Bankruptcy is a legal proceeding that helps individuals with financial difficulties get back on track. Filing for bankruptcy allows you to enjoy the automatic stay and have some time to pay your debts without pressure from creditors. Although bankruptcy has many benefits, many people fear it because they may lose their assets.
Fortunately, this is not always the case. Federal and state bankruptcy exemptions help you keep your valued assets safe from the bankruptcy trustee. Whether you file for bankruptcy under Chapter 7 or Chapter 13, you have the opportunity to claim an exemption and save a certain percentage of your home, vehicle, and some of your income.
Protecting your assets through bankruptcy exemption is not automatic. You must follow the right procedures and choose the type of exemption you wish to use. A mistake in claiming bankruptcy exemption can cause you to lose your assets or have your bankruptcy petition denied.
Therefore, seeking legal guidance is critical throughout the bankruptcy and exemption process. At Los Angeles Business & Real Estate Law Firm, we offer top-notch legal guidance to all our clients seeking to file for bankruptcy in Los Angeles, CA.
Understanding Bankruptcy Exemptions in California
Most people who file for bankruptcy aim to set themselves up for a bright financial future. Bankruptcy is often the final step when debts are overwhelming, and you cannot repay them. Filing for bankruptcy in California gives you a second chance at building your credit score and record.
However, securing a fresh financial start comes with a compromise; you must be willing to either lose some of your valuables or make a plan to repay the creditors. California bankruptcy laws allow you to retain a certain amount of property in bankruptcy proceedings.
Bankruptcy exemptions are assets that are safeguarded from the bankruptcy trustee and creditors. The bankruptcy exemptions will help you keep certain equity in your residential home, vehicle, and other life essentials. You can qualify for bankruptcy exemptions whether you file under Chapter 7 or 13. Unfortunately, the bankruptcy process is not easy, and nothing comes easy.
You will need to note down all your exempt assets and file for an exemption, which is different from filing for bankruptcy in court. You must be very careful when claiming exemptions. An attempt to lie to the court for an undeserved benefit will prompt your bankruptcy trustee to contest your exemption.
After living for up to 180 days in California, you can file for bankruptcy and receive a discharge. However, you can only use the California bankruptcy exemption if you have resided in the state for up to 730 days. If you have not met this requirement, it would be wise to file your case in the state where you have resided for the past two years.
Seeking the guidance of a skilled lawyer is critical when filing for bankruptcy exemption. Your attorney will ensure that all the necessary documents are filed, and you can protect them as much as possible.
Common Bankruptcy Exemptions
In most states, you can file for exemptions under federal or state laws. However, California has no choice but to use federal bankruptcy exemptions. If federal laws apply to your property or assets, you can explore the non-bankruptcy exemptions.
Another factor you must understand when using bankruptcy exemptions is that California does not allow joint filing for spouses. Therefore, even when you file for joint bankruptcy, the exempt amount for each property must fall within the required amount. Federal exemptions will allow a married couple to double the exempt amount. This means that you protect more equity.
There are two types of bankruptcy exemptions in California. Whether you choose the 703 or 704 exemptions will depend on the type of property you wish to protect in your bankruptcy. If you have significant equity in your home, 704 exemptions will serve your purpose better. This is because the 704 set of exemptions has tiers to protect more of your home.
For individuals with little or no equity in the property, you would benefit from Section 703 exemptions. Some common assets you can protect in bankruptcy include:
Homestead Exemptions
The homestead exemption helps you protect a certain amount of equity in your residence. One of the main fears of bankruptcy is losing your home. Being homeless, especially when you have a family, can put you into a greater financial struggle. When you choose the 704 exemptions, you can protect your primary residence.
A primary residence, in this case, could be a condominium, mobile home, boat, or community apartment. This homestead exemption applies to the proceeds of a home sale you may have received up to six months before declaring bankruptcy. The total home equity you can protect with 704 exemptions is $600,000.
For individuals who use 703 exemptions, you can protect property they use as a residence, including burial plots. 703 bankruptcy exemptions can help you protect up to $31,950. You can use the remainder to protect any other asset if you do not need the entire exemption.
If the homestead exemption amount is not enough to cover your home equity, the bankruptcy trustee in Chapter 7 bankruptcy can sell your home to pay the balance on your mortgage and give you the exemption amount.
While you can still keep your home with the minimal exemption under Chapter 13 bankruptcy, you must cover the non-exempt amount after the bankruptcy discharge. In your Chapter 13 bankruptcy plan, you will account for the remaining home equity, which can be very expensive.
