Exemptions in Bankruptcy

When a debtor files for bankruptcy, he has a duty to disclose all real and personal property owned as of the date of filing. An interim chapter 7 or chapter 13 Trustee is assigned to the case once filed, whose duty is to administer what is called the "bankruptcy estate". Technically, when a debtor files for bankruptcy, any and all property owned at the time becomes part of the bankruptcy estate, UNLESS it is exempted from the estate. The trustee has a duty to liquidate all assets of the estate, and pay the proceeds to the debtor's creditors, to the extent they pay down the debt. Cases where the debtor is able to exempt all of his property from the esate are termed "no-asset" cases and are most common.

In California, there are two sets of exemptions the debtor may elect to use to apply to his assets, so as to exempt, i.e., keep, the assets. The value of any asset is deemed to be the fair market value as of the date of filing. One set of exemptions, found under section 704 of the California Code of Civil Procedure, is beneficial to a debtor who has significant equity in real property, among other things. The other set of exemptions, found under section 703.140 of the California Code of Civil Procedure and most commonly used, does not provide a large exemption for equity in real property, but instead provides a finite "wild card" exemption which can be used to exempt any property not otherwise applicable to the other exemptions under section 703.140. An updated summary of both sets of exemptions as of April 2010 can be downloaded here.

Some items of personal property may have their own exemptions, but others may necessitate use of the wild card exemption. For example, most tax-exempt retirement accounts are exempt to any amount, though there are no specific exemptions for cash accounts; the wild card must be applied to cash. Household goods are always exempt as long as each item is worth no more than $550.00. Section 703.140 provides for a motor vehicle exemption of only $3,525.00, though the wild card can be "stacked" to cover any additional equity in a motor vehicle. As of April 2010, the wild card exemption allows a debtor to exempt any property up to an aggregate value of $23,250.00.

So what happens if the debtor cannot exempt all property? In a chapter 7, the debtor is expected to surrender the property to the chapter 7 Trustee. Sometimes if the value of non-exempt property is low, or if the asset is something that cannot be easily sold, the Trustee may decide to not take it. If a debtor with non-exempt property seeking to file a chapter 7 case wishes to keep everything, he may elect to file a chapter 13 bankruptcy instead. As long as his general unsecured creditors in the chapter 13 receive at least what they'd receive in a chapter 7, namely the cash value of non-exempt property through the debtor's chapter 13 plan, he may keep all his property.

The law and application of exemptions can be difficult to understand, and can have dire consequences on the unsuspecting debtor. Contacting an attorney well-versed in bankruptcy law is the best way to avoid the possibility of losing property in bankruptcy.