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  • Writer's pictureDaniel Rodriguez

Will I Lose My Tools if I File for Bankruptcy in California?

The Bankruptcy Estate in California When you file for bankruptcy, several things automatically happen. First, a legal wall goes up between you and your creditors, protecting you from any legal or collection actions. Additionally, all your property becomes part of what is known as the “bankruptcy estate.” The way property in the bankruptcy estate is treated will depend on the type of bankruptcy filed. A Chapter 7 bankruptcy is also known as a “liquidation” bankruptcy. If a debtor files for Chapter 7, they are looking to eliminate most of their debt without paying their creditors. However, any property in the bankruptcy estate that the debtor cannot protect under California law will be sold by a court-appointed trustee. The proceeds from this sale will be used to pay a debtor’s creditors. If a person’s tools are not protected, they are liable to be sold. A Chapter 13 bankruptcy is a reorganization of a person’s financial liabilities. The significant difference between Chapter 13 and Chapter 7 is the bankruptcy plan. Based on numerous factors, a debtor in Chapter 13 will have a monthly payment for three to five years. The monthly payment is affected by the value of the unprotected property in the bankruptcy estate. Therefore, if a person is not able to protect their tools, they will be able to keep them but will have to pay more money each month under the terms of their bankruptcy plan.

Protecting Your Tools When Filing for Bankruptcy in California As stated above, all your property becomes part of the bankruptcy estate as soon as you file. However, bankruptcy is designed to provide people a fresh financial start and is not supposed to punish them. Therefore, under federal and state law, some exemptions permit debtors to keep most of their property. In most states, a debtor can choose between the federal exemptions in the Bankruptcy Code or their local state exemptions. California is one of the few states that does not allow a person to pick the federal exemptions. However, there are two groups or systems of exemptions available to filers in California. A debtor must use one or the other – they are not allowed to mix and match. Luckily, there are provisions to protect tools in both systems. Our California bankruptcy attorney will help determine which set of exemptions works best for you.

Equity or Value of Your Tools in Bankruptcy Before discussing the two exemption systems, it is important to understand the equity or the value of your tools. When value is used in bankruptcy, it refers to the fair market value of the asset at the time of filing – not the amount you paid for the item or the replacement cost. Therefore, if your tools are currently worth $5,000 but would cost $12,000 to replace, you are only required to exempt them in the amount of $5,000. If there is any lien on the tools, it will be deducted from the value. For instance, if you have a commercial van worth $10,000 with an outstanding loan balance of $6,000, you only need to protect $4,000 to exempt the van.

System 1 Bankruptcy Exemptions The first set of exemptions is generally used by individuals and couples with significant equity in their home. When filing for bankruptcy, our experienced California attorney will evaluate your tools along with your other assets. In many cases, the set of exemptions you pick will be driven by more than one factor. Under the first system, there is a specific exemption for tools of the trade, including materials, uniforms, equipment, furnishings, books, and one commercial vehicle. If a person is filing individually, the amount of equity that can be protected is $8,725. If a couple is filing jointly and using this exemption, the amount is $17,450.

System 2 Bankruptcy Exemptions The second system of exemptions available in California is typically used by individuals who do not have substantial equity in their home. The benefit of this system is a “wildcard” exemption. The wildcard exemption could be applied to any property, including your tools. First, there is an exemption specifically for tools of the trade available under this system. However, this exemption only includes tools, books, and implements of the trade valued up to $8,725. Debtors are permitted to apply the wildcard exemption to their tools. The base wildcard amount is $1,550. However, any portion of the homestead or burial exemption that is not used could be applied to the wildcard. If a debtor does not claim any portion of their homestead exemption, the wildcard will increase to a total of $30,825. Our California attorney will thoroughly review your situation, including your debts, assets, and goals, to determine which system of exemptions works best.

Call Our California Bankruptcy Attorney to Learn More Filing for bankruptcy is not an easy decision, and every potential filer will have many questions. If you are concerned about losing your tools, contact our experienced California bankruptcy attorney to review your options. At The Bankruptcy Group, our attorneys and staff are committed to providing professional and compassionate representation to those seeking a fresh start. Call to schedule a free, confidential consultation.

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