Bankruptcy is a legal proceeding that gives a fresh financial start to individuals without a means to cover their debts. Bankruptcy relief can be as simple as liquidating your non-exempt property to pay creditors and discharging the rest or making a repayment plan that gives you enough time to pay your creditors. Chapter 7 bankruptcy is the most common form of bankruptcy. You will qualify for this bankruptcy with a small income and minimal assets.

The court will appoint a bankruptcy trustee to sell your non-exempt property and divide the proceeds among your creditors. Although this can offer some relief from debt, most people are worried about losing valuable property like homes, vehicles, and tools of trade. Fortunately, California law allows you to protect some, possibly all, of your assets and accounts through bankruptcy exemptions.

You could choose between the two available bankruptcy exemption schemes depending on your exact situation and long-term plans. Navigating the bankruptcy process and using the exemptions appropriately can be challenging. Therefore, having a reliable bankruptcy lawyer by your side is critical.

Understanding Chapter 7 Bankruptcy Exemptions

When you file for bankruptcy in California, you must list all your assets and properties in the paperwork. This gives the court jurisdiction over everything you own. Chapter 7 bankruptcy is commonly known as liquidation bankruptcy. This is because the bankruptcy trustee can liquidate all of your non-exempt assets and use the proceeds to pay creditors.

Most people will go bankrupt due to increased financial struggles and accumulated debt. Therefore, losing everything you own in liquidation could make life more difficult financially. If a bankruptcy trustee were to take everything from you, they would clear all your debts and leave you homeless and without a way to care for your family. Fortunately, this does not happen, thanks to the bankruptcy exemptions.

If you claim an asset or account as exempt during your bankruptcy filing process, the trustee cannot use it for debt repayment. By allowing you to keep some equity in your home, vehicle, and other personal belongings, the bankruptcy exemptions ensure you can have a fresh financial start and move on with your life.

Although bankruptcy exemption laws aim to protect your property, the exemption process is not automatic. You must claim the exemptions in your bankruptcy forms. Additionally, you must claim exemptions for all properties you want to keep.

On Schedule C of your bankruptcy forms, you must indicate the type of exemption you want to use. California has two categories of exemptions that offer different forms of protection. A competent lawyer can help you choose the right exemption and follow the right procedures to protect your assets. For every asset that you wish to protect, you must:

  • Describe the asset. If you want to protect your vehicle from bankruptcy, you must indicate the type of car.
  • Indicate the current value of the asset. This helps show how much the property would bring to bankruptcy if liquidated.
  • State the amount you are claiming as exempt for the property.
  • State the exact exemption you are claiming. Unlike other states, California residents cannot utilize federal bankruptcy exemptions. Therefore, you must choose from the two categories of state exemptions.

When claiming an exemption, the value and description of the property you indicate must match what you indicate on your Chapter 7 bankruptcy forms. The exemptions from which you can choose for your Chapter 7 bankruptcy include the following:

704 Bankruptcy Exemptions

This type of bankruptcy exemption generally suits individuals who want to protect their homesteads. The approach for the 704 bankruptcy exemptions on different assets includes:

Homestead

The homestead exemption under this category protects a particular amount of equity in your primary residence. When you choose 704 exemptions, you can only protect a home if it is your residence at the time of bankruptcy filing. This could include a community apartment, mobile home, boat, or condominium.

This type of exemption will also apply to the proceeds of a forced property sale. In this system of exemptions, you could protect up to (as of 2024) $699,426 of your property. However, you must have owned the property for 1,215 days before claiming the exemption.

Motor Vehicle

This exemption protects your vehicle, motorcycle, or truck when filing for Chapter 7 bankruptcy. If the state exemption does not cover your vehicle's equity, the bankruptcy trustee can still liquidate it to pay creditors. The following steps will help you determine whether the bankruptcy exemptions are enough to keep your vehicle:

Determine the exempt amounts. Under the 704 exemptions, you could exempt up to $7,500 in vehicle value. 

  • Determine the value of your vehicle. When filing for liquidation bankruptcy, you must state the market value of your assets, including your vehicle. The vehicle's value will be determined by its age and condition.
  • Determine your vehicle's equity. When determining your equity in the vehicle you seek to exempt, you must account for the balance on your car loan.
  • Compare the vehicle value to the exemptions. If the motor vehicle and wildcard exemptions are enough to cover the vehicle equity, you can file for bankruptcy and keep the car. Otherwise, the bankruptcy trustee can sell the vehicle and give you the exempt amount before distributing the balance to creditors.

Under the following circumstances, you can keep the vehicle even when its total value is not exempt:

The trustee abandons your car. The trustee may make such a move when no money is available to pay creditors after selling the vehicle. In this case, you can keep the vehicle and continue paying your loan.

The trustee allows you to buy back the car. You can keep your vehicle after Chapter 7 bankruptcy if you can pay the trustee for the non-exempt property value.

