California's Two Bankruptcy Exemption Systems

California Bankruptcy Exemptions

California Has Two Sets of Exemption Laws

Although bankruptcy law is federal, property rights are determined under state laws. California has its own laws, California Bankruptcy Exemptions, governing how much property debtors can shield from their creditors both inside and outside of Chapter 7 or Chapter 13 bankruptcy. These “exemption” laws complicate California Bankruptcy for debtors. Firstly, California is an “opt-out” state, meaning federal exemptions are not available. Secondly, California has two sets of bankruptcy exemptions laws. So, if you have lived in California for more than 2 years, you must choose between the exemptions outlined in sections 703 or 704 of the California Code of Civil Procedure.

Some Filers are Eligible for Federal Nonbankruptcy Exemptions

California does not allow bankruptcy filers to invoke federal bankruptcy exemptions. You must use one of California’s bankruptcy exemptions laws. However, there are other federal non-bankruptcy exemptions that you can claim. These exemptions pertain to specific situations and groups of people or employees of certain professions. If you qualify for these exemptions, they can help you protect property that otherwise would not be protected using just the California bankruptcy exemptions.

Some of the situations and circumstances where these exemptions can be applied include:

  • Retirement benefits
  • Death or disability benefits
  • Survivor’s benefits

If you belong to one of the following groups, you may be able to apply the federal nonbankruptcy exemptions:

  • Military service members
  • Government employees
  • Seamen
  • Railroad Workers
  • Individuals who receive Social Security

California Does Not Allow Joint Filers to Claim Double Exemptions

Unfortunately, the state of California significantly penalizes married debtors in terms of what assets they are allowed to keep. Some of the California bankruptcy exemptions have a maximum dollar amount attached to them. California does not allow joint filers to double these amounts – a married couple can only protect half the property that 2 unmarried individuals could protect! This contrasts with other states where federal exemptions are allowed. Joint filers in those states can double federal exemptions that have a maximum dollar amount attached. In California, if you are filing for bankruptcy jointly, all the property being claimed as exempt needs to fall within the original amount allowed by the exemption.

Using California Bankruptcy Exemptions Has a Residency Requirement

To use the California bankruptcy exemptions, you must have lived in California for at least the past two years. If you have not lived in California for the past two years, then you must use the bankruptcy exemption laws from the state you resided in for the majority of the 6-month period prior to two years ago.

California’s Bankruptcy Exemption Systems

California’s two bankruptcy exemption systems differ by the degree they protect different types of property.

  • System 1: 704 Exemptions
    This system is usually a better fit if you own your home and have built up equity. The tiers in this system allow for significantly more equity to be protected than using System 2.
  • System 2: 703 Exemptions
    This system is usually a better fit if you do not own a home or other real property but have a lot of personal property you want to keep.

Homestead

This California bankruptcy exemption is important for homeowners. It covers real property such as family homes, co-ops, mobile homes, burial plots, etc.

  • System 1 (704 exemptions)
    • If single: Up to $75,000 (in equity)
    • If family$100,000
    • If 65 or older, or has a disability that prevents earning income, or 55 or older and on limited income$175,000
  • System 2 (703 Exemptions)
    • $29,275 (in equity)

Motor Vehicles

This California bankruptcy exemption covers cars, mobile homes, etc.

  • System 1 (704 exemptions)
    • If you are up to date on your payments, there is a possibility that California’s System 1 motor vehicle exemption can help you keep your car during Chapter 7. This is only allowed if your payments have made up less than $3,500. If you have paid more than that on your car, it might not be protected when you file.
  • System 2 (703 Exemptions)
    • $5,850 (in equity)
    • If you are up to date on your payments, there is a possibility that California’s System 2 motor vehicle exemption can help you keep your car during Chapter 7. This is only allowed if your payments have made up less than $5,350. If you have paid more than that on your car, it might not be protected when you file.

Personal Property

This California bankruptcy exemption covers most of your day-to-day items. This likely includes items like clothing, appliances, animals, household goods, electronics, etc.

  • System 1 (704 exemptions)
    • Exempt:
      • Household items and personal effects
      • Cemetery and burial plot
      • Health aids
      • Personal injury and wrongful death recovery needed for support
    • Exempt up to a certain amount:
      • Jewelry, heirlooms and works of art - up to $8,000
      • Bank deposits from Social Security payments up to:
        • $3,200 for a single payee
        • $4,800 for husband and wife payees
        • unlimited if funds are not commingled
        • Bank deposits from other public benefit payments up to $1,600 (if single); $2,375 (for husband and wife filing jointly)
        • Residential building materials to repair or improve home - up to $3,200
  • System 2 (703 Exemptions)
    • Exempt:
      • Health aids
      • Wrongful death recoveries needed for support
    • Exempt up to a certain amount:
      • Personal injury recoveries - up to $29,275
      • Clothing, household goods, appliances, furnishings, animals, books, musical instruments, and crops - up to $600 per item
      • Jewelry - up to $1,750

Wages

  • System 1 (704 exemptions)
    • 75% of wages (must have been paid to you within 30 days prior to filing bankruptcy)
    • Public employee vacation credits (at least 75% if receiving installment payments)
  • System 2 (703 Exemptions)
    • No Exemptions (except for the “wildcard” – see below)

Retirement & Pensions

The California bankruptcy exemption for insurance includes the money you set aside for later in life.

