You may know that so-called liquidation bankruptcy petitions under Chapter 7 of the Bankruptcy Code are available only to individuals whose income falls below certain specified limits. However, some individuals who are eligible to file under Chapter 7 nevertheless elect instead to file a Chapter 13 repayment petition.
This can be an appropriate choice for some debtors. In some cases, though, the decision is based on the mistaken belief that a Chapter 7 debtor must surrender all of his or her property to creditors.
The Purpose of Filing for Bankruptcy
It is true that, as a very general rule, a debtor who files for bankruptcy must indeed give up his or her property to the bankruptcy trustee. The property in this “estate” can then be sold, with the proceeds being distributed to creditors. In reality, however, many individuals can file for Chapter 7 relief and still keep virtually everything they own.
The underlying purpose of personal bankruptcy is to give the debtor a “fresh start,” not to leave him or her destitute. In furtherance of this purpose, the Bankruptcy Code contains a list of so-called exempt property that does not become part of the bankruptcy estate. Although the Code is a federal statute and supersedes state insolvency laws, state laws do come into play when determining which property of the debtor is exempt.
Experience is the Key to Understanding
As part of his or her Chapter 7 petition, the debtor must submit a schedule of exempt property. This schedule is included among the forms in most “do-it-yourself” Chapter 7 kits on the market, and it can be tempting for those already deeply in debt to save a few hundred dollars by foregoing competent legal advice. Unfortunately, this can prove to be particularly unwise when it comes to completing the exempt property schedule.
California’s exemption statutes are complex, and it is easy for an inexperienced individual to overlook or misinterpret available exemptions. Consultation with an experienced bankruptcy attorney can help ensure the debtor claims the full value of all exemptions to which he or she is entitled.
California has two sets of exemptions, and the debtor must select one. The debtor’s attorney will review the debtor’s property holdings and advise which is more advantageous. Both lists are too extensive and detailed to be summarized here. However, both include the debtor’s equity in his or her principal residence, or “homestead,” along with burial plots, jewelry and other personal property and certain insurance policies.
More Information that You Need to Know
In recognition of the post-bankruptcy debtor’s need to continue earning a living, California also exempts the tools of the debtor’s trade or business. These may include instruments, books, uniforms and even vehicles and vessels, provided they are necessary to the debtor’s business or profession.
Here are a few additional general comments:
- If any property is collateral for a loan, the exemption limit is based upon the debtor’s “equity”; that is, the difference between the value of the property and the amount owed.
- In general, each member of a married couple filing a joint petition may claim the full value of an exemption.
- A debtor may be able to keep the non-exempt property, but must ordinarily pay into the bankruptcy estate the property’s value.
NOTE: This is for informational purposes only and does not constitute legal advice.