You will be entitled to the total value of your homestead exemption if you have lived in the home for at least 1,215 days. If you fail to meet the residential time requirement, the exemption may be limited to $189,050.
In addition to filing for exemptions, you must stay current on your mortgage payment for a chance at keeping your home. The home exemption in California is straightforward. Therefore, filing a homestead declaration is unnecessary. Instead, you will claim the exemption when you submit your bankruptcy petition.
Although declaring a homestead is not necessarily for an exemption, you can do it to protect the home from other judicial liens outside of bankruptcy. In California, a judicial lien will arise when your creditors use you for unpaid debt, and the judge issues an order to collect.
Even after declaring the homestead, if your mortgagor sells your home in foreclosure, the proceeds may go towards payment of your mortgage and domestic obligations like alimony and child support.
Vehicle Exemptions
The California motor vehicle exemption helps you protect certain equity in your motorcycle, truck, or car. If you are experiencing financial struggles, multiple vehicles will be unnecessary. Therefore, if you want to give back a bank-financed vehicle for a loan discharge, you can do it in bankruptcy.
You can do this by informing your bankruptcy trustee of your intention. Otherwise, your ability to keep a vehicle when you file for Chapter 7 bankruptcy depends on the amount of vehicle exemption you choose. You can use the following criteria to check your ability to retain the vehicle:
- Determine the vehicle value. When you file for bankruptcy, your vehicle will be valued at its fair market value, or the amount a buyer would be willing to pay.
- Subtract the loan balance on the vehicle from its value.
- Check the amount of exemption you can enjoy in the category of exemption you choose. The equity you can exempt for your vehicle differs for 703 and 704 exemptions. Therefore, you must check the amount that matches the exemption you choose.
When you file for Chapter 7 bankruptcy, keeping the vehicle may be impossible without paying the agreed-upon amount. This is because the lender can use their lien on the vehicle to repossess it.
Sometimes, you can keep your vehicle by paying the non-exempt value. Often, this is possible if the bankruptcy trustee allows you to buy the vehicle or if they abandon it. A bankruptcy trustee can abandon a vehicle if the proceeds from its sale will not be available to creditors.
Under the 704 exemptions, you may be able to exempt up to $3,625 of your vehicle equity. 703 bankruptcy exemptions, on the other hand, can exempt $6,375. If you have no home equity and a valuable vehicle you wish to keep, it would be wise to use the 703 exemptions.
Personal Property Exemption
When you file for bankruptcy and claim 704 exemptions, you may be able to protect the following personal property:
- Personal effects and household items. Unlike popular belief, bankruptcy does not leave you with anything. A bankruptcy trustee cannot sell your personal effects and essential household items to pay your creditors.
- Up to $9,525 in heirlooms and artwork
- Up to $ 3825 in materials used for building and home renovation
- Health aids. If you have expensive health equipment needed for survival, it cannot be taken away when you file for bankruptcy.
- Up to $1,826 is needed for daily support.
- Bank deposits from Social Security payments. For a single payee, you can protect up to $3,825 in Social Security benefits and $5,725 for married couples.
- A personal injury or wrongful death lawsuit proceeds. You can file a lawsuit and receive compensation if you are injured or lose a loved one because of another person’s negligence. In most cases, the compensation benefits are used to recover from medical expenses and lost income from injuries. Losing your benefits to bankruptcy can be devastating. Fortunately, bankruptcy exemptions can allow you to safeguard enough benefits for support.
On the other hand, if you move forward with the 703 exemptions, you can protect the following properties:
- $31,950 for burial plots
- Animals, musical instruments, appliances, and household goods cost up to $800 for each item.
- Health aids
- $31,950 for death and wrongful death recoveries
Public Benefits
703 and 704 bankruptcy exemptions can protect these public benefits from your bankruptcy:
- Relocation benefits
- Public assistance benefits
- Student financial aid
- Disability and unemployment benefits
- Workers’ compensation benefits
- Restitution for crime victims
Tools of Trade
In California, ‘tools of trade” are the books, uniforms, instruments, and materials you need for your occupation. For a single bankruptcy filer, you can exempt up to $9,700 in tools of trade under 704 exemptions. If both spouses use the tools, you can be exempt up to $19,050. When you use 703 exemptions, you can keep tools of a trade valued at $9,525.
