Individuals who are evaluating whether the filing of a Chapter 7 bankruptcy
would be appropriate have a lot to consider including the type of debt
(e.g., credit card, mortgage, etc.) they have and the impact of a bankruptcy
filing on their personal and business lives, and both are important issues
to be assessed. But there is another part of the bankruptcy puzzle that
deserves careful analysis, and that is
which of the debtor's assets will be protected and what personal property will become a part of the “bankruptcy
The rules that govern what property a debtor may retain and what must be
turned over to the bankruptcy trustee are referred to as “exemptions.” If you file a Chapter 7 – or “liquidating” bankruptcy
– the court-appointed trustee will take legal possession of your
“non-exempt” assets and administer them for the benefit of
your creditors. If you file a Chapter 13 – or a “wage earner”
bankruptcy – exemptions will determine what amount you are required
to pay to your creditors as a part of the “Chapter 13 plan.”
While federal law establishes certain “exemptions,”
California law requires debtors who are subject to California law to utilize the exemptions established
under state law.
To make matters even more complicated, California law actually provides
two sets of exemptions, generally referred to as “System 1”
and “System 2.” Some commentators say that System 1 is the
better choice when a debtor has substantial home equity and that System
2 offers more protection for debtors who have substantial liquid assets
such as investments and savings. But only a lawyer who is experienced
in such matters can analyze the facts of your particular case to determine
which set of exemptions is more likely to protect property that you really
want to keep.
That said, here is a brief look at some of the exemptions provided by System
1. Subject to various qualifiers including your age and income, System
1 exemptions can protect up to $175,000 of equity in your principal residence.
It also will preserve your equity interest in an auto to the extent of
$2,900, jewelry, heirlooms and artwork to the extent of $7,625, and bank
deposits that arose out of payments from Social Security up to $4,575
for married debtors. Also exempt is that amount that is 75% of the wages
paid within 30 days of the filing of the bankruptcy case.
Depending on the occupation of the debtor (or debtors, if the case was
filed by both spouses as a “joint petition”), between $7,625
and $15,250 of the value of related implements, tools, uniforms, books,
equipment, instruments and furnishings as well as a commercial vehicle
may be exempt. Generally, moreover, the value of tax-exempt retirement
accounts like Section 401(k) accounts, SEPs, IRAs and Roth IRAs is exempt
under California state law pertaining to exemptions.
Since the filing of a bankruptcy case has significant, long-term effect
on your financial life and generally results in the debtor losing some
of his physical assets, anyone considering such a filing ought to meet
with experienced bankruptcy practitioners.
Contact us to consult with experienced bankruptcy lawyers who can guide you through
the complex decisions that have to be made.