California Bankruptcy Exemptions Explained

**What Are The California Bankruptcy Exemptions **

The California bankruptcy exemptions are divided into two state systems: System 1 and System 2. Since California does not accept the federal bankruptcy exemptions, you must choose either System 1 or System 2 when filing for bankruptcy in California.

It is a common misconception that you have to give up all of your property when you file for bankruptcy.

In fact, most people who file get to keep all or most of their day-to-day property using the california bankruptcy exemptions or the federal exemptions.

State and federal bankruptcy exemptions are different categories of property that the government will let you keep after you file.

They are called exemptions because they “exempt” or “excuse” certain property from being taken.

Some states recognize both the federal and their state’s bankruptcy exemptions and allow you to choose between the two depending on what is best for your situation. Other states do not.

California does not recognize the federal bankruptcy exemptions. If you decide to file for bankruptcy, you have to follow California’s state rules that govern the process. Meaning, you must use the California bankruptcy exemptions if you decide to file.

There are the three main things to keep in mind about the California bankruptcy exemptions:

California does not allow for federal bankruptcy exemptions, but does allow for other federal nonbankruptcy exemptions. California doesn’t allow joint filers to use double exemptions California has two state exemption systems: System 1 and System 2

There are a few distinct features of the California bankruptcy exemptions. This article will help you understand some of the ways the California bankruptcy exemptions operate and the things to keep in mind when filing.

The Residency Requirement

First things first. . .

Before settling on California’s bankruptcy exemptions, it’s important to be sure that you meet the residency requirements.

california-bankruptcy-exemptions-residentcy-req

You are required to have lived in California for at least the past 2 years (720 days before filing) to use that state’s exemptions.

What if you haven’t lived in California for the past 2 years? Then, you use the bankruptcy exemptions from the state you resided in for the majority of the 6 month period prior to 2 years ago.

For example, I am filing for bankruptcy in New York today where I live. But until I moved to New York last year, I lived in Vermont for my entire life. When I file for bankruptcy, I need to use Vermont exemptions.

Now that you’ve figured out which state exemptions apply to you, let’s discuss how they might compare to the federal exemptions.

California Does Not Accept the Federal Bankruptcy Exemptions.

california-bankruptcy-exemptions-doubling Unlike other states, California does not allow you to choose between the state or federal bankruptcy exemptions.

Although you are limited to either System 1 or System 2, there are certain instances where you can claim other federal exemptions that aren’t related to the bankruptcy code. These are called the federal nonbankruptcy exemptions.

You can use the federal nonbankruptcy exemptions if you belong to a specific group of people or work in a particular profession. These exemptions can be applied if you have special circumstances with:

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

Some of the professions it applies to are:

It’s important to know whether or not these special cases apply to you. If you’re eligible, the federal nonbankruptcy exemptions can help you protect property that otherwise wouldn’t be protected under California bankruptcy exemptions.

California Does Not Allow Joint Filers to Claim Double Exemptions.

california-bankruptcy-exemptions (Keys)

At times, both the California bankruptcy exemptions and and federal exemptions have a maximum dollar amount attached to an exemption. This is the highest value of property that you can protect under that exemption.

If you’re filing jointly, the federal exemptions allow you to double those amounts. This means that each person or spouse is able to protect the amount allowed under the exemption.

This is not the case in California.

California does not let you double the amount you can protect under the California bankruptcy exemptions. If you’re filing jointly, all the property being claimed as exempt needs to fall within the amount allowed by the original exemption.

There are Two Types of California Bankruptcy Exemptions: System 1 and System 2

The biggest thing to consider when choosing between System 1 and System 2 is deciding what kind of property you want to protect.

System 1, also known as the “704 exemptions,” is generally the better fit if you own a home and have a lot of equity built up. The homestead exemption in System 1 has tiers that allow for significantly more equity to be protected than in System 2.

System 2, also known as the “703 exemptions,” is generally a better fit if you don’t own real property but, instead, have a good amount of personal property that you want to keep.

