Do You Lose Everything If You Declare Bankruptcy?

Frequently I get questions from clients considering bankruptcy, who ask, “Can I keep my car? What about my house?” They have the impression that by filing for bankruptcy, they are guaranteed to lose everything they have.

This is not true.

Federal and state laws exist to protect certain assets and properties from creditors. Whatever type of bankruptcy you file, the court will allow you to invoke these provisions to allow you to keep at least some of what you own.

Under a Chapter 7 bankruptcy, these exemptions will determine whether what you own can be liquidated and paid to your various creditors. The Trustee handling the bankruptcy has the right to take possession of any assets not protected by an exemption—such as cash in an account or an extra car that’s not protected—and, after the sale of those assets, divide up the proceeds among creditors. In a Chapter 13 bankruptcy proceeding, there generally is no liquidation of assets; however, those items that do not fall under an allowable exemption may play a role in determining how much the Trustee is going to require to be paid to your creditors (“liquidation analysis”).

While in several states across the U.S., debtors can choose between federal and state exemptions, here in California, residents are not permitted to claim federal exemptions; they are limited to certain state exemptions. On the plus side, there are two types of state exemptions to choose from, as defined by the California Code of Civil Procedure: those under (1) Section 703 and (2) those under Section 704.

704 Exemptions

Under the 704 Homestead Exemption, a person declaring bankruptcy can protect a certain amount of equity deriving from their principal residence (such as house, mobile home, condominium, etc.). These current amounts include:

  •  Up to $75,000 if you are single and not disabled
  • Up to $100,000 for a family
  • Up to $175,000 if you are 65 or older or physically or mentally disabled
  • Up to $175,000 if creditors want to force the selling of your home and you’re either 55 or older; single and earn less than $25,000 a year; or 55 or older, married and earn less than $35,000 a year

Under the 704 Vehicle Exemption, a person can retain $2,900 worth of equity in their car, truck, motorcycle or other vehicle.

Other 704 exemptions include equity in wages, retirement and pensions, public benefits, tools of the trade and insurance.

703 Exemptions

 Under this system, exemptions only apply in bankruptcy—meaning, you’re not allowed to use them to guard your property against creditors outside of bankruptcy (e.g. defending against bank levies, other attempts at attachment of assets). So while the 703 exemptions generally provide more favorable protection than the 704 exemptions with respect to personal property that most people have (e.g. cars, furniture and furnishings, etc.), some California courts may not permit you to make use of them.

The 703 Vehicle Exemption allows the qualified individual to exempt up to $5,100 of equity in their motor vehicle. Additionally, under 703, there is a “wild-card” exemption of $25,575 for real or personal property that is not protected under any other 703 exemption.

 Selecting the right exemptions

 When a client seeks assistance in determining bankruptcy exemptions, the first thing we determine is if he or she has equity in assets such as a house or a car. If there is no equity – meaning the debt against the asset loan is more than that property’s fair market value – then there is a good chance the client will be able to keep the asset through the bankruptcy as long as:

  • Maintaining that asset does not constitute a continuing undue hardship, i.e., extreme monthly payments well above their ability to pay;
  • They continue to make the required payments on the secured debt; and
  • In most cases, the debtor is willing to sign a Reaffirmation Agreement with the creditor, which permits the debt to pass undischarged through the bankruptcy.

If a person does have equity in an asset, we explore the appropriate bankruptcy exemptions. Many times the exemptions line up and completely protect a client’s property. However, if the applicable exemption does not fully cover the equity of the asset, that property may be subject to liquidation (surrendering it to the Trustee to be liquidated). So, for example, if you’ve got $30,000 car with no loan against it, the trustee can sell it, give you $5,100 (under the 703 Vehicle Exemption) and use the rest of the net proceeds to pay off , at least in part, your debts.

Are you in need of legal counseling for bankruptcy or debt issues or have any questions regarding the above? The Law Offices of Ian S. Topf offer free consultation in a variety of issues, ranging from bankruptcy, family law and estate planning to traffic violations and landlord/tenant disputes.