Individual debtors (people) are allowed to exempt certain assets in bankruptcy from seizure and liquidation by the trustee. This is in contrast to corporations, which must surrender the equity of any property of value to the trustee.
Even though bankruptcy law is federal, each state sets its own exemptions for its citizens. A debtor who has lived in a state for two years or longer uses the exemptions of that state. Otherwise, the exemptions of the state where the debtor lived two years prior to the filing of the petition are used.
California has two sets of exemptions. One set is designed primarily to protect home equity - the "home equity" set of exemptions. The other set is essentially $30,825 worth of "wildcard" (protect anything you want) exemptions - the "wildcard" set of exemptions.
With the "home equity" set, a debtor may protect between $75,000 and $175,000 of equity in a home, depending on their circumstances. Other categories include $3,325 (only!) of equity in a car, $8,725 each for jewelry and tools of a trade, 75% of wages paid in the last 30 days, full protection for most household items, and an essentially unlimited amount for retirement benefits.
With the "wildcard" set, a debtor may protect $5,850 of equity in a car, $1,750 of jewelry, $8,725 for tools or books of a trade, $725 of value in any household item, retirement benefits "reasonably necessary" for support, and $30,825 to cover anything the debtor wishes, including items (like additional equity in a car) that may not be otherwise fully protected.
These days, with many homes still being "upside down," in that the balance(s) on the mortgages exceed the market value of the home, many debtors choose the "wildcard" set to gain greater flexibility in protecting their assets.
It is important to keep in mind when considering exemptions that only the debtor's equity in an asset needs to be exempted. For example, a $500,000 home with $500,000 of loans against it has no equity, and therefore nothing to exempt.
It is also important to know that the value used for personal property is quick-sale, or garage-sale, value. Non-exempt assets that the trustee might seize must be sold by the trustee. This involves the expenses of obtaining the asset, storing it, transporting it, protecting it, selling it, and accounting for it.
Further, the item is not polished up and sold at some local trustee goods store, but rather it is often disposed of in a wholesale manner. Because of this, and the fact that most consumer goods drop precipitously in value once purchased and/or used, a debtor should not use purchase price in valuing most assets, but the lower, garage-sale value for the item. Using too high a value will result in wasted exemptions, which may cause the loss of other property.
Another important consideration when applying exemptions to protect property, especially in cases with significant amounts of equity in assets, is to apply the exemptions strategically to discourage the trustee from seizing any of the items.
Some assets, such as cash, cost the trustee very little to obtain. Other assets, such as cars or houses, will likely involve substantial costs of selling and disposal. A mistake made in "exemption planning" may well cost a debtor much more than the fee paid to an experienced attorney to handle the case.
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