Insurance
Under 703 and 704 bankruptcy exemptions, you can protect the following insurance benefits:
- Unmatured life insurance
- Interest from unmatured life insurance
- Disability and life insurance benefits
- Fidelity bonds
- Life insurance benefits where the policy prohibits the use of the money to pay creditors
- Payments for loss of future earning capacity
Child Support and Alimony
When you choose to protect your assets using 703 bankruptcy exemptions, you can protect your alimony and child support payments from bankruptcy. In California, domestic support payments are always protected. Therefore, you can keep the amount necessary for support.
Will I Keep The Exempt Property Equity Automatically?
Nothing is automatic in bankruptcy. If you want to protect your property and assets, you must choose an exemption and list the property you wish to safeguard. Failure to exempt your property could result in the loss of the property. When you file for the exemptions, your bankruptcy trustee may appoint a person to manage the case.
The appointed overseer will work to ensure that you have a right to protect the property named in the exemption. Even when you make an error in filing the exemption, the trustee will not object to it unless your intention is to gain an undeserving advantage. If the errors are genuine, the bankruptcy trustee allows you to correct them before proceeding with the bankruptcy case.
Federal Non-Bankruptcy Exemptions
California does not allow its residents to use federal bankruptcy exemptions. You only have the opportunity to choose from 703 or 703 exemptions. However, some federal non-bankruptcy exemptions are reserved for individuals working in specific professions or belonging to a certain group.”
The term “non-bankruptcy” exemptions comes from the fact that these exemptions are not indicated in the formal bankruptcy code. However, the non-bankruptcy exemptions ensure that you keep some of your property and assets safe from seizure and liquidation in a bankruptcy case.
Since federal non-bankruptcy exemptions are available for individuals who use the state exemptions, you can safeguard your assets with a combination of state bankruptcy exemptions and federal nonbankruptcy exemptions.
Some of the most common non-bankruptcy exemptions include:
- Social security benefits.
- Disability benefits.
- Death benefits.
- Retirement benefits.
- Survivors benefits.
United States veterans and CIA employees have the right to fully exempt their retirement benefits using federal non-bankruptcy exemptions.
Additionally, you can exempt your retirement benefits if you have worked as a civil servant. Other less obvious groups of individuals who qualify for the non-bankruptcy exemption are railroad workers and lighthouse workers.
The Fate of Non-Exempt Property in California Bankruptcy
Bankruptcy exemptions will help you safeguard some essential assets, like your home and vehicle. Additionally, you can protect your disability and retirement benefits.
However, some assets are not covered by any type of bankruptcy exemption, including:
- Vacation homes or any property that is not a primary residence.
- Expensive vehicles.
- Expensive musical instruments that are not essential for work.
- Family heirlooms.
- Designer clothes, and bags.
- Valuable artwork.
A non-exempt property cannot be protected with bankruptcy exemptions. Therefore, its fate lies in the type of bankruptcy you file. Chapter 7 bankruptcy involves the liquidation of non-exempt assets to pay your creditors.
Therefore, the chances of losing these items may be high. Your bankruptcy trustee will sell most of your non-exempt assets and use the money to offset some of your debts.
The remaining debts are discharged if no more money or assets are left. This means that if you owe the creditor money, they cannot come after you after the bankruptcy discharge. However, if you file for Chapter 13 bankruptcy, you can safeguard your exempt and non-exempt property.
Instead of liquidating your assets, the bankruptcy court allows you to make a repayment plan. The repayment plan ensures you pay all your creditors within three to five years. Therefore, the creditors cannot sue you for the debt until the repayment plan period.
Find a Skilled Lawyer Near Me
Filing for bankruptcy is a risk you take to eliminate some of your debt and improve your financial future. However, there are some downsides to declaring bankruptcy. Depending on the type of bankruptcy you file, you could lose some of your assets in a liquidation to pay your creditors. California, like other states, has some exemptions that you can explore to protect your assets while declaring bankruptcy.
There are two sets of exemptions from which you can choose based on the period of time you have lived in the state. These exemptions help you secure valuable assets and ensure you do not have a deeper financial crisis. Bankruptcy is a complicated process, and the need to claim exemptions makes it more challenging. Therefore, hiring and retaining a reliable attorney throughout the process is critical.
At the Los Angeles Business & Real Estate Law Firm, we will guide you through the right chapter of bankruptcy and ensure your exemptions are filed correctly. We serve clients seeking to protect their assets during bankruptcy in Los Angeles, CA. Call us today at 310-796-7794 for much-needed legal guidance.
