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Once a person files bankruptcy, their property becomes part of the "bankruptcy estate".  Property consists of money, household goods, cars, real estate, etc., but it also includes non-obvious esoteric rights, such as right to receive a tax refund or the right to sue someone. Because bankruptcy concerns itself with “rights” in property, it includes property that you have a right to but is titled in someone else’s name. Bottom line: property means just about everything under the sun (and more)! 


The goal of the bankruptcy attorney is to make sure that all of your rights in property are “exempt”. If not exempt, a Trustee might determine it to be of sufficient value to liquidate for benefit of the creditors. When the value of assets exceed exemptions, sometimes the simplest solution is to delay filing until mortgage or rent checks clear and cash resources are lower, IRA contributions have been made, etc. Proper planning and execution of a bankruptcy case is crucial to protect a debtor's assets from liquidation and distribution to creditors.

Selecting exemptions can be a complex task as there are multiple possible choices under Federal and State systems.  A homeowner with substantial equity in their residence might pick one set of rules, while another homeowner with little or no equity and cash in the bank, might choose a completely different set of rules. More than 75% of my clients are renters.  Many find that they can file a bankruptcy case and still hold on to a surprisingly large amount of cash and equity in things like cars. 


I have prepared two different examples to demonstrate how exemptions work:

EXAMPLE #1: John owns a BMW worth $20,000 with a loan of $6,000. John also has a checking account of $10,000, a diamond ring worth $7,000, a tax refund due of $3,900, and $125,000 in a 401k. The remainder of his property consists of household goods and wearing apparel of no great value. ALL OF JOHN'S PROPERTY IS EXEMPT USING THE CALIFORNIA WILDCARD AND ASSOCIATED EXEMPTIONS AND HIS BANKRUPTCY WOULD BE DETERMINED TO BE A “NO-ASSET” CASE!

EXAMPLE #2: Sally, a resident of San Francisco, owns a Toyota worth $20,000 with a $16,000 outstanding loan. She is a 40 year old executive who lives alone and owns her residence and makes about $90,000 per year. The house is worth $800,000 with a mortgage of $300,000. She has owned the house for 5 years and all the equity is traceable to her original down payment, subsequent regular monthly payments, and appreciation. She has $6,000 in the bank, all traceable to paid earnings within the last 30 days. SALLY WOULD PROBABLY BE A GOOD CHAPTER 7 CANDIDATE AND BE ABLE TO PROTECT ALL OF HER ASSETS (AS OF JANUARY 1, 2021).  This is because, for San Francisco and many of the surrounding counties, the homestead exemption has increased to $600,000 and the rest of her assets would likely be protected by a combination of other available exemptions or otherwise timing the filing of the case where her available funds were the lowest. The important thing is that her house, despite the large equity, would be exempt on these facts.

There are lots of caveats to applying the new California Homeowner's Exemption in a Federal Bankruptcy Case. For instance, with certain exceptions, a person could be denied or have the exemption limited if they acquired their interest in their residence within 40 months of the filing of the bankruptcy case (1,215 days to be exact).  An exemption could also be denied if the equity could be traced to the fraudulent transfer of assets in the prior 10 years.  

The most important thing to keep in mind here is that analyzing exemptions is an important aspect of legal work in a bankruptcy case and should not be left to chance or the ill informed.  Determining whether as asset is exempt may mean the difference between losing or saving a house!  Call San Francisco Bankruptcy Attorney Marty Courson for an evaluation and make sure you are protected.

By:  Marty Courson

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