Exemptions:

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 ( at least one family member doesn’t have an interest in the homestead)

If 65 or older: $175,000 (or have a physical or mental disability)

If you’re at risk of a forced sale of your home : $175,000 *Note: you must be either: *55 +, single and earn under $25,000 per year, -or - *55+, married and earn under $35,000 per year)

System 2 (703 Exemptions)

$26,80 (in equity)

Motor Vehicles

Bankruptcy-exemptions (Car interior) This California bankruptcy exemption covers cars, mobile homes, etc

System 1 (704 exemptions) $3,050 (in equity)

If you’re 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 $3,050. If you’ve paid more than that on your car, it might not be protected when you file.

System 2 (703 Exemptions)

$5,350 (in equity) If you’re 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’ve paid more than that on your car, it might not be protected when you file.

Personal Property

Bankruptcy-Exemptions (Clothes Accesories) 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 $26,800
  • Burial plot up to $26,800 (instead of the homestead exemption)
  • Clothing, household goods, appliances, furnishings, animals, books, musical instruments and crops - up to $675 per item
  • Jewelry - up to $1,600

    Wages

    This California bankruptcy exemption covers the money you earn from work.

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 exemption]

Retirement & Pensions

The California bankruptcy bankruptcy exemption for insurance includes the money you set aside for later in life. System 1 (704 exemptions) Exempt:

  • 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) Exempt:
  • 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) Exempt:

  • 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 in order to be exempt. System 1 (704 exemptions) Exempt up to $8,00 (or $15,975 if used by both spouses in the same occupation). Includes:

  • Tools
  • Implements
  • materials,
  • books,
  • uniforms,
  • instruments,
  • one commercial vehicle,
  • equipment, and
  • furnishings System 2 (703 Exemptions) Exempt up to $8,00, Includes:
  • Tools,
  • books And
  • 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 $12,800
  • 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 $14,325

Alimony & Child Support

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

System 1 (704 exemptions) [No Exemption]

System 2 (703 Exemptions) Amount necessary for support

Misc (704)

This California bankruptcy exemption operates similarly to the Wildcard exemption in System 2. It is an important and useful resource for protection property that is either: 1) over the amount maximum of another exemption or 2) doesn’t quite fall under another exemption category.

System 1 (704 exemptions) Business or professional licenses Trust funds of inmates (up to $1,600) Property of business partnership System 2 (703 Exemptions) [No “Miscellaneous” exemption]

Although there isn’t a “Miscellaneous” exemption in System 2, it’s important to note that System 2’s Wildcard Exemption operates very similarly.

The Wildcard exemption is what you would assign to any property that you want to keep but doesn’t fall under any of the other available exemptions.

Wildcard (703)

This California bankruptcy exemption is an important and useful resource for protection property that is either: 1) over the amount maximum of another exemption or 2) doesn’t quite fall under another exemption category.

System 1 (704 exemptions) [No Exemption]

System 2 (703 Exemptions) If homestead exemption **is used:**

  • $1,425 plus any unused amount of burial or homestead exemption in any property If homestead exemption is **not used:**
  • $28,225 in total

Conclusion

When you’re filing for Chapter 7 bankruptcy, California does not give you the option to use the [federal bankruptcy exemptions] (https://www.nolo.com/legal-encyclopedia/federal-bankruptcy-exemptions-property.html). Assuming you meet the residency requirements, you are required to use California’s bankruptcy exemptions alone.

When thinking about how the exemptions can work for you, there are a few other things to keep in mind.

California does not allow for federal bankruptcy exemptions, but does allow for other federal nonbankruptcy exemptions. This is important to consider if you are included in the categories of professions and workers that receive additional exemptions.

California doesn’t allow joint filers to use double exemptions This is important to consider if you are married and want to know how much property you can protect. Some states allow married couples to each protect the maximum amount of property by doubling the exemption allowance. Although California will not let you double the exemptions, there are some that have increased allowances for joint filers.

There are Two Types of California Bankruptcy Exemptions: System 1 and System 2.** This is important to consider because you will need to pick between the system that lets you protect the most property. System 1 is generally better if you are a homeowner looking to keep your house. System 2 is generally a better fit if you don’t own a home but, instead, need to protect a significant amount of your personal property.

As you can see, when you’re filing for Chapter 7 bankruptcy, the California bankruptcy exemptions can help you keep most of the property that you own.

Chapter 7 bankruptcy is a powerful social safety net. By erasing your debts and using the property exemptions to protect your stuff, you will be well on your way to a fresh start.

Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.

To learn more, read our reviews from past clients, or read our press coverage.