Getting exemptions protects your property when you are filing for bankruptcy. In California, there are two sets of exemptions – 703 exemptions and 704 exemptions. You can only choose either of these sets regardless of the type of bankruptcy you are filing for. To help you understand the process of getting exemptions better, our attorneys at San Diego Bankruptcy Attorney share the following detailed information on this aspect of bankruptcy.
The Federal vs State Laws on Bankruptcy Exemptions
States bankruptcy laws are coiled from the federal bankruptcy laws. At both levels, the main purpose of bankruptcy laws is not to punish the debtor and make it impossible to start afresh. Instead, the laws address the situation and treat the creditors fairly while allowing the debtors to save some assets and a means of starting anew. This means that even if the creditor has security interests in the asset, the debtor can protect some personal property depending on the amount of the loan and the consumer’s equity in the asset.
As per the Federal laws, each state should allow its citizens to use the Federal bankruptcy exemptions. Alternatively, the state can withdraw from the Federal exemptions and instead, opt for the state's exemptions. California has already opted out of the Federal bankruptcy exemptions, allowing the use of California set of exemptions for its citizens.
Understanding How Bankruptcy Exemptions Work
In California, you can file for either chapter 7 or chapter 13 bankruptcy. In either case, if you have an asset whose worth is less than or equal to the exemption amount, you keep the asset. If its value exceeds the set exemption amount, the trustee is likely to sell your asset to pay your creditors the money above the exemption amount. For example, if you have a vehicle worth $5,000 and the state’s motor vehicle exemption is $8,000, you will keep the vehicle after filing for chapter 7 bankruptcy. On the contrary, if your vehicle is worth $17,000, the trustee will most likely sell the vehicle, give you $8,000 for exemption, and then give the rest to your creditors.
Trustees incur costs when selling your assets. So if the asset’s equity is not noticeably more than the exemption, chances are the trustee will not sell the asset. For instance, if you have a car that is worth $3,000 and the state exemption for motor vehicles is $2,500, the trustee may not sell the vehicle. This is because the cost of selling and transporting the vehicle would be more than the 500 dollars in expenses from selling the vehicle.
California Bankruptcy Schedule Basics
One of the important components of bankruptcy paperwork is schedules. Schedules are the heartbeat of bankruptcy since they reveal your assets, income, and debt. There are two sets of laws that a debtor can use to protect their property. They are section 703 exemptions and section 704 exemptions.
It is important to understand that a person can only use one of these exemptions. For example, if you get amounts that are advantageous to you for a vehicle under the section 704 list and more favorable amounts for jewelry under 703 list, you can’t use both 704 and 703 exemptions. In simple words, if you start using section 703 exemptions, you use it to the end to protect your property.
704 Exemptions (Bankruptcy Exemption System 1)
It is important to note that the following exemptions are referenced from the California Code of Civil Procedure. Also, the exemptions were last amended on April 1, 2016 by the California Judicial Council and will be reviewed next on April 1, 2019.
Homestead exemption
Homestead exemption covers a certain amount of equity in your home. In 704 exemptions, a debtor can exempt personal or real property they live in at the time of filing for bankruptcy. This can include condominium, community apartment, mobile home, stock cooperative, or boat.
Below is a brief overview of how an individual can qualify for homestead exemptions (and the exemption amounts) under System 1:
- $75,000 if you are single and not disabled;
- $100,000 if your family or no less than 1 family member has no ownership interest in the house;
- $175,000 if you are mentally or physically challenged and not in a position to engage in substantial lucrative employment. This is determined by Social Security disability. Moreover, you are eligible for this exemption if your doctor issues a statement of diagnosis and opinion that you can’t work;
- Up to $175,000 if your creditors are forcing the selling of your house and you are either (a) 55 years of age or above, single, and have a gross annual income of $25,000 or less, or (b) 55 years or above, married and your combined income is $35,000 or less.
Gross annual income, here, refers to a person’s income for 12 months before filing the petition. Gross annual income for self-employment people who are service providers is determined by subtracting operating expenses from the total income figure.
Motor Vehicle
Under System 1, this exemption can protect your car, motorcycle, or truck up to $3,050.
