In California, when you file for bankruptcy, certain property may be exempt, which means it is protected from being sold to repay your creditors. The specific property that’s exempt depends on whether you choose the state’s 704 or 703 exemptions series, which includes the homestead exemption, motor vehicle exemption, personal property, wages, and more.
California Bankruptcy Exemption Laws
- Which Bankruptcy Is Better – Chapter 7 or Chapter 13?
- When Are California Bankruptcy Exemptions Available?
- Common California Bankruptcy Exemptions
- California Exemption Issues to Avoid
- Is Exempt Property Automatically Mine?
- Are My Exemptions Going to Be Checked?
- If I Make a Mistake, What Should I Do?
- Do I Need a Bankruptcy Lawyer?
Which Bankruptcy Is Better – Chapter 7 or Chapter 13?
Chapter 7 and Chapter 13 are the most common forms of bankruptcy. Chapter 7 involves the liquidation of nonexempt property to repay debts. A bankruptcy trustee is appointed to handle this. Chapter 13, on the other hand, involves creating a repayment plan to pay back debts over a period of three to five years. The best option depends on your financial situation, assets, and long-term goals.
Pros and Cons of Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” presents a set of advantages and disadvantages. One of the primary advantages of Chapter 7 is its speed. Typically, a Chapter 7 bankruptcy can be completed in a few months, offering individuals a quicker path to a fresh start. Many unsecured debts, such as credit card balances and medical bills, can be entirely discharged, eliminating the obligation to pay them back.
Another advantage is the absence of a repayment plan, contrasting with Chapter 13’s setup.
However, Chapter 7 is not without its drawbacks. The process may involve the liquidation of nonexempt property by a bankruptcy trustee, potentially leading debtors to lose valuable assets.
Additionally, eligibility for Chapter 7 is not guaranteed. A means test determines eligibility, and those with income above a certain threshold might not qualify. Furthermore, the long-term impact of a Chapter 7 filing is significant, as it will remain on one’s credit report for 10 years, potentially hindering the ability to obtain new credit.
Pros and Cons of Chapter 13 Bankruptcy
Chapter 13 bankruptcy, sometimes termed “reorganization bankruptcy,” offers a different set of challenges and benefits. A significant advantage of Chapter 13 is the ability to retain property, both exempt and nonexempt. This bankruptcy type also provides a structured environment where debtors can reorganize their debts into more manageable payments, potentially with reduced amounts or interest rates.
Throughout the repayment period, which ranges from three to five years, Chapter 13 provides a shield against creditors, preventing them from initiating or continuing any collection efforts. This extended timeframe can offer individuals the breathing room needed to stabilize their financial situations.
On the flip side, Chapter 13 demands a lengthy commitment. Debtors are locked into a repayment plan that spans several years, requiring strict budgeting. Obtaining court approval becomes necessary for significant financial decisions during this period.
In terms of credit impact, while Chapter 13 may seem less severe than Chapter 7 as it remains on the credit report for seven years, it can still affect creditworthiness. Additionally, Chapter 13 often incurs higher legal and court fees than its Chapter 7 counterpart. Choosing between Chapter 7 and Chapter 13 requires careful consideration of one’s financial status and future aspirations.
Advice from a bankruptcy attorney can be valuable in this decision-making process.
When Are California Bankruptcy Exemptions Available?
California bankruptcy exemptions are available when you file for bankruptcy in the state. These exemptions determine what assets you can keep and which may be sold. You must decide between the California 704 series or 703 series exemptions, but you cannot mix and match between the two.
Common California Bankruptcy Exemptions
Below, we will go over some common California bankruptcy exemptions.
California 704 Homestead Exemption
The California 704 Homestead Exemption is a pivotal component of California’s bankruptcy laws designed to shield homeowners from total financial ruin. Specifically, this exemption focuses on safeguarding a defined amount of equity in the debtor’s primary residence.
The exact amount that can be exempted varies based on factors such as the debtor’s age, marital status, and whether there are any dependents in the household. This exemption ensures that individuals or families going through financial distress won’t be left homeless as a result of bankruptcy proceedings. However, there are limits to the exemption, which means if the equity in the home surpasses the stipulated exempt amount, the bankruptcy trustee could potentially sell the home, give the debtor the exempted amount, and use the rest to pay off creditors.
California 704 Motor Vehicle Exemption
For many, a vehicle is an essential asset, vital for transportation to work, school, or other daily necessities. Recognizing this, the California 704 Motor Vehicle Exemption exists to protect a specific amount of equity in a debtor’s vehicle. This means that up to a certain equity value, the vehicle is safe from being sold off to satisfy debts.
Here are some possible scenarios:
- If the motor vehicle is reasonably necessary and actually used by the judgment debtor or their spouse in their trade, business, or profession, the exemption amount is $8,725.
