How is My Equipment Treated in a California Bankruptcy?
When a person files for bankruptcy, it triggers two important legal repercussions. First, an automatic injunction goes into effect that creates a wall between you and your creditors. This automatic stay will stop any collection actions against you, including the repossession of your equipment. Second, everything you own becomes part of what is known as the bankruptcy estate. So, if you have construction tools or farm equipment, you are giving the court control over that property in exchange for the ability to eliminate a significant part of your debt.
The Bankruptcy Code was not designed to punish people seeking a fresh start. People need to keep their property to move forward with their lives and businesses. Therefore, when you file for bankruptcy, you are entitled to protect specified property through mechanisms known as exemptions. In most states, a debtor can pick between their local state exemptions or the federal bankruptcy exemptions. In California, when you file for bankruptcy, you must use one of two distinct sets of state exemptions.
Keeping Equipment in Chapter 7 or Chapter 13 Bankruptcy
The most common type of bankruptcy in California is a Chapter 7 bankruptcy. Known as liquidation bankruptcy, a debtor seeking relief through Chapter 7 could lose any non-exempt property in the bankruptcy estate. A court-appointed trustee will take control of your non-exempt property, including your construction or farm equipment, and sell it to pay your creditors with the proceeds.
Chapter 13 is a reorganization of your financial liabilities. When filing for Chapter 13, a debtor will propose a bankruptcy plan that will pay their creditors over three to five years. The time and amount will depend on many different factors. For the sake of this discussion, our California bankruptcy attorney will only look at the effect of non-exempt property.
If you own construction or farming equipment and cannot exempt the value, the amount that remains non-exempt must be paid to your unsecured creditors. For example, if you have $45,000 of unsecured debt and $15,000 of non-exempt equity in your equipment, you must pay your unsecured creditors $15,000 through your bankruptcy plan. It is crucial to note here that other factors will influence your monthly payment. Our experienced California Chapter 13 bankruptcy lawyer will thoroughly review your plan with you before you file.
Exempting Equipment When Filing for Bankruptcy in California
As stated above, California offers debtors two systems of exemptions. You must pick one or the other. Debtors are not permitted to use exemptions from both systems.
People who have significant equity in their homes will typically use the first system of exemptions. Under this system, tools of your trade, including equipment, could be exempt up to a value of $8,725. If a couple is using this exemption jointly, they could protect up to $17,450.
Value in a bankruptcy does not mean the price you paid for the equipment or the replacement cost. It refers to the amount of money you could reasonably expect to receive if you sold it at the time of filing. Our California bankruptcy attorney will assist you in obtaining a good faith estimate of your equipment’s market value.
If a business partnership owns your equipment, you could exempt its entire value under the first system.
The second system of exemptions under California law is known as the “wildcard exemptions.” The benefit of this system is a wildcard provision that allows debtors to exempt any property that does not have a specific exemption.
Under the wildcard exemption, a debtor can apply $1,550 plus any unused portion of the included homestead exemption of $29,275. Therefore, if a debtor does not have to use any of their homestead exemption, they could protect up to $30,825 of their construction and farm equipment.
The wildcard exemptions also include a tools and equipment exemption of $8,725. There is no ability to double this amount by filing jointly. Our knowledgeable California bankruptcy attorney will review all your assets, including the equipment you want to protect, to determine which set of exemptions is better for your needs.
Farmers and Chapter 12 in California If you are a family farmer looking to protect your farm equipment, then filing for Chapter 12 might be a better option for you. A debtor will have to pay back a portion or all their debt over three to five years in Chapter 12. Some of the benefits of Chapter 12 include a higher debt ceiling than Chapter 13 and it is more streamlined than Chapter 11. More importantly, you can exempt business assets, including farming equipment, necessary for running the farm. There are requirements that a debtor must meet before filing for Chapter 12.
You must be engaged in a farming or commercial fishing business.
Your total debts cannot exceed $4,031,575, including your secured and unsecured debt.
At least 50% of your debts, excluding your home, must be related to your farming business.
More than 50% of your gross income must come from your farming business. If you are a family farmer, talk with our California Chapter 12 bankruptcy attorney to discuss the requirements and benefits of filing for Chapter 12.