**Please note that this blog article is not to be construed as legal advice, nor does it create an attorney / client relationship. Please consult an attorney or contact our office should you desire a consultation**
Here in California, when preparing your bankruptcy paperwork, one of the critical components of your paperwork includes your “Schedules”. These Schedules are, as I like to call them, the heartbeat of your bankruptcy as in this set of papers you disclose your income, expenses, debt, and property. One of the most important Schedules is Schedule C in which you protect or “exempt” your real estate and personal property. By properly protecting your property, you can spare them from being liquidated by the presiding Trustee in your case.
What Does It Mean To “Exempt” My Property?
To “Exempt” in bankruptcy, means that you are using applicable statutes (laws) to protect your property. Contrary to the notion that if you file bankruptcy you’ll have everything taken from you and kicked out into the street shirtless, the majority of people filing Chapter 7 keep everything they have. The laws in California are quite generous in allowing you to protect or “exempt” a decent amount of your property thereby allowing you to either keep your home and certainly keep your shirt so that when your bankruptcy concludes, you can proceed forward with rebuilding your life and your finances without having to start from zero.
California Has Two Sets of Exemption Laws: 703 and 704
In California, there are two sets of laws you can use to protect your property, whether you’re protecting your kitchen appliances and your cars or your house. The first set is referred to as the 703 exemptions and the other, 704 exemptions.
Before you decide which one to use, please remember that you can only use one or the other. You cannot mix and mingle. If you see certain dollar amounts that are favorable to you for certain items under the 704 list, and others that are more favorable to you for other items under the 703 list, you cannot use some 704 and other 703 exemptions. Once you start using 704s you can only use other 704 exemptions to protect your property. If you start using 703s on the other hand you should only use 703s to protect your belongings.
As an example, let’s say you have $4,500 in jewelry that you’d like to protect. You look over the exemption lists and see that under 703.140(b)(4) the statute allows you exempt or protect up to a maximum of only $1,600 worth of your jewelry. Looking at the 704 exemptions however, you realize that 704.040 allows you to protect $8,000 worth of jewelry. Wanting to save your jewelry, you decide to use the 704.040 statute to fully protect your $4,500 of jewelry. (For simplifying the example, we’ll ignore the 703 wildcard and how that works for the moment).
But now you want to protect your fully paid-off car. Your car is valued at $5,000. The 703.140(b)(2) law allows you to protect up to $5,350 of your car, while the 704.010 statute limits your car to only $3,050. Fearing you might lose your car, you now choose the 703 statute to protect your car. Can you do this?
NO! You cannot simultaneously use 703 and 704 exemptions. Once you start using one list you have to stick with it. In reality in both scenarios, the individual could have use 703s to fully protect the jewelry and the car using the 703.140(b)(5) “wildcard” exemption, however we’ll discuss this particular exemption in another article.
Which Exemption Set Should I Use – 703 or 704?
Which exemption list you use depends exclusively on your particular situation in terms of what assets you have, the fair market value of those assets, and your equity in those assets. Generally speaking, the 704 exemptions are geared towards people that have a material amount of equity in their home, but need to file a bankruptcy. It allows them to keep their home along with a decent amount of equity in it, while wiping out their debt. The trade-off is that it allows less protection for other certain types of property and money you may have. The majority of people use 703s if they don’t have any real estate or a minimal amount of equity in their home.
If you have a significant amount of equity in your home and are unsure if you can protect your home within the 704 exemption allowances, you should certain consult an attorney (hopefully me!) to go over your figures. The last thing you want is to risk having your house liquidated in a bankruptcy.
Also bear in mind the amounts you can exempt change periodically. In the examples above, these numbers were correct as of August 2017. If you are preparing your bankruptcy on your own, remember to do your research and look up the current amounts as they may have changed.
Another pitfall that people make is they double up on exemptions if they are filing jointly, meaning if they are filing their bankruptcy with a spouse. In California, the exemption limits are for both you and your spouse so please do not think that you can multiply your exemption amounts by two since there are two of you.
Good luck with your bankruptcy and if you have any questions feel free to leave a comment. If you’re thinking about filing bankruptcy, don’t leave it to chance. I offer a free consultation and if retained as your attorney, I will help you seamlessly through the process from A through Z to ensure you get your discharge. In any event, it is highly recommended you speak to a bankruptcy professional if you are in need of help