California Bankruptcy Exemption Laws
When an individual files for bankruptcy, they're allowed to exempt certain categories and amounts of assets. This provides not just the "necessities" to continue functioning on a daily basis, but also makes some of the debtor's assets and equity "off limits" by preventing their liquidation. Bankruptcy is generally a federal proceeding, and there is a sort of default federal list of exemptions, but the economies and situations in each state are so different that each has its own bankruptcy exemption laws. California is the only state that has two different sets of laws.
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Identification
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A debtor in bankruptcy in a California jurisdiction cannot claim exemptions under the federal exemption rules. Instead, they must choose one of two systems as described in Chapters 703 and 704 of the California Code of Civil Procedure. The amounts in these statutes were updated by the California Judicial Council in 2007 and every three subsequently.
Features
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The general categories of exemptions are homestead, insurance, pensions, personal property, public benefits and tools of trade. There is also a miscellaneous category in each system, covering various items such as alimony, professional licenses and assets of a business partnership. Each category is broken down into specific types of property; a maximum exemption limit is assigned to assets of that type.
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Size
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The California bankruptcy laws do not allow a debtor to mix and match exemptions---they must choose either the Chapter 703 exemptions (system 2) or 704 exemptions (system 1). System 1 is not unlike the exemptions allowed in other states. There is a large exemption for the debtor's homestead, up to $50,000 for an individual and up to $75,000 for a family (in 2007), with the retired and disabled receiving significantly higher exemptions. System 2 allows for fewer specific exemptions, but allows the unused portion of the homestead exemption to be applied to any property.
Considerations
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Only system 1 of the California bankruptcy laws benefits married couples. Under system 2, the exemption amounts are not doubled for married debtors, whereas system 1 specifically creates higher allows in some instances for couples. System 1 also exempts at least 75 percent of the debtor's wages earned in previous three months and all money gained as student financial aid. These exemptions makes system 1 the most commonly chosen. System 2, however, is good for a debtor who does not own their principle place of residence, is receiving child support or alimony or who wants to take advantage of the wild card, which can be used for any property.
Significance
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When the value of a specific asset exceeds the exemption, the bankruptcy trustee can seize the property and sell it, returning to the debtor cash in the amount of the exemption. This is often what happens with homes---the exemption allows the debtor to retain some of their home equity and ensures they won't be immediately without means to provide for their shelter. Both systems have exemptions for automobiles, jewelry, clothing, food and household furnishings. While a debtor with few assets can fit most or all of their worldly possessions into the exemptions, the somewhat more well off debtor will be forced to prioritize what they want to keep.
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