When a person files a Chapter 7 bankruptcy petition, the federal Bankruptcy Code requires that he or she must surrender assets to the bankruptcy trustee. The trustee, in turn, liquidates the assets in this so-called bankruptcy “estate” and distributes the proceeds to creditors.
However, the accepted intent of the Code is to rehabilitate and not punish. It would be difficult, if not impossible, for most individuals to avail themselves of the Code’s so-called “fresh start” if they were required to give up literally all of their assets.
For this reason, the Code provides that certain assets are beyond the reach of the trustee and creditors.
It does this in one of two ways:
- By Exclusion. By law, the excluded asset is not considered part of the petitioner’s “estate”. Examples include balances in certain types of retirement and pension accounts.
- By Exemption. The asset is part of the estate, but falls under a state or federal exemption.
California Requires Debtors to Use State Exemptions
Although the Code is a federal law, it does leave some matters to the states. In the case of exemptions, individual states have authority to require their residents to choose an exemption system, selected from certain options. In some states, the choice is between state exemptions and their federal counterparts. In others such as California, a bankruptcy petitioner must rely solely on state exemptions.
There is still an election Californians must make, however. Under state law, there are alternative exemption systems (cleverly named “System 1” and “System 2”). Filers must choose one system exclusively; “mixing” and “matching” exemptions is not permitted.
As a general proposition, because System 1 provides a larger homestead exemption, debtors who own a home in which they have substantial equity are better served by electing System 1. System 2 is more often preferred by those with property other than equity in a home.
A note of caution here. Bankruptcy exemption analysis is a complex area of state law, even for highly experienced bankruptcy practitioners. Although the types of property are largely the same, there are exceptions. Also, most, though not all, exemptions are subject to a cap, which may differ between Systems 1 and 2. A value above that limit may still be considered an asset of the estate.
Additionally, federal law may still be relevant in certain cases. The list below is thus intended to serve solely as a very general summary. Only a knowledgeable bankruptcy lawyer with detailed knowledge of your individual circumstances can properly advise the client regarding the exemptions available.
Exemptions Common to Both Systems
- Homestead (Equity in the debtor’s principal residence).
- Motor Vehicle
- Household items and personal effects
- Residential building materials to repair or improve home
- Jewelry, heirlooms and works of art
- Health aids
- Social Security payments deposited in a bank
- Certain personal injury and wrongful death claims and awards.
- Cemetery plot
- Retirement Plan and Pension Balances
- Public Benefits
- Tools of Trade
- Life and Other Insurance Policies or Proceeds
In some states, each member of a married couple filing a joint bankruptcy petition may claim the full amount of any applicable exemption. In California, however, this is only the case when the exemption expressly allows it.
Call (949) 328-6392 today to reach Tran Bankruptcy Law.