That is understandable, certainly. It is important to be prepared, and California has one of the more complicated bankruptcy exemption regimes in a Chapter 7
filing (the type of bankruptcy where debt is "discharged" or wiped out completely). Brace yourself, this is a little bit of a lengthy answer....
Before looking at how to protect assets in a particular type of bankruptcy, it is worth looking at how to qualify for, and the merits of, the two most common types of consumer bankruptcy, chapter 7 and chapter 13.
To qualify for a chapter 7 bankruptcy, in which all debt (with a few exceptions) is wiped out, your household income must be less than the median income for your household size in California. For example, a 2 person household in California has a median income of aproximately $63,000. So, with a household income of less than that, an individual qualifies for chapter 7 bankruptcy. The other way to qualify for a chapter 7 bankruptcy, if the household income is above the median income, is to pass the "means test
", which is a formula that compares the household income to the household's necessary expenses.
The advantage of chapter 7 is that it completely wipes out most debt (generally excluding tax debt, child support, and student loan debt). The disadvantage, if you have assets of value, such as a home, is that the trustee
has a right to seize any non-exempt assets and sell them to pay some of the creditors before the rest of the debt is discharged. California has two "Exemption" sets and a bankruptcy debtor has to choose between them. The first is focused on the homestead. A single person can exempt up to $75,000 of equity
in the home, a family up to $100,000 of equity. In addition, up to $2725 in a motor vehicle, all tax exempt retirement funds (including 401ks). This option does not include an exemption for cash in the bank specifically, although it does include 75 % of any wages
paid within 30 days of the filing of the bankruptcy petition
The second option focuses instead on personal property, including cash in the bank. With this option, the debtor (person filing for bankruptcy), may protect up to $22,075 in a homestead (real estate the individual lives in), and then up to $15,000 cash in the bank or any other personal property. The debtor may also choose to use any portion of the homestead exemption not used for a home on cash in the bank or other personal property. The motor vehicle exemption is also higher at $4800, and this option also includes any funds in a tax exempt retirement account.
So, as you can see, the key to preparing for a chapter 7 in part rests on figuring out where you have more exposed equity, either in cash/personal property or in a home, that way you will be better prepared to choose the exemption option that is best for you.
The other bankruptcy option is to file a chapter 13, in which the debtor enters in to a court sanctioned repayment plan
, often paying significantly less than the actual amount owed. The big disadvantage of this option is that the debt does have to be repaid, at least to some degree. The big advantage, however, is that there is no risk to real or personal property. Because the debt is being paid, generally a home, vehicles, cash in the bank, etc, are not at risk for seizure. Chapter 13 is also available when someone does not qualify for chapter 7 because the household income is too high.
One thing it is important to keep in mind that there will inevitably be temptation to try and avoid seizure of property that is not exempt by transferring title to someone else. It is important to know that if this is done too close to the bankruptcy it can be considered fraud and at best be voided, and at worse bring about fines and sanctions.
Under section 548 of the Bankruptcy Code
, any transfer of property made within 2 years of the date of filing intended to defraud or hinder the trustee's ability to seize property that would otherwise not have been exempt. What consitutes fraud is a fact specific analysis, and it is consequently best to avoid transfers of property when looking at bankruptcy just to make sure that fraud is not raised by the trustee.
Prior to filing for bankruptcy, and because California is a relatively complicated state when it comes to exempt assets in bankruptcy, it is important to sit down in person with a bankruptcy attorney and review your options. Once you are ready to consider bankruptcy (should it become necessary), the state bar association of California has a referral service available at:
I hope this information is helpful, and please do not hesitate to ask if you need any additional information, I have not addressed something that you needed answered, or you need clarification of anything I have said (never be afraid to ask for clarification!).
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