When people are considering filing for Bankruptcy relief, the idea of losing their assets can be intimidating. A significant portion of people think that they might lose their house, their car, or various other assets. However, the reality is that filing for Bankruptcy relief does not necessarily mean you will lose any of your assets. Bankruptcy Exemptions make it possible for a Debtor to file for relief and retain some of his/her assets.
Below we will discuss how these exemptions work and how our office can use them to protect your assets. If you are considering filing for bankruptcy, please CONTACT our office and our bankruptcy exemption attorney will review your personal situation with you directly.
WHAT ARE BANKRUPTCY EXEMPTIONS?
When filing for Chapter 7 Bankruptcy, you are authorizing the Bankruptcy Court, and more specifically the court appointed trustee, to divide and sell your assets to pay for your debts. When filing for Chapter 13 Bankruptcy, your assets are not sold but they do determine how much is paid to the general unsecured creditors. With the help of Bankruptcy Exemptions, you may able to keep some (or maybe all) of your assets or limit the amount paid to the general unsecured claims.
Bankruptcy Exemptions are established by State Law to protect a certain amount of your assets when filing. To do so, the fair market value of each protected asset remains exempt. Although the Bankruptcy Code is federal law, a state is able to establish its own statewide exemptions and have these be used in place of the federal exemptions. In order to qualify under your state’s exemptions, you must generally have resided in the state for at least 730 days (i.e. 2 years) prior to filing for relief. Our discussion will focus on California exemptions.
Specific assets may be considered fully exempt regardless of the value of that asset. For example, your retirement account is one asset that is generally exempt regardless of the amount in the retirement account (certain restriction do apply). This means that if a person is filing for Bankruptcy and they have $50,000.00 in their employer sponsored 401(k) plan, that amount is fully exempt and a Trustee is unable to liquidate those funds.
While state or federal law establishes what qualifies as exempt, “wildcard exemptions” are not specific to any particular asset and can be applied towards any assets. Some assets may be fully protected, while others may only be protected up to a certain dollar amount. If the full value is protected, you will not have to worry about having that asset taken from you (chapter 7) or increase the amount paid to your creditors (chapter 13). If there is a secured loan against your home or car, the equity amount above and beyond the amount of the loan is what you need to exempt. For example, if you own a car that has a fair market value of $15,000.00 and you have a loan secured against that car for $10,000.00, you only need to consider the $5,000.00 equity portion and determine how much of that portion can be exempted and protected.
Contact Sacramento Bankruptcy Lawyer by calling 916-800-7690 and our highly skilled Bankruptcy Attorney Pauldeep Bains will be able to analyze your case and discuss with you your specific options.
HOW DO EXEMPTIONS WORK?
Exemptions play different roles in Chapter 7 and Chapter 13 Bankruptcy cases.
During a Chapter 7 Bankruptcy, assets are able to be liquidated by the court appointed trustee and they would liquidate assets that are un-exempt. The funds made from selling those assets are used to pay off your debts. The theory of allowing debtors to exempt and protect some assets is that if a Debtor was forced to give up all assets (i.e. house, cars, clothes, furniture, bank accounts, retirement accounts, tools, etc.), filing for Chapter 7 Bankruptcy would actually put them in worse off position than they were prior to filing. By utilizing Bankruptcy Exemptions, the Debtor can prevent the Trustee from selling and liquidating any exempt assets.
Our dedicated bankruptcy exemption attorney will thoroughly discuss with you how the exemptions will work in your case and whether there are any assets that would in fact be liquidated.
EXAMPLE 1: Arnold files for Chapter 7 Bankruptcy and owns a vehicle with a fair market value of $2,500.00. The vehicle does not have a loan secured to it. Arnold lives in a state that provides a vehicle exemption of $3,500.00. In this situation, Arnold has the ability to fully exempt and protect the full value of his vehicle and the Trustee would not be able to liquidate it.
EXAMPLE 2: Thomas and Mandy are a married couple and file a joint Chapter 7 Bankruptcy case. The two own various jewelry and it combines to have a fair market value of $4,000.00. Thomas and Mandy live in a state that provides a jewelry exemption of $2,500.00. After applying the exemption, the two are left with $1,500.00 worth of jewelry that is un-exempt and that portion can be liquidated by the Trustee. The Trustee could then use that $1,500.00 of proceeds to pay their debt.
EXAMPLE 3: Billy files for Chapter 7 Bankruptcy and owns a vehicle with a fair market value of $28,000.00. The vehicle has a loan secured against it in the amount of $18,000.00. With those figures, it is clear that there is $10,000.00 of equity in Billy’s vehicle. Billy lives in a state that provides a vehicle exemption of $4,000.00. Thus, after factoring in the $18,000.00 loan and the $4,000.00 vehicle exemption, there still remains $6,000.00 of un-exempt equity in Billy’s vehicle. Here, the court appointed trustee could liquidate the vehicle for $28,000.00, pay the vehicle loan off of $18,000.00, return $4,000.00 to Billy for his allowed exemption, and then ultimately use the remaining $6,000.00 to pay Billy’s debt.
