Financial stress is a common problem many Californians are experiencing, primarily due to the many layoffs resulting from the COVID-19 pandemic. Hefty credit card bills, unsecured debts, and delinquent secured accounts are a significant cause of financial stress.
For many Californians, bankruptcy is the best way to erase your bills, obtain a fresh start and keep most of your retirement accounts intact. And you don’t need to worry about the common myth about bankruptcy that you will lose everything after filing a petition. Bankruptcy exemptions protect your property for whatever bankruptcy chapter you choose to file.
What are the California Bankruptcy Exemptions?
The most critical question you should ask yourself when filing for bankruptcy is whether you will retain your property, mainly your home and vehicle, throughout the process. Remember, even the government doesn’t want you to lose your home or car because you will end up homeless, forcing you to apply for government aid, which is something they don’t want. Remember, the automatic stay’s goal is to provide filers a clean slate, which means you need property to start afresh. Otherwise, you will apply for government support, something that nobody wants, and this the point where exemptions come into play.
California exemptions are the statutes that establish the assets you maintain post-bankruptcy under Chapter 7. The laws protect your exempt property from being taken over by trustees and sold to repay creditors. Because of the multiple exemption schemes and choices available for filers, you must pick the option that designates your particular assets as exempt.
Each exempt property is assigned a fair market value, which is the standard for evaluating the value of your existing possessions. Note that you cannot pick two bankruptcy exemption options. If you select one option, you must forego the other. Also, you can shield 100% of your assets under some circumstances, and others you cannot.
Can One Use Federal Bankruptcy Exemptions in California?
California Bankruptcy Code exemptions don’t allow you to protect your property like commercial vehicles and bank deposits. Many states allow filers to choose between federal and state bankruptcy exemption laws. Therefore, if you are declaring bankruptcy in California, you must use the state’s exempt statutes because federal bankruptcy laws are unavailable to filers.
If you have lived in San Diego for more than two years, you can choose between exemptions in scheme 703 or 704. Fortunately, these exemptions are better than the federal ones. Alternatively, you can utilize the federal nonbankruptcy exemptions if your property is under their cover.
Note that the federal exemptions allow married spouses to double their exemption amount, but the spouses cannot double their exemptions under California laws.
Can I Lose My Property If I Don’t Adequately Exempt It?
Do not assume that bankruptcy exemptions come automatically. You must pick the bankruptcy exemption that fits your needs perfectly. You can do this on any possessions that are critical in keeping your job and home, like clothing, furnishing, and vehicle equity.
To file for bankruptcy exemptions, you must fill out the Schedule C Forms by listing all your assets and file together with any required paperwork. Remember, even though bankruptcy exemptions don’t come automatically, the two newly adopted 2020 exemptions can help you obtain exemptions automatically.
After you have filed the Schedule C forms, a court-appointed official known as a trustee will review the form to ensure that you have the right to exempt the property you have listed. If the official objects to your application, they will file a motion to oppose in court. The judge hears the petition and decides whether you can keep the property in question at the end of the bankruptcy or not.
Mistakes are common when completing the Schedule C forms, but this should not object to the exemption. If you have made significant errors when completing the form, the trustee will reach out and try to rectify the issue. However, if it appears you were trying to pull one over the court, they are likely to object to your application.
Remember, it’s not wise to knowingly provide incorrect information in the forms. You should provide accurate information in your documents. Any deliberate filling of inaccurate information is deemed as bankruptcy fraud and is punishable by $250,000 court fines, twenty years in prison, or both.
What is the Role of Bankruptcy Exemptions Under Chapter 7?
Exemptions play a more prominent role under Chapter 7 bankruptcies because, under the chapter, you are trying to use all your nonexempt assets to clear dischargeable debts, meaning you will lose most of your help.
The trustee appointed to oversee your case by the court repossesses your assets and then auctions them to raise money. The proceeds are divided among your creditors based on the amount owed and the form of debt in question.
Losing all your property in bankruptcy is worse than not declaring bankruptcy at all. As mentioned earlier, the government doesn’t want you to lose everything in bankruptcy and begin filing for support. They want you to maintain your job and home so that you can have a fresh start after the process, meaning they will exempt some of your property. So, the trustee will let you pick the value of a property that you want to keep at the end of the legal process. You must choose your exempt property wisely because this will determine your financial position at the end of the procedure.
