California Bankruptcy Exemptions and How They

Work

By Gary Fraley California State Bar Certified

Bankruptcy Law Specialist

Today we are going to talk about California bankruptcy exemptions. “Exemptions” is a fancy word for a list of things that you are able to keep and creditors cannot reach. In a Chapter 7 bankruptcy, anything that is not exempt (protected) is taken by a Bankruptcy Trustee and sold to pay your creditors.

In California we have two systems,. One set of exemptions is what we call the " Standard Bankruptcy Exemption System." The other exemption system is referred to as the " Wild Card Exemption System.”

The “Wild Card Bankruptcy Exemption System” can only be used in a bankruptcy.

On the other hand, the “Standard Exemption System” can be used both inside and outside of bankruptcy.

You have to choose between them. You get to use only one.It is like going into a Chinese restaurant. You can have meal “A” or meal “B.” You cannot take the Sweet & Sour Pork out of “A” for meal “B”or the Shrimp out of “B” for meal “A”

Let’s first look at the Standard Exemption System. The chief benefit of the Standard Exemption System is that, if you have significant equity in a home you are going to have to use the Standard Exemption System to protect that home.

The Standard System has a homestead exemption that protects:

$75,000 of equity for an individual,$100,000 for a husband and wife, and$175,000 for senior citizens, disabled people

and low income individuals age 55 or older.If you do not have a home or there is little equity in it you do not get to use the homestead exemption for anything else. You use it on your home or you lose it.

There are a few additional benefits such as higher exemptions for jewelry, tools of trade, household goods and personal injury claims.

In the cases I see, it is rare that I use the Standard Exemption System for anything other than equity in my client’s home.

The problem with the standard exemption system is that the exemptions for most things other then a home is downright stingy

As an example, if you have a car with $5,000 equity and you wanted to keep it, you will not be able to do so without paying a Chapter 7 Bankruptcy Trustee the value above the $2,900 vehicle exemption. Not a very good result.

If you have a car with $5,000 equity it, it is fully exempt under the $5,100 regular Wild Card vehicle exemption.

Why that vehicle exemption is $2,900 under the Standard Exemption System but is $5,100 under the Wild Card System makes no sense but that is the law.

The major problem with the Standard Exemption System is that you cannot protect: stocks, bonds, non IRA, non 401(k) accounts, checking accounts, savings accounts, tax refunds, businesses, cash on hand and 1/4 of earned but unpaid payroll checks etc,.

They all will be taken by a Chapter 7 Trustee and sold to pay creditors.

Now let's take a look at the Wild Card System. The difference is striking. Let's say you don't have a house or you have a house that has nominal equity in it.

To the extent you do not use the Wild Cardhomestead exemption, which is $25,575. Itgets thrown in with another $1,350 for a totalof $26,925 of Wild Card exemption.

That is in addition to all the other exemptions that are available in the Wild Card Exemption System. You can use it to protect anything that you wantto with it.

I refer to this as “Monopoly money.” You cannot go to the store with it but you can buy back things that would otherwise not be protected.

Let's say you have something that does not have its' very own exemption.

Let’s say you have cash or a savings account or a tax refund coming next year. None of those things have its’ own exemption either under the Standard Bankruptcy Exemption System of under the Wild Card Bankruptcy Exemption System.

However, we have that $26,925 of Monopoly money.

So if you had $5,000 in a checking account you would protect it out of the Wild Card bankruptcy exemptions and keep it.

That would leave you with $21,925 of Monopoly money left. ($26,925 - $5,000 = $21,925.) If you had a tax refund of $1,000 coming you then have $20,925.

There is a lot of leeway in the Wild Card bankruptcy exemption system that is not available in the standard exemption system.

The key thing in doing this is not justknowing how the California bankruptcyexemption systems work, but what you can do to legally change things to geta better result which is keeping themost value for you. This is calledpre-bankruptcy exemption planning.

For example, if you had $1,000 cash and you were under the standard bankruptcy exemption system or you were in the wild card system but all your wild card had been used, that money would not be protected. However, you could take that cash and buy $1,000 of groceries before the case was filed.You may not have been able to keepthe cash. However you get to keep thesame $1,000 value in a different formThe money was not exempt but the$1,000 of groceries would be.

In the wild card system we could literally protect $26,925 in cash if we did not need any of the Wild Card to protect other non-exempt things.

We will get into details about the specific exemptions in another article but for today, you now have a basic understanding on how the California bankruptcy exemption system works.

If you think you need good advice as to bankruptcy exemptions and how they effect your options in dealing with your financial problems, don’t make seeing a bankruptcy attorney your last resort. That is true even if you do not intend to file a bankruptcyor if filing bankruptcy may be a choice of lastresort for you.

You need to know all your rights and optionsbefore you start making financial decisionsthat could come back to haunt you later.

Isn’t it wise to get as much knowledge as possible?Remember the saying, “Knowledge is power.”

Isn’t it time you got your power back?

I’m Gary Fraley, a California State Bar Certified

Bankruptcy Law Specialist. I have over 35 years

experience in over 10,000 bankruptcy cases.

Call me now at (916) 485-5444 to schedule your free

attorney consultation.