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High rates of unemployment coupled with soaring credit card debt and a slow rebound housing market continue to be the primary contributing factors for the record bankruptcy rates across the country. As the economy slowly begins to recover, the overall numbers of bankruptcy filings are expected to decrease. For individuals for whom the recovery does not come fast enough, bankruptcy may be their best option for returning to financial stability in 2012.
Consumer bankruptcy comes in two basic forms, Chapter 7 and Chapter 13. Chapter 7 bankruptcy gives debtors an opportunity to erase their debts and to start rebuilding their credit with a clean slate. In exchange for this opportunity, the debtor may have to sell, or liquidate, some of his or her personal belongings. During a Chapter 7 filing, the bankruptcy trustee will collect any nonexempt property owned by the debtor and liquidate it in order to repay some of the debt owed to the creditors.
However, in most cases, debtors filing for Chapter 7 will not lose any of their personal property, including their family home and car. This is because in California when you file for bankruptcy, deductions allow you to protect your assets. In fact, most of the time people that file for bankruptcy get to keep everything and lose nothing. Some or all assets are exempt, meaning that the bankruptcy court cannot take them in order to help pay off the bankruptcy filer’s debt; this is not so in other states. In other states, bankruptcy filers do not get the deduction that are available in California.
California has two systems that dictate what property the bankruptcy court can and cannot take away from you during bankruptcy; the law can be found under California Code of Civil Procedure Sections 703 and 704. Anyone going through bankruptcy must choose only one of the two options for exemptions.
If you have equity in your home, you may wish to use the exemptions provided under Section 704. Under this section, the following assets are among those exempt: up to $75,000 in the value of real property if single and not disabled, $100,000 if married, and $175,000 if 65 years of age or older, or disabled. Up to $2,725 in the value of a vehicle ordinary and required household furnishings and clothing up to $5,000 for jewelry, heirlooms and art.
If you do not own a home or your home has no equity, consider filing under Section 703. One of the benefits of Section 703 is the all important ‘wild card’, unlike Section 704. A homestead exemption does exist for Section 703 but it is only $20,725. This is why homeowners with greater equity are likely to file under Section 704. However, for those with little or no equity in real property, Section 703 can be advantageous in that a bankruptcy filer can take the unused portion of the homestead exemption and use it for other property. The ‘wild card’ exemption is precisely as the name suggests: the exemption can be used to protect any kind of asset, up to the maximum dollar amount.
In addition to these exemptions, exemptions exist for reasonable IRA retirement plans and ERISA 401k plans are typically not property of the estate, and are protected.
Exemption analysis is a complex matter, and one that can ‘make or break’ the success of a Ch. 7 or Ch. 13 bankruptcy. California’s unique system of bankruptcy exemptions is just one example of some of the complicated laws that govern bankruptcy.
The summaries included in this article are not complete. If you are considering filing for bankruptcy, you should speak with an experienced bankruptcy attorney in order to more fully understand how proper exemption elections may be able to help you protect your property from the Ch. 7 or Ch. 13 trustee.
The purpose of this column is to provide general information on the law, which is subject to change. It is not legal advice. Consult a lawyer if you have a specific legal problem.
Published: December 8, 2011 – Volume 10 – Issue 34