How Do Bankruptcy Exemptions Work?
Generally speaking, bankruptcy exemptions refer to the property that you are able to keep. The reason why bankruptcy allows filers to protect some of their property is because bankruptcy is intended to provide a fresh start. If a Chapter 7 bankruptcy filing, for instance, meant that you lost everything and were simply put out on the street, it would be of extremely limited usefulness. And in reality, few people would make use of such a system.
Bankruptcy exemptions are dependent on both federal and state law. While some states allow individuals to select from either the federal exemptions or the particular state exemptions available in the jurisdiction, California does not. California law requires a person with domicile in the state to use the state exemptions. Luckily, the state does provide its own set of bankruptcy exemptions that can protect the property of bankruptcy filers. California provides filers with the choice of two separate systems of bankruptcy exemptions: System 1 and System 2. Depending on the individual’s assets, one system likely provides a more complete protection of property, and therefore is a better choice.
What Is the Difference Between California’s Exemption Systems? Potential filers with significant home equity will usually prefer the System 1 bankruptcy exemptions. People considering or filing bankruptcy with significant savings, liquid assets, or valuable person items find the second set of exemptions more favorable. The current exemption values were set on April 1, 2013. The next update to exemption values is expected on April 1, 2016. The main reason System 1 is more favorable for people with home equity is because of its relatively generous homesteads exemption. Under System 1 a bankruptcy filer is able to exempt the property they live in up to:
$75,000 if the filer is single and not disabled
$100,000 for most families
$175,000 for seniors over age 65 and disabled individuals
$175,000 is creditors are seeking to force the liquidation of the home and certain other conditions are met For individuals lacking equity in their home who will not use California’s Homestead Exemption, System 2 allows the bankruptcy filer to apply their homestead exemption to the wild card category. This means that a bankruptcy filer can protect property of any type not otherwise covered up to $26,925 in total. Both systems also provide exemptions of varying amounts for:
Cars, trucks, and other motor vehicles.
Personal property such as household items, jewelry, health aids , and other personal effects
Retirement accounts
Pensions
Public benefits
Tools of a particular trade
Insurance There are significant potential differences between the systems that can greatly affect the type and amount of property you are able to keep. Consulting with an experienced bankruptcy attorney is essential before you file.