It is at this point that your California bankruptcy attorney comes into play. Based on your financial situation, an attorney will evaluate the two bankruptcy exemptions and advise you accordingly on the type of exemption that will assist you to end up in a better financial position after bankruptcy than before.
What is the Role of Exemptions Under Chapter 13?
Chapter 13 bankruptcies are also called reorganization bankruptcies because they help you put your finances to continue with debt repayment. The legal procedure provides you with an automatic stay duration of three to five years to create a debt repayment plan for the delinquent accounts. During this period, creditors and collection agencies are prohibited from engaging in debt collection activity. Any outstanding debt at the end of the automatic stay is then canceled.
Exemptions play a role in this form of bankruptcy when it comes to general unsecured debts. The amount you repay for these debts is based on the total value of your non-exempt assets. So, the more your bankruptcy exemptions, the less you will pay for the unsecured debts, meaning that you will retain more property at the end of the process.
Bankruptcy Exemptions Schemes or Systems
California has two exemption systems which are 703 and 704 (As provided for under CCP (Code Of Civil Procedure) 703 and 704, respectively). Each of these schemes has its merits and demerits, so it’s up to you to do your evaluation and find the most appropriate system. Retaining the services of a bankruptcy attorney at this point comes in handy because these professionals understand the pros and cons of both systems and can therefore advise you accordingly on the most suitable.
The rule of thumb is if you have massive home equity to protect, you can do better by opting for the 704 system, while if you have a non-home equity possession, system 703 is the most appropriate. However, the rule of thumb doesn’t always apply, meaning you will need an attorney to explain the most appropriate action.
The 704 Exemption System
If you have lived in your San Diego homestead for over ten years, the 704 exemption scheme allows you to claim a generous homestead exemption. The system will enable you to maintain a hefty amount of equity on your primary residence, which includes:
- Community apartments
- Stock cooperatives
- Mobile homes, liveable boats
Note that lawmakers have been forced to expand the scope of the 704 exemptions scheme after the coronavirus outbreak.
The 704 Homestead Exemption
Under scheme 704, you can exempt real or personal property you live in at the time of declaring bankruptcy, no more than $50,000 if you are single. For families and family heads, the exemption is up to $75,000, while for the mentally and physically disabled, or those aged 65 or older, you can protect up to $150,000 of your homestead equity. If you, as the filer or a family member and have an interest in the property, you can exempt up to $100,000 of the equity.
If you are either 55 or older, the creditor is seeking to force the sale of your property, you are single and earn below $25,000 per year, or you are married and make under $35,000 annually, you are allowed $175,000 as home equity.
The 704 Vehicle Exemption
The vehicle exemption under this scheme protects equity in your vehicle, truck, motorbike, or any other automobile. Motor vehicle equity under this scheme is $3,325. The amount is low, but considering that the equity is independent of the value of the car and the need to protect your primary home, it is beneficial.
The 704 exemption scheme protects various personal properties. These include:
- Residential construction materials for home enhancement for a value of no more than three thousand, five hundred dollars per CCP 704.030.
- It’s possible to protect household items and personal effects under 704.020
- Artwork, personal jewelry, and heirlooms no more than $8,725
- Health aids, under section 704.050 that enables you, your family, and loved ones to work, maintain a healthy life, and orthopedic tools that are entirely exempt.
- Bank deposits stemming from Social Security payments are also exempt an amount not exceeding three thousand five hundred dollars for one payee, five thousand, two hundred and fifty dollars for payees who are married, and unlimited if they are not commingled.
- Bank deposits for other public benefits remissions are also exempt, no more than one thousand, seven hundred and fifty dollars ($1,750) or two thousand, six hundred dollars ($2,600) for joint payees married as per the statutes.
- Trade tools like instruments, furnishings, implements, books, materials, uniforms, and other personal possessions used in trade or business are exempt to no more than $8,000.
- Cemetery plots under section 704.200
- Personal injury and wrongful death actions of compensations required for underpinning are also exempt.
Other critical exemption categories under the 704 scheme include:
- Pensions and retirement accounts
- Miscellaneous items
- Unemployment benefits
- Student financial aid funds
- Disability or workers’ comp payments
- Tools of trade
Note that you can protect 75% of what is paid within 30 days before bankruptcy under wages.
