What Personal Assets Are Protected in A Personal (Chapter 7 or Chapter 13) Bankruptcy?

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What Personal Assets Are Protected in A Personal (Chapter 7 or Chapter 13) Bankruptcy?

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 estate.”

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.

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