Bankruptcy Exemptions in California
Filing for Chapter 7 bankruptcy in California is a powerful tool that can relieve debtors of unsecured debts and provide a fresh start. Many people assume that bankruptcy involves creditors taking all their personal property, especially their home and vehicle. However, California bankruptcy exemptions allow debtors to maintain possession of certain personal property when filing for bankruptcy. While this guide provides a broad outline, it is important to contact an experienced California bankruptcy attorney who can guide you through the bankruptcy process and maximize your bankruptcy exemptions without making a costly mistake
What is a Bankruptcy Exemption?
A bankruptcy exemption allows a debtor to keep property that would otherwise be sold to pay creditors. For example, in Chapter 7, all property of the debtor is liquidated by a bankruptcy trustee to pay creditors. However, the Chapter 7 Trustee is not permitted to liquidate property of the debtor that will not produce a benefit to the bankruptcy estate. This means that if the value of the asset is lower than the amount of the exemption, the trustee will not sell the property, but will instead let the debtor keep that asset. Due to California’s generous exemptions, about 95% of bankruptcies are “no asset” cases where no assets are sold, creditors receive nothing, and the debtor keeps everything they own.
Residency Requirement to Claim California Exemptions
To file for bankruptcy in California, you must first meet the residency requirement by having lived in California continuously for at least 2 years prior to filing for bankruptcy. If you lived in more than one state during the last 2 years, speak to a bankruptcy attorney on how to file while maximizing your exemptions.
Choosing Between California’s Two Sets of Exemptions – 704 vs. 703
California is the only state that has two separate sets of exemptions, according to Nolo.com, but debtors are only permitted to pick one set. One set is known as the “704 Exemptions”, which are generally a better fit for those with substantial home equity. The second set of exemptions is known as the “703 Exemptions”, which allows for a “wildcard exemption.” This is usually a better fit for those who do not own real property or who have less home equity. Property is generally exempt up to a certain dollar amount, as specified in the applicable bankruptcy code for each set.
The 704 Exemptions in California Bankruptcy
704 Exemptions, aptly named after Code of Civil Procedure Section 704.XXX, are most commonly used by homeowners with substantial home equity.
Under 704 Exemptions, debtors are entitled to protect the equity in their home under California’s recently updated homestead exemption. Between $300,000 and $600,000 (depending on the location of the home) in equity may be protected under the generous new homestead exemption. However, special rules apply as explained in our article on the California homestead exemption published in the Los Angeles Lawyer Magazine.
Vehicles are protected up to $3,325 (combined, for all vehicles). Cal. Code Civ. Proc. 704.010
Household Furnishings, Apparel, Personal Effects
These items are exempt if they are “ordinarily and reasonably necessary to, and personally used or procured for use by, the judgment debtor and members of the judgment debtor’s family at the judgment debtor’s principal place of residence.” Cal. Code Civ. Proc. 704.020. However, if an item is not “ordinarily found in a household” or it has “extraordinary value,” it may not be exempt.
Materials Used for Repair or Improvement
Materials that are purchased in good faith to be used to repair, maintain, or improve a principal place of residence are exempt up to $3,500. Cal Code Civ. Proc. 704.030
Jewelry, Heirlooms, and Works of Art
Such items are exempt up to $8,725. Cal. Code Civ. Proc. 704.040
Health Aids and Prosthetic & Orthopedic Appliances
Health aids are exempt so long as they are “reasonably necessary to enable the judgment debtor or the spouse or a dependent of the judgment debtor to work or sustain health.” Cal. Code Civ. Proc. 704.050
Items Required for the Trade, Business, or Profession
Items such as “tools, implements, instruments, materials, uniforms, furnishings, books, equipment, one commercial motor vehicle, one vessel, and other personal property” are exempt up to $8,725 if they are “reasonably necessary to and actually used by the judgment debtor in the exercise of the trade, business, or profession by which the judgment debtor earns a livelihood.” Cal. Code Civ. Proc. 704.060. The exemption is twice that amount ($17,450) if both the debtor and the debtor’s spouse are in the same trade, business, or profession and require said items. This section also provides an exemption for a commercial motor vehicle in the amount of $4,850.