  • System 1 (704 exemptions)
    • Tax exempt retirement accounts including: 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined benefit plans)
    • IRAS and Roth IRAs (limits apply. This amount is set by federal law. See the Federal Bankruptcy Exemptions for updates on this dollar amount.
    • Public retirement benefits
    • Private retirement plans and benefits, including: IRA, Keogh
    • Public employees
    • County employees
    • County peace officers
    • County fire fighters
  • System 2 (703 Exemptions)
    • Tax exempt retirement accounts including: 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined benefit plans)
    • ERISA: qualified pension, annuities, and benefits necessary for support.

Public Benefits

The California bankruptcy exemption for public benefits covers money that you receive from government. These are things such as Social Security, unemployment, veteran’s benefits, etc.

  • System 1 (704 exemptions)
    • Unemployment and disability benefits
    • Union benefits due to labor disputes
    • Workers’ compensation benefits
    • Public assistance benefits
    • Relocation benefits
    • Student financial aid
  • System 2 (703 Exemptions)
    • Exempt:
      • Unemployment compensation
      • Social Security
      • Veterans’ benefits
      • Public assistance
      • Crime victims’ reparation benefits

Tools of Trade

The California bankruptcy exemption for tools of trade covers equipment that you need for your business or livelihood. This could include tools, factory equipment, and business vehicles. The item must be necessary to your specific trade or job to be exempt.

  • System 1 (704 exemptions)
    • Exempt up to $8,725 (or $17,450 if used by both spouses). Includes:
      • Tools
      • Implements
      • materials
      • books
      • uniforms
      • instruments
      • one commercial vehicle
      • equipment
      • furnishings
  • System 2 (703 Exemptions)
    • Exempt up to $8,725 Includes:
      • Tools
      • books
      • Implements of trade

Insurance

The California bankruptcy exemption for insurance includes different types of insurance such as life and disability.

  • System 1 (704 exemptions)
    • Exempt:
      • Matured life insurance benefits needed for support
      • Disability or health insurance benefits
      • Fidelity bonds
      • Life insurance proceeds if policy prohibits use to pay creditors
    • Exempt up to a certain amount:
      • Unmatured life insurance policy — up to $27,950
      • Homeowners’ insurance proceeds for six months after received — up the to amount of homestead exemption
  • System 2 (703 Exemptions)
    • Exempt:
      • Unmatured life insurance policy, other than credit
      • Disability benefits
      • Loss of future earnings payments needed for support
    • Exempt up to a certain amount:
      • Unmatured life insurance accrued interest, dividends, loan, cash or surrender value — up to $15,650

Alimony & Child Support

This California bankruptcy exemption covers the amount that you receive for alimony or child support from a former partner or spouse.

  • System 1 (704 exemptions)
    • No Exceptions
  • System 2 (703 Exemptions)
    • Amount necessary for support

Miscellaneous (704)

This important California bankruptcy exemption is a useful resource for protection of property that is either over the maximum amount allowed by another exemption or does not quite fall under any of the other exemption categories.

  • System 1 (704 exemptions)
    • Business or professional licenses
    • Trust funds of inmates (up to $3,500)
    • Property of business partnership
  • System 2 (703 Exemptions)
    • No “Miscellaneous” exemption
    • Although System 2 does not include a Miscellaneous exemption, its Wildcard exemption operates very similarly. If you have property that you want to keep, the Wildcard exemption is available if the property does not fall under any of the other exemption categories.

Wildcard (703)

This important California bankruptcy exemption is a useful resource for protection of property that is either over the maximum amount allowed by another exemption or does not quite fall under any of the other exemption categories.

  • System 1 (704 exemptions)
    • No Wildcard
  • System 2 (703 Exemptions)
    • $1,550 plus any unused amount of burial or homestead exemption in any property, for a total of up to $30,825.

Need Help Understanding California Bankruptcy Exemptions?

If you think you are facing bankruptcy and do not understand what property you will be allowed to protect and keep, it is a good idea to talk to a bankruptcy attorney. Call (619) 678-1134 to schedule your initial consultation with San Diego bankruptcy attorney Chris Bush.