Further, under the 704 scheme, there are newly adopted exemptions: deposit accounts and Federal Emergency Management Agency (FEMA) benefits. With these new exemptions, you can protect your bank account deposit and benefits originating from FEMA like a folder.
Deposit accounts exemptions became effective as of 1st January 2020 to support the judgment debtor, their spouses, and dependents. It means if your family lives from paycheck to paycheck, your whole account balance will be exempt if you assert the exemption.
Another deposit account became effective 1st September 2020 with a minimum exemption of $1,788. With this exemption, you can protect the minimum essential standard enough to care for a family of four, which is equivalent to $1,788. This exemption covers one deposit account such that when a judgment creditor seizes the amount in your account through a bank levy, a minimum balance of $1,788 is left in the account.
When it comes to FEMA benefits, these became effective 1st January 2020, and it automatically protects all funds obtained from FEMA without the need to apply.
The 703 Exemption System
The 703 scheme, also called system two, applies to individuals who don’t own a home or have lived in your home for less than ten years. The system is very similar to scheme 704. The main difference is the existence of wild card exemption and the figure assigned to each exemption. The scheme only works in bankruptcy, and you can’t apply it to protect your property against creditors outside of bankruptcy. Some courts have ruled these exemptions unconstitutional, while others have held them constitutional and allowed debtors to use them.
The 703 Homestead Exemption
On the issue of personal or real property, system two allows you, as a filer, to protect a modest $25,000 or more in equity of the household you live in. The fair homestead exemption won’t bother individuals with little equity in real property or who own inexpensive residences like a trailer house or camper. However, if you have plenty of equity in your home and you would like to maintain it after Chapter 7 bankruptcy, you could benefit immensely from this form of bankruptcy.
The 703 Vehicle Exemption
Under system two, car exemptions property is up to $5,850 equity in your automobile. The exemption only applies to a single vehicle.
If you choose system two exemptions, you can protect the following:
- Burial plot of no more than $29,275 as per 703.140 (b)(1)
- Health aids are exempt as per
- Jewelry is commonly used for family, homes, or personal purposes up to $1,750
- Personal injury recoveries are exempt no more than $29,275
- You will obtain an exemption of $750 for items like clothing, appliances, animals, books, household goods, crops, and musical instruments as per section 703.140(b)(3).
- Wrongful death compensation needed for the support of victims according to section 703.140(b)(11)
Public benefits that you are allowed to exempt include victim restitution under section 703.140(b)(11) and unemployment benefits, veteran’s benefits, and public help.
Other exemptions include retirement and pension accounts, alimony and child support, insurance, and disability benefits.
California Wildcard Exemptions
The wildcard exemption is used in scheme 703, and it allows you to use the available exemption dollars on almost everything you want. You are required to pick a wildcard exemption amount for each category and spread it as needed. You can utilize the wild card exemption amount to increase other areas.
If you file to utilize your homestead exemption to protect the equity in your home, the wild card amount increases. So, if you have a vehicle worth $7,000, but you are only acquiring $4,000 as your exemptions, you can take $3,000 from your wildcard exemptions to maintain your car or increase exemptions on any of your possessions.
Furthermore, if you have the wild card exemptions leftovers, you can utilize them to cover liquid cash. The purpose of doing so is to avoid an empty or depleted bank account when all your debt is discharged under Chapter 7.
With the benefits of wild card exemptions, many people opt for the 703 exemptions because the 704 scheme lacks wild card exemptions. Unfortunately, the 703 scheme is not for everyone who wants to file bankruptcy. You won’t consider wild card exemptions when the 704 scheme allows you to maintain most of your assets or when you have massive equity on your homestead. However, to pick wisely, you need to consult with a bankruptcy attorney to understand your options better.
Find a Bankruptcy Attorney Near Me
If you are considering filing for bankruptcy, you need to speak to a reputable attorney who will work extremely hard to reduce the adverse effects of filing for bankruptcy. At the San Diego Bankruptcy Attorney, we understand the two categories of exemptions and their benefits, meaning we will help you choose the proper exemptions to obtain maximum benefits from bankruptcy. Call us today at 619-488-6168 to discuss your case and the bankruptcy laws that apply in your financial situation.