Debtors may exempt certain wages that were paid to him or her in the 30 days prior to the bankruptcy filing. Civ. Proc. Code § 704.070
$1,750 for single debtors, $2,600 for married debtors filing jointly. Cal. Code Civ. Proc. 704.080
Social Security Benefits
$3,500 for single debtors, $5,250 for married debtors filing jointly. Cal. Code Civ. Proc. 704.080
Unmatured life insurance policies are completely exempt. The loan value of such policies, however, is only exempt up to $13,975. Cal. Code Civ. Proc. 704.100
The 703 Exemptions (Wildcard Exemption) in California Bankruptcy
703 Exemptions, also known as “wildcard” exemptions, may be a better choice for those who are more interested in protecting personal property and who don’t own a home. “Wildcard” refers to the ability to protect various forms of property that may not be protected under the 704 exemptions.
Wildcard Exemption in California Bankruptcy
Anything that does not fit another exemption category or goes over the maximum exemption amount in that category may be exempted up to $1,550, plus any unused homestead exemption amount, adding up to $30,825 for single debtors as of 2021. Cal. Code Civ. Proc. 703.140(b)(5)
Exemption in homestead property is up to $29,275, though every dollar used on this exemption decreases the remaining available wildcard exemption. Cal. Code Civ. Proc. 703.140(b)(1)
Vehicles are protected up to $5,850 (combined, for one or more vehicles). Cal. Code Civ. Proc. 703.140(b)(2)
Household Furnishings, Goods, Misc.
Items such as “household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments” may be exempted up to $725. Cal. Code Civ. Proc. 703.140(b)(3)
Jewelry that is “held primarily for the personal, family, or household use” is protected up to $1,750. Cal. Code Civ. Proc. 703.140(b)(4)
Health Aids and Prosthetic & Orthopedic Appliances
Health aids that are professionally prescribed are completely exempt. Cal. Code Civ. Proc. 703.140(b)(9)
Tools, Books, and Implements of Trade
Such items are protected up to $8,725. Cal. Code Civ. Proc. 703.140(b)(6)
Federal nonbankruptcy exemptions allow for retirement savings accounts (such as a 401(k) or 403(b)) to be completely exempt and for IRAs and Roth IRA’s to be exempt up to $1,362,800.
Unemployment, veterans’ benefits, disability, workers’ compensation, crime victims’ reparation benefits, and Social Security benefits are completely exempt.
Unmatured life insurance policies (other than credit life insurance contacts) are completely exempt. However, “any accrued dividend or interest under, or loan value of, any unmatured life insurance contract” is only exempt up to $15,650. Cal. Code Civ. Proc. 703.140(b)(8)
Note that this list contains only the most common exemptions. There are many others not discussed in this article due to their uncommon use by debtors in California bankruptcies.
Note: Federal Exemptions are Not Available Given that California is an Opt-Out State
Note that California is an “opt-out” state, meaning that anyone filing for bankruptcy in California is restricted to using only the California bankruptcy exemptions. Luckily, California’s bankruptcy exemptions are overall more generous than federal bankruptcy exemptions. Federal bankruptcy exemptions are not available to those who file for bankruptcy in California; however, federal nonbankruptcy exemptions (that is, federal exemptions that exist outside of the Bankruptcy Code) may still be available to certain groups of people.
Contact Talkov Law’s Knowledgeable Bankruptcy Attorneys
Bankruptcy is a chance to start anew: a fresh start for anyone who may be in over their heads. The attorneys at Talkov Law understand that bankruptcy process can be confusing and grueling. We have provided this list of California’s bankruptcy exemption sets for you to review with an experienced bankruptcy attorney who can help you better understand your options. To speak with one of Talkov Law’s bankruptcy attorneys, call (844) 4-TALKOV (825568) or contact us online.
This blog post has been updated as of 07/30/21. Because the dollar amount of bankruptcy exemptions may change at any time, we cannot guarantee this information has been updated to accurately reflect the current exemption amount. Exemptions are extremely important in bankruptcy such that it crucial to have these matters reviewed by an experienced bankruptcy lawyer in California. Due to the damages that can result when an exemption is denied, this article is not intended for use by non-lawyers, bankruptcy petition prepares, self represented litigants or otherwise.