On the flip side, during a Chapter 13 Bankruptcy debts are reorganized and payments are made over a 3-5 year period. Chapter 13 allows for the Debtor to keep all of his/her assets regardless of how much un-exempt equity there is. The repayment plan outlines that certain types of debts must be paid in full. For example, if you owed Federal Taxes for the previous tax year, they must be fully paid off during your repayment period. Other debts, like credit cards, only require a portion of the debt to be paid, if anything. Once you receive a discharge at the end of our Chapter 13 case, the remainder of unpaid debts are generally eliminated.
Exemptions determine how much of your general unsecured debt must be paid under your Chapter 13 Plan. One of the factors that determines how much you are required to pay to the general unsecured debt is how much of your assets are unprotected (i.e. un-exempt). The remaining value of assets must be paid to your creditors over the life of your Chapter 13 Plan.
EXAMPLE 1: Nick files a Chapter 13 Bankruptcy and owns a vehicle with a fair market value of $12,000.00. Nick does not have a loan secured to his vehicle. Moreover, he owes $20,000.00 in credit card debt. Nick’s state of residence allows for a vehicle exemption of $6,000.00 and a “wildcard” exemption of $1,500.00 that can be used towards any asset. By combining those two exemptions together, Nick is able to exempt and protect $7,500.00 of his vehicle value. Since $4,500.00 of the vehicle is un-exempt, Nick must pay at least $4,500.00 of his $20,000.00 credit card debt during his chapter 13 repayment plan. The remaining $15,500.00 of credit card debt will be eliminated upon Discharge if not required to be paid by another factor.
EAMPLE 2: Stephanie files a Chapter 13 Bankruptcy. She owns a beautiful home with a fair market value of $700,000.00 and secured by a mortgage in the amount of $550,000.00. In addition, Stephanie has $30,000.00 of credit card debt. Stephanie’s state of residence allows her to use a homestead exemption of $150,000.00. Here, Stephanie is able to fully exempt the equity in her home---there is $150,000.00 of equity in her home and her state allows for a homestead exemption to be applied in the amount of $150,000.00. Based on this, she will not have to pay any of her credit card debt in her Chapter 13 case because she does not have any un-exempt equity and therefore, the full $30,000.00 of credit card would be eliminated (i.e. discharged) upon Stephanie receiving a discharge at the end of her bankruptcy case.
EXEMPTION SCHEMES IN CALIFORNIA
Compared to other states, California is unique when it comes to offering exemption schemes for its residents. California residents have the option to choose between two different schemes, known as the “703” and “704” exemption schemes. Below you will find a brief summary of each scheme. To learn more about how to use the bankruptcy exemptions and which scheme may be more beneficial for you, please contact our office ASAP by calling 916-800-7690 and scheduling your free consultation!
The figures below are accurate as of the typing of this information (01/07/2022).
703 Exemption Scheme (located in California Code of Civil Procedure § 703.140(b)). Below are examples of some of the common exemptions:
1. Motor Vehicle Exemption - $5,850.00
(C.C.C.P. § 703.140(b)(2)
2. Clothing, Household Goods, Appliances, Furnishings, etc. - $725.00 per item
(C.C.C.P. § 703.140(b)(3))
3. Jewelry - $1,75000
(C.C.C.P. § 703.140(b)(4))
4. Wildcard Exemption - $30,825.00
(C.C.C.P. § 703.140(b)(5))
5. Tools of the Trade - $8,725.00
(C.C.C.P. § 703.140(b)(6))
6. Unmatured Life Insurance Benefits - $15,650.00
(C.C.C.P. § 703.140(b)(8))
704 Exemption Scheme (located in California Code of Civil Procedure §§ 704.010 - 704.730). Below are examples of some of the common exemptions:
Homestead Exemption – The greater of $300,000.00 or an amount equal to the median sales price of homes in that county for the prior calendar year, capped at $600,000.00.
(C.C.C.P. § 704.730)
The homestead exemption is a MAJOR change from prior years. This new amount went into effect on 01/01/2021.
2. Motor Vehicle Exemption - $3,325.00
(C.C.C.P. § 704.010)
3. Unmatured Life Insurance - $13,975.00
(C.C.C.P. § 704.100(b))
4. Tools of the Trade - $8,725.00 ($17,450.00 for joint filing)
(C.C.C.P. § 704.060)
5. Deposit Accounts – To the extent necessary for the support of the debtor and the spouse and dependents of the debtor.
(C.C.C.P. § 704.225)
6. Bank Deposits from Social Security Benefits - $3,500.00 ($5,250.00 for joint filing
(C.C.C.P. § 704.080)
7. Personal Injury & Wrongful Death Recovery – Amount necessary for support
(C.C.C.P. § 704.140)
HOW CAN WE HELP?
Our highly skilled Bankruptcy Attorney Pauldeep Bains has extensive knowledge in using exemptions to maximize a Debtor’s results. Filing Bankruptcy without a full understanding of how the exemptions function could put you in a situation where the Chapter 7 Trustee is liquidating your assets or a Chapter 13 Trustee is requiring you to pay a much higher than expected amount to your general unsecured creditors (i.e. credit cards, medical bills, etc.) when you shouldn’t be. Please contact our office by calling 916-800-7690 right away to speak with Mr. Bains, a top local Sacramento Bankruptcy Lawyer.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.