Personal Property

You can protect the following personal property with 704 bankruptcy exemptions:

  • Personal effects and household items
  • Up to $3,825 in residential building materials are needed to improve or repair your home.
  • Artwork, jewelry, and heirlooms of up to $9,525
  • Health aids
  • A reasonable amount of money in a deposit account.
  • Social security payments 
  • Proceeds from wrongful death and personal injury lawsuits

Pensions and Retirement

You could protect these forms of pension and retirement by claiming 704 bankruptcy exemptions in California:

  • Retirement accounts, including money purchase plans and 401(k)s, are exempt from tax.
  • Public and private retirement benefits and plans
  • Pensions and retirement benefits for county firefighters, peace officers, and public employees

Public Benefits

The following public benefits cannot be used for payment of your creditors when you file for liquidation bankruptcy:

  • California Workers Comp Benefits
  • Disability and unemployment benefits
  • Relocation benefits
  • Students financial aid

Insurance 

You may be able to exempt a part of your insurance benefits from Chapter 7 bankruptcy liquidation:

  • An unlimited value of matured life insurance benefits. You could protect up to $15,250 in benefits with an unmatured policy.
  • Health insurance and disability benefits
  • Up to six months’ worth of homeowners' proceeds
  • Life insurance benefits if the policy prohibits payments to creditors with the proceeds

Tools of Trade

The tools of trade are materials, instruments, and equipment used for your work. For a single bankruptcy filer, you can exempt up to $9,700 in tools of trade or $19,050 if you and your spouse are in the same profession.

703 Bankruptcy Exemptions

The other category of bankruptcy exemption is the 703 exemption scheme, which only applies in bankruptcy cases. Assets you can protect with this type of exemption include:

  • Homestead exemption. You could protect up to $31,950 of your primary residence using the 703 bankruptcy exemptions. This is significantly lower than the exemption offered by 704 exemptions.
  • Motor vehicle. You could exempt up to $7,500 of motor vehicle equity from this exemption system.
  • Personal property. Personal items like clothes, books, and musical instruments amounting to $800 can be protected using the 703 exemptions. Additionally, you can use this exemption to protect a burial plot. Personal injury benefits, health aids, and jewelry
  • Alimony and child support. When you choose 703 exemptions, the bankruptcy trustee cannot use the amount you receive for alimony or child support to pay your creditors.
  • Insurance. You can use this category of exemption to protect your life insurance proceeds, disability benefits, and proceeds from personal injury claims.
  • Wildcard. The wildcard exemption can be used for the property of your choice. The amount you can exempt in a wildcard is $1,700 plus the amount that is left unused from exempt burial plots or homestead exemptions.

Frequently Asked Questions on Chapter 7 Bankruptcy Exemptions in California

Bankruptcy is often the last choice for individuals who cannot pay their debts. In addition to protecting you from constant calls by creditors, the legal proceeding offers relief from your debt. Protecting your assets through exemptions is complicated for individuals who have legal knowledge. A mistake in making the exemptions can cause property loss or the dismissal of your bankruptcy case.

The following are frequently asked questions on Chapter 7 Bankruptcy exemptions:

     1. What will happen if I don't claim exemption in Chapter 7 bankruptcy?

Most people who file for bankruptcy want to protect the assets and property needed to lead a basic life. You can only prevent the liquidation of your assets by naming them as exempt in your bankruptcy forms. If you leave an asset off the Schedule C forms or claim the wrong exemptions, the trustee can liquidate it and use the money to cover some of your debts.

Sometimes, the trustee can allow you some time to correct the mistakes in your first attempt at exemption. You can do this by amending the forms. However, if you leave Schedule C blank and do not make appropriate attempts to claim an exemption, you will have no chance to prevent the trustee from seizing the assets. Having a bankruptcy attorney by your side is critical to avoiding these errors.

     2. Do all Chapter 7 Bankruptcy Filers lose their property?

No. If all your assets are exempt, the trustee will have nothing to liquidate for the payment of creditors. Most Chapter 7 bankruptcy cases are no-asset. This happens when a bankruptcy trustee reviews your case and asserts that you have correctly claimed your exemptions. In this case, the trustee will write a report informing creditors that no property liquidation will occur.

Keeping your assets from liquidation is not straightforward, even when all your property is exempt. You are responsible for correctly filling out Schedule C and indicating the correct exemptions.

     3. Does anyone check my bankruptcy exemptions?

Yes. When you file for Chapter 7 bankruptcy, the court appoints a trustee to oversee your case. The role of your bankruptcy trustee includes reviewing your bankruptcy petition to ensure that you have indicated all your assets. The trustee will also check your exemptions to ensure your claim is genuine and within the confines of the law.

If the trustee disagrees with the exemptions you have made in your Schedule C, they can file an objection in bankruptcy court. Before filing the objection, the trustee will determine the type of mistake you made and your motive. You could face severe legal trouble if you intend to defraud your creditors. Making inaccurate statements when filing for bankruptcy is a felony punishable by a twenty-year prison sentence and fines that do not exceed $250,000.

Find a Competent Bankruptcy Lawyer Near Me

Filing for Chapter 7 bankruptcy is a great way to eliminate your debt and have a fresh financial start. However, the worry of losing your home and other valued assets may leave you wondering whether bankruptcy is the best option, given your financial situation. Although your bankruptcy trustee will require you to surrender your property for liquidation and pay your creditors, you could use the bankruptcy exemptions to safeguard some of your property.

California has two sets of bankruptcy exemptions, including the 704 and 703. Each exemption category can help you protect a certain percentage of your assets and accounts. This allows you to keep substantial equity in your home and safeguard money from pensions and personal injury benefits.

Whether or not you can use the exemptions in your Chapter 7 bankruptcy case will depend on the period of time you have lived in California and other factors in your case. Failure to use the exemptions or following the wrong procedures can cause you to lose your property. If you or a loved one is undergoing bankruptcy in Modesto, CA, you will benefit from the top-notch legal guidance we offer at Modesto Bankruptcy Attorneys. Call us today at 209-314-3010 for a case review.