Personal Asset
- Household goods and personal effects. Under California Code of Civil Procedure (CCP) 704.020, there is no set value for the asset in question, but it cannot exceed the value of property in similar households;
- Up to $3,200 to protect construction materials to improve or renovate your home;
- $8,000 for jewelry, the art world, and heirlooms;
- Health aids as per CCP 704.050;
- Bank deposits (direct) from Social Security payments – $3200 if the payee is single, $4,800 for spouses who are joint beneficiaries, and unlimited if the money is not commingled;
- Bank deposits from other public benefit payments are $1,600 for a single payee and $2,375 where both spouses are joint payees;
- Personal injury and wrongful death actions or damages under CPP 704.140 and CPP 704.150;
- Burial plot under CPP 704.200.
Wages
- 75% of wages that was paid 30 days before filing for bankruptcy, and
- At least 75% of public employee vacation credits will be protected provided they are being paid installment payments.
Retirement and Pensions
- Tax-exempt retirement account such as 401(k), 403(b), profit-sharing and money purchasing plan, defined benefit plans and SEP, and Simple IRAs cannot be claimed by any creditor or considered as part of the bankruptcy estate;
- The amounts for Roth IRAs and IRAS are set by the federal laws. They are covered up to $1,283,025;
- Public retirement benefits fall under CPP 704.110;
- Private retirement plans and benefits such as Keogh and IRA are found in CPP 704.115.
Public Benefits
- Unemployment and disability benefits and union benefits resulting from labor disputes are found in CPP 704.120;
- Workers’ compensation benefits under CPP 704.170;
- Relocation Benefits under CPP 704.180;
- Student financial aid under CPP 704.190.
Tools of Trade
- Tools of trade such as furnishings, one commercial car, equipment, books, instruments, and uniforms are capped at $8,000 or at $15,975 in cases where they are used by a couple that works in the same field.
Insurance
- Up to $12,000 for both non-matured life insurance policy and matured life insurance benefits for support of the unlimited value;
- Health or disability insurance benefits under CPP 704.130;
- Homeowners’ insurance equals the amount of their homestead exemption. It continues for up to six months after the receipt;
- Life insurance goes on if the policy forbids use to repay creditors.
Miscellaneous
- Trust funds of inmates are $1,600
703 Exemptions
Also referred to as California’s Bankruptcy Exemption System 2, 703 exemptions cannot be used to protect assets against creditors in the bankruptcy case. Some courts consider bankruptcy-only exemptions systems unconstitutional while others will permit you to use them. If for instance, you are filing for a bankruptcy case outside California but still using its exemptions because of home rules, chances are you will not be allowed to use the 703 exemptions. Consequently, it is important to engage a knowledgeable attorney.
Just like the System 1 exemptions, all System 2 laws reference back to California Code of Civil Procedure and were last reviewed on April 1, 2016. The exemption amounts are updated every 3 years. The review is based upon the California Consumer Price Index for every Urban Consumer.
Homestead exemption
Homestead exemption is found in section 703.140(b) (1). This allows homeowners to exempt up to $26,800 for both personal and real property that is the primary residence. This amount also applies to owned cooperative and burial plots.
Motor Vehicle
- 703 exemptions allow you to protect your vehicle up to $5,350.
Personal Property
- $26,800 for a burial plot;
- Section 703.140(b) (3) allows you to exempt your household furnishings and goods such as clothes, musical instruments, or books in amounts of $675 per household item. These items must be for personal or family use by the debtor or their dependent;
- Jewelry – System 2 exempts aggregate interest on jewelry up to $1600;
- Health aids – Health aids prescribed by a professional are made pursuant to 703.140(b) (9). It allows the exemption in unlimited amounts;
- Wrongful death recoveries required for support under section 703.140(b) (11);
- Personal injury recoveries are capped at $26,800 and are found in section 703.140(b) (11).
Retirement and Pension
Section 703.140(b)(10E) permits exemption of payments under profit-sharing and money purchase plans, defined benefits, SEP and SIMPLE IRAs, 401(k)s, 403(b)s, benefits essential for support, annuities, and ERISA-qualified pension.
Public Benefits
Section 703.140(b) (10) protects a debtor’s interest as far as social security benefits, local public assistance benefits, unemployment compensation, disability benefits, alimony and child support, illness benefits, and veteran benefits are concerned in an unlimited amount.
Tools of Trade
Tools of the trade like equipment, implements, and books are exempted to $8,000.
Insurance
- Immature life insurance policy (apart from credit) is made pursuant to section 703.140(b)(7);
- Immature life insurance with interest, cash, loan, or dividends are exempted up to $14,325. This is available on section 703.140(b) (8);
- Disability benefits under section 703.140(b) (10).
