The general goal of bankruptcy is to eliminate debt and provide a "fresh start" to those who have become overwhelmed by financial obligations. Many people erroneously believe that filing for bankruptcy means you lose everything but that would defeat the purpose of bankruptcy. Without a home, vehicle, or household goods and clothing it would be almost impossible to rebuild your life. Congress recognizes that people who are forced to file for bankruptcy relief need certain assets in order to maintain a minimal standard of living and reestablish themselves as a productive member of society. The federal government, as well as each state legislature, has created a set of exemptions which allow certain property (or more accurately, equity in property) to be protected from creditors and the trustee. The Bankruptcy Code allows states to opt out of the federal list of protected assets and create their own set of exemptions. California has done just that, and fortunately has provided a liberal set of exemptions so that debtors keep most, if not all, of their necessary belongings. So you may be relieved to know that bankruptcy does not strip debtors of all their assets, in fact, almost all of our clients keep all of their assets.
When you file for bankruptcy you are required to list all of your assets and the value of those assets. In addition, the bankruptcy code requires that to choose between two sets of exemptions that are available to protect those assets. In California, one set of exemptions is designed to allow you to protect significant equity in your home. Equity is the difference between the value of your home and what you owe against the home. In other words, what you would actually put in your pocket if you were to sell your home and pay off the mortgage. Under the current economic climate in California this has not been a problem lately, however, in an appreciating real estate market this becomes very important. If, on the other hand, you are one of the millions of Americans that does not own real estate, or if the balance of your mortgage(s) exceeds the value of your home, you do not need to worry about exempting your home. The other set of exemptions is designed for those who do not own a home or a home with equity but may have other assets such as bank accounts, CDs, whole life insurance policies with cash surrender value, Judgments or claims against a third party or who own vehicles. Many people often think they don't have to list assets that are paid off. The different exemption schemes and deciding which one to use can be complicated so it is best to seek the advice of an attorney specializing in consumer bankruptcy. If you make a mistake and choose the wrong exemption it could seriously jeopardize your ability to keep your assets.
While it is rare, if you do have non-exempt assets (assets that are not protected by statute), the Trustee assigned to your case may sell them for the benefit of your creditors. By consulting an experienced bankruptcy attorney you can determine if you have any non-exempt assets and what can be done to protect them.
Homestead Exemption
The homestead exemption allows you to protect equity in your home. As discussed above, equity is the difference between the value of your home and the amount you owe the bank. In California, you can protect between $75,000 and $175,000 of equity depending on various circumstances such as marital status, number of minor dependents, age, medical condition, etc). Certain exceptions apply to newly acquired homes and homes that were purchased with equity from the sale of a prior home.
Automobiles
As mentioned above, in California there are two sets of exemptions. If you have to use the set of exemptions to protect equity in your residence, you are limited to $2,725 of equity in vehicles. However, this is usually not a problem because most vehicles have no equity do to large automobile loans. If you do not have equity in a home, you are permitted up to $3,525 of equity in a vehicle. In the case of families with multiple vehicles, California also has a wildcard exemption which allows you to protect up to $23,250 in miscellaneous assets, including vehicles. But be careful, you must use the correct set of exemptions to get the wildcard and the wildcard is not available if you have to protect significant equity in your home.
Household Items
In California all household goods, furnishings, appliances, electronics and personal clothing and effects are protected, unless you are Donald Trump and your dining table is made of gold.
Retirement Assets
If your retirement account is ERISA qualified it is exempt and safe in a bankruptcy case. Most retirement accounts including IRA's, 401(k)'s, pensions, annuities, and stock bonus plans are exempt.
If you are contemplating bankruptcy it is recommended you speak to an attorney. Proper bankruptcy planning and asset protection are critical to a successful bankruptcy case. A certified bankruptcy attorney will be able to advise you on the best asset protection strategy and avoid having you commit fraud. We have seen lots people attempt to file bankruptcy without an attorney, or with an inexperienced attorney, only to discover they are losing one or more assets. Do not let this happen to you.