- If the motor vehicle is reasonably necessary and actually used by both the judgment debtor and their spouse in the same trade, business, or profession, the exemption amount is $17,450. This is the only case where the exemption can be applied to more than one motor vehicle.
- If the motor vehicle is not used for any trade, business, or profession, the exemption amount is $7,500. This applies to any combination of the equity in motor vehicles, the proceeds of an execution sale of a motor vehicle, or the proceeds of insurance or other indemnification for the loss, damage, or destruction of a motor vehicle.
- If the judgment debtor has only one motor vehicle and it is sold at an execution sale, the proceeds of the execution sale are exempt in the amount of $7,500 without making a claim.
Personal property is an umbrella term encompassing a range of items that individuals own, and it goes beyond just real estate or vehicles. In the context of California’s 704 exemptions, personal property can refer to household items, clothing, jewelry, appliances, and other personal possessions.
According to the California Code of Civil Procedure § 704.020, household furnishings, appliances, provisions, wearing apparel, and other personal effects are exempt if they are ordinarily and reasonably necessary to and personally used or procured for use by, the judgment debtor and members of their family at their principal place of residence. The court will take into account the extent to which the particular type of item is ordinarily found in a household and whether the item has extraordinary value as compared to the value of items of the same type found in other households.
If an item is not exempt because it has extraordinary value, the proceeds obtained at an execution sale of the item are exempt in the amount determined by the court to be a reasonable amount sufficient to purchase a replacement of ordinary value if the court determines that a replacement is reasonably necessary.
Other types of personal property that are exempt under California’s 704 exemptions include:
- Residential building materials to repair or improve home up to $3,825;
- Jewelry, heirlooms, and works of art up to $9,525;
- Bank deposits to $1,826 or the extent needed for support.
The vulnerability of one’s wages in bankruptcy is a concern for many, especially those who rely on every paycheck to meet their living expenses. The California 704 series offers protection for a portion of a debtor’s earned but not unpaid wages. This exemption acts as a buffer, ensuring that while an individual might be navigating the complexities of bankruptcy, they still have some financial inflow to support themselves and their dependents.
Retirement & Pensions
Under the 704 exemptions, most pensions and retirement accounts, including IRAs, 401(k)s, and defined benefit plans, are shielded from bankruptcy proceedings. This exemption underscores the importance of long-term financial planning and ensures that individuals, even those who face financial challenges, have some form of financial security in their retirement years.
There are some rules and exceptions that apply to withdrawals or disbursements from retirement accounts under the 704 exemptions. Here are some examples.
California law conforms to the federal provisions under the Setting Every Community Up for Retirement Enhancement (SECURE) Act that increase the age for required minimum distribution from 70½ to 72 and allow a withdrawal of up to $5,000 penalty-free from the retirement plan upon the birth or adoption of a child.
Under California Code of Civil Procedure § 704.115 (e), the amounts in an IRA are exempt only to the extent necessary to provide for the support of the judgment debtor when they retire and for the support of their spouse and dependents, taking into account all resources that are likely to be available for their support when they retire. This means that if an IRA has an extraordinary value or is not reasonably necessary for retirement support, it may not be fully exempt from creditors.
California 703 Homestead Exemption
This exemption allows you to protect up to $31,950 of equity in real or personal property that you or your dependent use as a residence, including a cooperative or a burial plot. This amount also applies as a wildcard exemption, meaning that if you don’t need the entire homestead exemption to protect your home’s equity, you can use the unused portion to protect any property of your choice.
California 703 Motor Vehicle Exemption
This exemption allows you to protect up to $6,375 of equity in one or more motor vehicles. This amount is higher than the 704 series, which only allows you to protect up to $3,325 of equity in one motor vehicle.
California Exemption Issues to Avoid
Bankruptcy fraud, including undervaluing assets or hiding property, can result in your case being dismissed. Be accurate and truthful in all documentation.
Is Exempt Property Automatically Mine?
Yes, exempt property remains yours after filing bankruptcy. However, remember that you must still maintain payments on any liens attached to exempt property, like home mortgages.
Are My Exemptions Going to Be Checked?
Absolutely. The bankruptcy trustee reviews your exemptions. If they believe you’re not entitled to an exemption, they can challenge it in court.
If I Make a Mistake, What Should I Do?
Mistakes, especially if unintentional, can be addressed. If you realize you’ve made an error regarding your exemptions or any other part of your bankruptcy filing, consult a lawyer immediately. Honest mistakes can often be rectified, but deliberate attempts at bankruptcy fraud can result in severe consequences. Having a lawyer can help you understand the complexities of federal bankruptcy exemption laws.
Do I Need a Bankruptcy Lawyer?
While it’s possible to file for bankruptcy on your own, having a lawyer can help you understand California bankruptcy laws and potential pitfalls.
If you’re considering bankruptcy, get matched with a trusted California bankruptcy lawyer through LegalMatch. They can guide you, ensuring your property is protected, and your financial future is on the right track.
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