset because of its value, you can offer to repurchase it. You can achieve this by borrowing a loan from a family member or friend. Alternatively, you can negotiate to have the price of the nonexempt lowered. You can utilize the revenue gained from a bankruptcy filing or the sale of exempt assets to finance the purchase.
- Exchanging Exempt for Nonexempt Assets
If you're contemplating bankruptcy, it may be challenging to consolidate your finances in order to buy back the nonexempt property from the trustee. Therefore, if you value a nonexempt asset a lot and cannot afford to lose it, you can offer the bankruptcy trustee an exempt asset in exchange. The trustee's decision on whether to accept or reject your request for a trade will depend on the value of the exempt asset you are offering and whether selling it will result in additional labor and storage costs.
Bankruptcy Assets Schedule
When filing, bankruptcy laws require you to list all your assets. A list of all your secured and unsecured assets must be submitted as part of the filing procedure. These assets include:
- Automobiles
- Personal and household appliances
- Land or primary or secondary homestead
- Commercial property
- Financial assets like deposit accounts
When you list any of these assets as exempt, you must furnish the court with a separate list of exempt assets. When listing your land, homestead, or real estate, you must include its address, the names of the individuals with ownership interests, the value of the property, and any other information relevant to the court.
You must include the vehicle category's year, mileage, and model. Also, you must indicate its total value, any individuals with interest in the property, and your share of the asset.
In the financial assets category, you must mention cash, bank account deposits, annuities, security depots, and retirement accounts.
The court relies on your asset list to administer and liquidate your bankruptcy estate. Only the assets you had when filing for bankruptcy are counted toward your estate and are up for sale.
It is worth understanding that when submitting your documents to the court, you do so under oath, and the information provided must be correct. Therefore, if you leave out some of your assets from this list, you will face perjury charges and possible penalties if convicted. The penalties include 20 years in prison or a court-ordered monetary fine of $250,000.
Additionally, if you submit a petition for debt relief and lie to the court about your assets, it will be denied. Additionally, failing to disclose assets—whether on purpose or by mistake—will lead to criminal prosecution because it constitutes bankruptcy fraud. Have a lawyer by your side when declaring bankruptcy to prevent these asset omissions that could land you in legal trouble. An attorney will ensure that the asset schedule contains all the assets you need to list.
No-Asset Bankruptcy
In a no-asset kind of bankruptcy, the trustee has no nonexempt assets to liquidate. These cases are shared under the liquidation code. And because your bankruptcy estate has no unprotected assets to pay unsecured creditors, they do not receive any proceeds from the asset sale. Instead, the trustee files a no-assets report with the court.
If you omit nonexempt assets from the list but uncover them later on during the automatic stay, the trustee will still seize the property and put it up for sale. The court then informs unsecured creditors of the assets and requests them to file a proof of claim within a stipulated duration to receive proceeds from the sale.
Considerations when Listing Items in Bankruptcy
It is advisable to emphasize the need for a bankruptcy attorney when outlining your assets. The court is looking for a complete picture of your assets, and a legal team can help you paint a clear picture of what you own. You must remember that every little detail counts in this process because it can impact how much your bankruptcy estate and exempt property are worth overall. Therefore, it is crucial to know that California will enforce its list of exempt assets under the 703 or 704 schemes.
The assets have limits up to a particular dollar amount. Your lawyer must assess the cap under each plan and recommend the best exemption plan based on the value of the assets.
Also, when listing items, you can list them as a single filer or a joint filer. Whether you are filing as a single individual or a married person, the other spouse who is not filing must list their assets to give the court a vivid picture of the financial situation in the marriage.
Finally, reaffirming secured creditors for assets like your home or car would be beneficial. You can do this by promising to honor your payments even during the automatic stay if they can guarantee they will not repossess your house or car.
Find an Experienced San Diego Bankruptcy Lawyer Near Me
However small your assets are, it is crucial to disclose them when filing. It is better to over-disclose your assets than to omit some. To avoid being left penniless, you should also be aware of which assets to list as exempt and nonexempt. At the San Diego Bankruptcy Attorney, we are eager to help you understand bankruptcy and its effects on your assets to avoid all the misconceptions about filing. Reach out to us today at 619-488-6168 for a free consultation.
