For anyone considering filing, you are likely wondering what property I keep in bankruptcy, and what can be sold to pay creditors.
In bankruptcy, there are certain assets that are protected. Such assets are described as “exempt.” The exemption scheme is designed to ensure individuals are not left destitute as a result of filing bankruptcy. (Note: This article considers the impact of the Califoria exemption scheme only).
Common Exemptions – Property I Keep in Bankruptcy
There are all sorts of exemptions that are available to specific categories of assets. If you own a home (and there is equity which you want to protect), then a homestead exemption is available for that purpose. The amount of this available exemption can range from $75,000 to $175,000*, depending on a series of criteria. Other common exemptions are also available for vehicles, IRAs, jewelry, household goods and furnishings, tools used in a trade, and certain business assets. If a debtor has no home equity to protect, then there is also a general exemption, called the “wildcard exemption.” As the name implies, the wildcard exemption can apply towards any type of property you own. As of the writing of this article, the Wildcard Exemption was $28,225,* but adjusts periodically.
How Exemptions Work in Chapter 7
In a chapter 7, any fully exempt assets cannot be sold by the chapter 7 trustee. If an asset is partially covered by an exemption however, then there is a possibility the trustee may attempt to sell the asset. Once sold, the trustee would retain the non-exempt portion of funds for distribution to creditors, while returning the exempt portion to the debtor. In such a situation, the Debtor may also offer a compromise payment to the trustee that essentially buys out the non-exempt portion of the asset.
How Exemptions Work in Chapter 13
A chapter 13 differs from a chapter 7, in that a debtor is permitted to keep all of his or her assets, but must make regular monthly payments in order to distribute some percentage on creditors’ claims. Exemptions help establish what that percentage needs to be. Because a debtor must always pay to creditors more in chapter 13 than they would receive in a chapter 7 liquidation, exemptions establish which assets would not be part of that hypothetical liquidation. In this way, the greater the amount of debtor’s exemptions, the lower the threshold percentage that needs be paid to creditors in a chapter 13.**
* Note 1: California’s exemptions are periodically adjusted by small amounts, so the figures reflected here may not reflect current exemption limits as time passes. As of December 14, 2016, these figures are accurate. But you can find a complete, up-to-date list of available CA Exemptions through the California Judicial Counsel website.
** Note 2: Exemptions are only part of the story when considering how much a debtor must pay out in chapter 13. The debtors disposable income also impacts this analysis. In short, if a debtor makes substantial income, then this could also require the debtor to pay more to creditors through his/her chapter 13 plan.