Wildcard
Unlike System 1, System 2 comes with a wildcard exemption. The wildcard exemption can be used to protect any item up to $1,280. It can be increased if you don’t use your house protection as equity in your home. Once one determines the amount the wildcard can protect, they can use the amount to protect any assets. Some of the common protected assets include jewelry, stocks and bonds, inventory, and collectibles.
How to Determine Which Property to Exempt
To determine which asset you will protect if you file for bankruptcy, begin with making an inventory of all your property and their replacement value. Start with big assets such as your primary residence, vehicles, vacation homes and liquid assets like stocks, bonds, and cash. Then, make a list of household items like appliances, electronics, clothing, furniture and anything else that a trustee may perceive to have value. If you are still not sure about the value of your property, consider hiring a knowledgeable lawyer who will ensure you value the assets realistically.
Once you have a list of all your assets, list them in order of importance. Then, compare the property’s value with your state’s exemption. Also, do this for the two systems offered in California. It will help you determine which system allows you to exempt your precious property. Remember to figure out how best you can use your wildcard exemptions.
How to Decide Which Exemption to Use
The decision on which exemption schedule to use mainly depends on your current financial predicament in terms of your asset, your property’s market value, and your equity in the property. Normally, the 704 exemptions are used by people with enough house equity but need to file for bankruptcy. On the other hand, most people who use section 703 of the California Code of Civil Procedure exemptions have little or no home equity.
If you have enough equity and still not sure whether you can protect your house using 704 exemptions, you need to consult an experienced attorney.
Also, take into consideration that the amount a person can exempt changes from time to time. It is, therefore, important to conduct extensive research and get the current figures before filing for bankruptcy.
One of the most common mistakes people make is doubling up exemptions when they are filing for bankruptcy jointly with their spouse. While this is allowed for couples, don’t be deceived that the exemption will be doubled because you are two people.
Here is What You Need to Know About The Homestead Exemption in California
Like mentioned earlier, homestead exemption protects your home equity when you file for bankruptcy and from your creditors.
Unlike other states, California does not allow bankruptcy filers to use the federal bankruptcy exemption system. So if you are a California resident and eligible to use bankruptcy exemptions, you should use either schedule 703 or 704.
To claim the full value of a homestead exemption in any state, you must have owned the asset for more than 1,215 days prior to the bankruptcy filing. Otherwise, the federal law will limit the homestead exemption.
You don’t need to declare your homestead; bankruptcy homestead exemption is automatic in California. Homestead declaration keeps the homestead exemption from judicial liens. Additionally, it protects the voluntary sale of your house proceeding for up to six months. However, it is necessary to claim the exemption when filing the bankruptcy paperwork.
Frequently Asked Questions on Getting Bankruptcy Exemptions in California
Does the debtor automatically keep the exempt property?
No, this is not the case. You will be permitted to exempt assets that you will require to maintain your job, household, and some vehicle equity.
Will someone review my expectation?
A trustee will review Schedule C to ensure you have the right to protect the asset. A trustee is an officer appointed by the court to manage your bankruptcy case. If a trustee objects your exemptions, they should file it with the court. Then, the bankruptcy judge will decide whether you should keep the asset or not.
What happens to a debtor if they made a mistake when applying for exemption?
A trustee will not file an objection unless it is crystal clear that you are trying to manipulate the process. If there is a minor mistake, the trustee will most likely call you to make the correction informally.
It is worth noting that you should give accurate details on the bankruptcy forms. Issuing deliberate inaccurate statements is deemed to be fraudulent and could attract up to 20 years in prison, a fine of $250,000, or both.
What should I expect from my bankruptcy lawyer?
Your retainer agreement will outline all the services your attorney will offer. A retainer agreement is a contract you signed together with the lawyer. An experienced bankruptcy lawyer should be able to handle your case.
Generally, the role of the lawyer is to offer sound legal advice during the course of the bankruptcy process. It also expected that your lawyer should respond to your questions promptly, particularly on getting exemptions.
Finding a Bankruptcy Attorney Near Me
Are you wondering how stop wage garnishments, foreclosure, harassing creditors, and repossessions? At the San Diego Bankruptcy Attorney, our bankruptcy lawyers will assist you to eliminate your debt, credit, tax debt, and medical bills by taking you through the various property exemption steps. Additionally, we can help you to file for bankruptcy under chapter 7 or chapter 13. Contact us today at 619-488-6188 for a free consultation with a bankruptcy attorney.
