What Property Exemptions Are Allowed Under the Bankruptcy Code in California?
Let’s first consider why we have exemptions in the first place. For the uninitiated, the term homestead exemption may not mean much, but it exists both inside and outside of the bankruptcy field. Outside of bankruptcy, the idea behind exemptions is that if somebody successfully sues you, you shouldn’t end up living under a bridge with just the clothes on your back. Exemptions are meant to protect some of your possessions so that you get to keep them after a judgment has been entered against you. While the creditor can collect against many of your belongings, it cannot take everything and strip you bare.
There are a couple of reasons why we have these exemptions in bankruptcy.
The first reason is really the foundation for the others. In a Chapter 7 bankruptcy, your dischargeable debts just go away without you paying a dime to your creditors. From the creditors’ perspective, that’s a pretty heavy hit. As a result, there are some limitations. One of the limitations is on what you get to keep. While you do get to retain some stuff, there’s at least the potential to lose assets in a Chapter 7. When we prepare a set of Chapter 7 bankruptcy papers for you, we include a complete listing of everything you own or have an interest in; those assets then get divided into two categories: exempt and nonexempt. The exempt stuff will be yours to keep, while the nonexempt stuff will be fair game for the Chapter 7 Trustee appointed to your case to seize and liquidate, and distribute the proceeds to your creditors.
How we determine whether something’s exempt or nonexempt? The Bankruptcy Code is a federal statute with its own exemption table in Section 522, but it also permits states to use their own state tables if they’d like. California’s unique among the states in that we don’t use the federal table at all, and we have two state exemption tables: One for homeowners with equity in their principal residence, and the other (our so-called renter’s table) for everybody else. However, homeowners can still use the renter’s table if they wish. Each table has a list of various categories of possessions. Some categories have dollar limits, and others have no dollar limits. Our goal, as we prepare your petition, is to list your assets and stick them into these categories so that they are protected from the depredations of the Chapter 7 Trustee.
Let’s return to the other reasons for this exemption process, which can be found in the other two chapters under which most individuals and married couples file for bankruptcy protection: Chapters 11 and 13. (There’s also Chapter 12 for family farmers and commercial fishing operations, which we rarely see in this part of California.) In those chapters, we propose a plan of reorganization that will repay creditors over time. While there is some conceptual overlap between Chapters 11 and 13, there are also fundamental differences that are a little bit beyond the scope of what we’re discussing here.
One of the provisions in both chapters that the plan must satisfy the Chapter 7 liquidation requirement — unless creditors accept some other treatment. Under this requirement the creditors must get paid at the very least over the life of the plan what they would have gotten if you had done a Chapter 7.
Some clients are a bit puzzled when I first state the Chapter 7 liquidation requirement. They reason that if debts just go away in Chapter 7, the creditors get nothing. That is correct for most Chapter 7s. We call those cases no-asset cases. In some Chapter 7s, however, the Chapter 7 Trustee takes any nonexempt assets, liquidates them, and distributes the money to creditors.
Therefore, even though you keep your assets in a Chapter 11 or 13, we still go through the exercise of listing all of your possessions and dividing them into exempt and nonexempt categories because the dollar value of the nonexempt pile is what the creditors would have gotten if you had done a Chapter 7 liquidation. That amount is the minimum that you can get away with repaying the creditors over the life of a plan, so we use it in determining what the monthly plan payments will be.
For more information on Homestead Exemption in California, a free 20 minute consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.
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