What kind of property may I retain as “exempt”?
As noted in the Chapter 7 overview, a trustee is assigned whose job it is to “liquidate” a debtor’s property and then distributing the proceeds to creditors. In reality, only a very small percentage of cases ever result in liquidation of assets. In the vast majority of cases, the trustee quickly determines that it is a no-asset case (meaning there are no assets for the benefit of creditors). Even in a “no-asset” case, a debtor may have substantial actual assets. This is because their assets are often entirely “exempt.”
Once a person files a Chapter 7, with a few exceptions, the property they own is considered part of their "bankruptcy estate." Property of the estate is defined in the Bankruptcy Code at 11 U.S.C. § 541. Such property definition is quite broad and often consists of esoteric rights that are not apparent at first glance. Beyond the obvious bank accounts, personal possessions and real property, such property rights may include the right to sue someone, a tax refund due and community property rights among other things. Congress, considering the death of someone a fortunate windfall to be shared with creditors, has designed the statute so that the right to inherit or get life insurance from someone who dies within 180 days of the filing of the bankruptcy to be property of the estate as well!
While the estate includes just about everything under the sun, a person who files bankruptcy is able to claim certain of their property as exempt.
Exempt means that the property is off limits to creditors and not subject to administration in the bankruptcy case. Like other areas of bankruptcy law, the exemption scheme can be quite complex and a lawyer should always be consulted. Every state has a different exemption scheme and what exemptions apply require knowledge of both federal and state law. Because of changes incorporated by the Bankruptcy Reform Act, a person may even be required to claim exemptions from the state of previous residence.
In California, a debtor is able to claim exemptions from either of two different systems. These systems are generally found under the California Code of Civil Procedure in CCP § 703.140, or under CCP §§ 704.010 – 704.210, and CCP §§ 704.710 – 704.730.
BEWARE: Exemptions are updated periodically. You should ALWAYS check with an attorney to make sure the exemptions you are relying on are updated and current and applicable to a particular situation.
There are other federal and state exemptions that supplement these as well. A nice summary of the California exemptions can be found here.
The choice of systems depends on which is more favorable to the client and a host of complex factors may come into play. A homeowner with substantial equity in their residence is more likely to pick the 704 system. A homeowner with little or no equity and $10,000 cash in the bank may very likely pick the 703 system. The big advantage of the 703 system is that it has a “wildcard” which can be applied into any property. The total value of the California wildcard is presently $23,500. Under the 703 system, you are already entitled to a basic exemption in many items such as an automobile, bank accounts, jewelry and the like. When the values of these items exceed the basic value, the wildcard can be used to protect the difference in a bankruptcy case. Exemptions basically serve to protect the debtor from being rendered a pauper and provide them a “grubstake” for their fresh start. Many California residents are surprised to learn that, because of the wildcard, they are able to file bankruptcy and exempt substantial amounts of cash and equivalents. Debtors in some other states are not so lucky.
I have prepared two different examples to demonstrate how exemptions at work.
EXAMPLE #1: John owns a BMW worth $15,000 with a loan of $6,000. John also has a Bank of America checking account of $5,000, a diamond ring worth $7,000, a tax refund due of $3,900, and $125,000 in a 401k plan. The rest of his property is simply household goods and wearing apparel of no particular value in any one item.
ALL OF JOHN'S PROPERTY IN EXAMPLE #1 IS EXEMPT AND THIS WOULD BE DETERMINED TO BE A “NO-ASSET” CASE!
Of the $9,000 equity in the car, $3,525 is exempt by way of the 703 system vehicle exemption; the remaining $5,475 in equity can be exempted under the available wildcard. The 703 system jewelry exemption of $1,425 is claimed for the diamond ring; the remaining $5,575 in value in the ring is exempted from the available wildcard. The tax refund of $3,900 is often overlooked as an asset of a debtor, but can still be exempted 100% under the available wildcard; same with the $5,000 bank account. Retirement funds like a 401k are exempt under the 703 system in their entirety. However, retirement funds are generally exempt (and may not even be property of the estate) under a variety of other statutes as well. In fact, retirement funds are one of the few true consumer protections incorporated by the Bankruptcy Reform Act; such funds should now be virtually off-limits in all states by way of new 11 U.S.C. § 522(b)(3)(C).
