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Will All My Assets Be Lost in a Chapter 7 Bankruptcy?


Chapter 7 bankruptcy is known as the "straight" or "liquidation" bankruptcy – it is designed to give debtors a fresh start by wiping out most types of debts. In return, the bankruptcy trustee liquidates the debtor's nonexempt property in order to partially repay the creditors. But, most Chapter 7 debtors have little to no property that is exempt. Most Chapter 7 bankruptcies are "no asset" bankruptcies and filers end up keeping most or all of their property.

What exactly are bankruptcy exemptions? Exemptions are a legal mechanism available to bankruptcy filers. An "exemption" allows a debtor to keep certain assets after the bankruptcy is filed; exempt property and assets cannot be sold to satisfy the debts of the person who has filed for bankruptcy.

California's Bankruptcy Exemptions

Some states offer debtors a choice between state and federal bankruptcy exemptions, California is not one of them. In California, debtors must use the state's exemptions, however, debtors can choose between two sets of the state's exemptions: these are referred to as System 1 and System 2.

Each system protects a certain amount of property and assets when you file Chapter 7 bankruptcy, but your choice of system will depend on:

  • The types of assets you own
  • The value of your property
  • Your individual circumstances

While you have a choice between System 1 and System 2, you cannot mix and match exemptions from the two systems, you will have to choose one and this decision will be made based on which system allows you to keep more property.

Debtors usually choose System 1 over System 2 when they have significant equity in their primary residence. While both systems have a homestead exemption to protect home equity, System 1 has a more generous homestead exemption than System 2.

System 2 allows you to keep more personal property such as money in your bank account. This means that System 1 is favorable for those who have a significant amount of home equity, but little personal property. If you do have a significant amount of personal property, be sure to compare the advantages of both systems to decide which one is right for you.

Examples of System 1 exemptions:

  • Homestead - $35,000
  • Motor vehicle - $2,900
  • Jewelry, heirlooms and art - $7,625
  • Retirement funds
  • Public benefits
  • Tools of the trade – up to $15,250

Examples of System 2 exemptions:

  • Homestead - $25,575
  • Motor vehicle - $5,100
  • Jewelry – up to $1,525
  • Unemployment, Social Security, veterans benefits, public assistance
  • Tools of the trade – up to $7,625
  • Alimony and child support

In California, the exemption amounts are adjusted every three years by the California Judicial Council. The next update will be on April 1, 2016. For further information about California's exemptions, contact a Fresno bankruptcy attorney from Arnold Law Group, APC. In a case evaluation, we would be glad to determine which exemptions would be the most suitable in your particular situation.

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