The dictionary defines bankruptcy as utter ruin, failure, depletion, or the like. With such definition, it’s not surprising that most people associate bankruptcy with being tossed out on the street, stripped of all of his or her belongings. I think of it as a strategic decision about one’s debts, ability to pay those debts and preservation of assets.

We are very fortunate to live in a country with bankruptcy laws that allows individuals as well as corporations to survive by getting rid of debt it cannot afford to pay. Our bankruptcy system is unique in that it allows individuals and corporations to do this without any punishment.

So, let’s review exemption relating to bankruptcy. Each State can set its own exemptions or it can also opt in to the Federal exemption. California has opted out of the Federal exemption and has its own generous set of exemptions. There is two systems of exemptions in California. The first system (CCP 703) uses “Wildcard” which can be applied towards any property. The second system (CCP 704) uses the home equity exemption, which can only be applied towards equity in a home. There are other differences, but these are usually the two driving forces of selecting 703 or 704.

Keeping Home Through Bankruptcy

The threshold question when it comes to keeping homes through bankruptcy is equity. Equity is determined by taking the fair market value of your home and subtracting all liens against the home such mortgages, taxes, HOA liens, etc. Assuming you actually have equity in your home, you can protect:

(1) $75,000 if single debtor.
(2) $100,000 if debtor is family unit.
(3) $175,000 if debtor or spouse is at least 65 years old, or disabled, or if you are 55 years or older with an annual income less than $15,000 or $20,000 if married.

In many cases, the home is underwater, hence no equity.

Keeping Cars Through Bankruptcy

Under system 1 (CCP 703), we can protect up to $3,525 of equity in one vehicle. If your vehicle has more equity than the allowed amount, you can apply some of the Wildcard exemption of $23,250.

For example, if your car is worth $10,000 and you own it free of any loans, we would take:

$10,000
$3,525 (vehicle exemption)
$6,475 (Wildcard exemption)

Under system 2 (CCP 704), we can protect up to $2,725 in a personal vehicle and $7,175 in a business vehicle.

Keeping Retirements, Pensions, etc Through Bankruptcy

In most circumstances, all qualified retirement funds and pensions are protected through bankruptcy. This is one reason we advise against borrowing from or liquidating retirement funds to satisfy creditors. In effect, you are taking fully exempt (protected) funds and applying it towards dischargeable debt. (Discharge is another way of saying forgiven in bankruptcy.) Don’t throw away your hard-earned retirement money.

Keeping Household Items Through Bankruptcy

In general, most normal, everyday household items, clothing, appliances, etc. are fully protected through bankruptcy.

Under system 1 (CCP703), each item is protected up to $550. It is important to keep in mind that in valuing household items, it is not the new value but replacement value used to determine the value of each item. Think of what you could get for it on craigslist or eBay.

Under system 2 (CCP 704), household furnishings and personal effects are protected to the extent reasonably necessary.

Another common concern is keeping pets through bankruptcy. Most household pets are not worth anything unless they are “show” dogs. They are priceless to you – worthless to everyone else.

Keeping Jewelry Through Bankruptcy

Similar to household items, jewelry is also protected through bankruptcy. One common misconception is that the amount exempted should be the same as what you paid for the item. This is not an accurate value of the item. The value we use for the bankruptcy petition is replacement value, taking into consideration the condition of the item.

Under system 1 (CCP 703), we can protect up to $1,425 of jewelry. Similar to cars, if you have more jewelry than the exempted amount, we can apply some of the Wildcard.

Under system 2 (CCP 704), the protected amount is $7,175.

Keeping Cash Through Bankruptcy

When I say “cash” I am including money in bank accounts, stock account (not retirement account), and coin jars in  your home.

Under system 1 (CCP 703), Wildcard is used to protect cash up to $23,250.

System 2 (CCP 704) does not provide protections for cash.

 

Image credit: Leo Reynolds

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