In Example 1, all of the debtor’s property is exempt and we still had $3,550 in available wildcard if the debtor had additional cash or assets that could not have otherwise been exempted. When the values of assets exceed exemptions, sometimes the simplest solution is to delay filing until mortgage or rent checks clear, the debtor has made their IRA contributions, etc. The timing of the filing of a bankruptcy case is usually the choice of the debtor. Proper planning and execution of a bankruptcy case is crucial to protect a debtor's assets from liquidation and distribution to creditors.
EXAMPLE #2: Sally owns a Toyota worth $15,000 with no liens. She is a 40 year old executive who lives alone and owns her residence. The house is worth $600,000 with a mortgage of $400,000. She has $6,000 in the bank, all traceable to paid earnings within the last 30 days.
SALLY'S PROPERTY IN EXAMPLE #2 WOULD BE SUBJECT TO BEING ADMINISTERED AS AN ASSET CASE.
In this case, Sally would avoid a Chapter 7 because her assets are subject to being administered by a Trustee. To maximize her exemptions, Sally would have chosen the 704 system because that system permits a homeowner to claim a lot more equity. However, in her situation, she would be entitled to only protect $75,000 in home equity from a Trustee in a hypothetical bankruptcy case (this exemption can be as high as $175,000 for certain people - but not Sally!). After taking into consideration the costs of sale of the home of about $36,000 and paying off the mortgage ($400,000) and giving Sally her $75,000 exemption, a bankruptcy trustee would still yield about $89,000 from the sale of the home. Also, under the 704 system (which has no wildcard), she is only able to exempt $2,725 of the Toyota's value, leaving $12,275 as not exempt. Under the 704 system, because 75 percent of paid earnings within the past 30 days would be exempt, Sally would be able to protect $4,500 of the money in the bank (small consolation).
In Sally's case, a Chapter 7 trustee would sell the car and the home and demand turnover of the $1,500 of non-exempt bank money. Sometimes, bankruptcy attorneys are contacted by people who have filed a bankruptcy case on their own. If such a person is looking for a lawyer after filing a case, it is usually because of extreme regret about something -- usually a trustee liquidating assets. Assuming that there is some reason that Sally is seeking bankruptcy protection, she probably needs a frank discussion about Chapter 13 and how she can hang onto her assets while paying some or all of her creditors in a court supervised repayment plan.
Once a person files a Chapter 7, with a few exceptions, the property they own is considered part of their "bankruptcy estate." Property of the estate is defined in the Bankruptcy Code at 11 U.S.C. § 541. Such property definition is quite broad and often consists of esoteric rights that are not apparent at first glance. Beyond the obvious bank accounts, personal possessions and real property, such property rights may include the right to sue someone, a tax refund due and community property rights among other things. Congress, considering the death of someone a fortunate windfall to be shared with creditors, has designed the statute so that the right to inherit or get life insurance from someone who dies within 180 days of the filing of the bankruptcy to be property of the estate as well!
While the estate includes just about everything under the sun, a person who files bankruptcy is able to claim certain of their property as exempt.
Exempt means that the property is off limits to creditors and not subject to administration in the bankruptcy case. Like other areas of bankruptcy law, the exemption scheme can be quite complex and a lawyer should always be consulted. Every state has a different exemption scheme and what exemptions apply require knowledge of both federal and state law. Because of changes incorporated by the Bankruptcy Reform Act, a person may even be required to claim exemptions from the state of previous residence.
In California, a debtor is able to claim exemptions from either of two different systems. These systems are generally found under the California Code of Civil Procedure in CCP § 703.140, or under CCP §§ 704.010 – 704.210, and CCP §§ 704.710 – 704.730.
BEWARE: Exemptions are updated periodically. You should ALWAYS check with an attorney to make sure the exemptions you are relying on are updated and current and applicable to a particular situation.
There are other federal and state exemptions that supplement these as well. A nice summary of the California exemptions can be found here.
The choice of systems depends on which is more favorable to the client and a host of complex factors may come into play. A homeowner with substantial equity in their residence is more likely to pick the 704 system. A homeowner with little or no equity and $10,000 cash in the bank may very likely pick the 703 system. The big advantage of the 703 system is that it has a “wildcard” which can be applied into any property. The total value of the California wildcard is presently $23,500. Under the 703 system, you are already entitled to a basic exemption in many items such as an automobile, bank accounts, jewelry and the like. When the values of these items exceed the basic value, the wildcard can be used to protect the difference in a bankruptcy case. Exemptions basically serve to protect the debtor from being rendered a pauper and provide them a “grubstake” for their fresh start. Many California residents are surprised to learn that, because of the wildcard, they are able to file bankruptcy and exempt substantial amounts of cash and equivalents. Debtors in some other states are not so lucky.
I have prepared two different examples to demonstrate how exemptions at work.
EXAMPLE #1: John owns a BMW worth $15,000 with a loan of $6,000. John also has a Bank of America checking account of $5,000, a diamond ring worth $7,000, a tax refund due of $3,900, and $125,000 in a 401k plan. The rest of his property is simply household goods and wearing apparel of no particular value in any one item.
ALL OF JOHN'S PROPERTY IN EXAMPLE #1 IS EXEMPT AND THIS WOULD BE DETERMINED TO BE A “NO-ASSET” CASE!
Of the $9,000 equity in the car, $3,525 is exempt by way of the 703 system vehicle exemption; the remaining $5,475 in equity can be exempted under the available wildcard. The 703 system jewelry exemption of $1,425 is claimed for the diamond ring; the remaining $5,575 in value in the ring is exempted from the available wildcard. The tax refund of $3,900 is often overlooked as an asset of a debtor, but can still be exempted 100% under the available wildcard; same with the $5,000 bank account. Retirement funds like a 401k are exempt under the 703 system in their entirety. However, retirement funds are generally exempt (and may not even be property of the estate) under a variety of other statutes as well. In fact, retirement funds are one of the few true consumer protections incorporated by the Bankruptcy Reform Act; such funds should now be virtually off-limits in all states by way of new 11 U.S.C. § 522(b)(3)(C).
In Example 1, all of the debtor’s property is exempt and we still had $3,550 in available wildcard if the debtor had additional cash or assets that could not have otherwise been exempted. When the values of assets exceed exemptions, sometimes the simplest solution is to delay filing until mortgage or rent checks clear, the debtor has made their IRA contributions, etc. The timing of the filing of a bankruptcy case is usually the choice of the debtor. Proper planning and execution of a bankruptcy case is crucial to protect a debtor's assets from liquidation and distribution to creditors.
EXAMPLE #2: Sally owns a Toyota worth $15,000 with no liens. She is a 40 year old executive who lives alone and owns her residence. The house is worth $600,000 with a mortgage of $400,000. She has $6,000 in the bank, all traceable to paid earnings within the last 30 days.
SALLY'S PROPERTY IN EXAMPLE #2 WOULD BE SUBJECT TO BEING ADMINISTERED AS AN ASSET CASE.
In this case, Sally would avoid a Chapter 7 because her assets are subject to being administered by a Trustee. To maximize her exemptions, Sally would have chosen the 704 system because that system permits a homeowner to claim a lot more equity. However, in her situation, she would be entitled to only protect $75,000 in home equity from a Trustee in a hypothetical bankruptcy case (this exemption can be as high as $175,000 for certain people - but not Sally!). After taking into consideration the costs of sale of the home of about $36,000 and paying off the mortgage ($400,000) and giving Sally her $75,000 exemption, a bankruptcy trustee would still yield about $89,000 from the sale of the home. Also, under the 704 system (which has no wildcard), she is only able to exempt $2,725 of the Toyota's value, leaving $12,275 as not exempt. Under the 704 system, because 75 percent of paid earnings within the past 30 days would be exempt, Sally would be able to protect $4,500 of the money in the bank (small consolation).
In Sally's case, a Chapter 7 trustee would sell the car and the home and demand turnover of the $1,500 of non-exempt bank money. Sometimes, bankruptcy attorneys are contacted by people who have filed a bankruptcy case on their own. If such a person is looking for a lawyer after filing a case, it is usually because of extreme regret about something -- usually a trustee liquidating assets. Assuming that there is some reason that Sally is seeking bankruptcy protection, she probably needs a frank discussion about Chapter 13 and how she can hang onto her assets while paying some or all of her creditors in a court supervised repayment plan.
