exemptions Archives - Northern California Bankruptcy Lawyer

New California Bankruptcy Exemptions

Californians filing bankruptcy got an increase in the exemptions that protect their assets on April 1, 2019.

Every three years, the dollar amounts are adjusted for changes in the cost of living.

Californians don’t get to protect possessions under the Bankruptcy Code’s exemptions. Instead, a California resident who files bankruptcy must use California exemption law. That’s the case even though bankruptcy is governed by federal law.

Don’t shed a tear for the bankruptcy exemptions: the state exemptions are arguably better.

You have a choice of two exemption systems. One choice is the standard California state law exemptions found in Code of Civil Procedure 704. These are the exemptions applicable in state law collections as well as bankruptcy.

The second choice, appealing to those without significant equity in their home, is the California bankruptcy exemptions found at CCP 703.140(b).

What do debtors get to keep

Here’s the new list of increasedCalifornia bankruptcy exemptions:

Principal residence	$29,275
Vehicles	$5,860
Household goods per item	$725
Jewelry	$1,750
Grubstake	$1,550
Business assets	$8,725
Loan value of life insurance	$15,650
Personal injury claims	$29,275
Other misc. exemptions	703.140

Californians, because they are required to choose one state exemption system or the other rather than the federal bankruptcy exemptions, can also use the federal list of non bankruptcy exemptions.

Bankruptcy wild card exemption

The trickiest part of the California bankruptcy exemptions is what’s called the “wild card”. (It’s also called the “grubstake”.) When 703.140(b)(1) and (b)(5) are added together, the debtor can protect $30,825 of equity in any asset or combination of assets. That’s the wild card.

The wild card amount can be parceled out to protect some cash in a bank account; some equity in a vehicle that exceeds the car exemption; stock; a business or whatever else you have.

The point is that the exemption isn’t restricted to a certain kind of property. It can be used to protect anything.

How exemptions work

Exemptions protect the specified amount of equity in an asset.

If it’s a house, the exemption protects a certain amount of value in the property that exceeds the liens on the property. It doesn’t matter if the value of the house is $200,000 or $1,200,000. The exemption protects the specified amount of equity in the house.

If there is equity in a house over and above the total of liens and the homestead, a Chapter 7 trustee can sell the house and give the debtor the homestead exemption in cash.

That doesn’t happen very often. Because, there has to be enough equity to pay the exemption, the costs of sale, any capital gains taxes and the trustee’s commission before the sale benefits creditors.

More about secret exemptions

If neither California exemption system adequately protects your assets, consider Chapter 13.

Exemptions in Chapter 13

Debts of spouses

Wild card:

Image courtesy of Flickr and k2d2vaca.

California Homestead Works In Other States, Too

By Cathy Moran

California homestead law drives bankruptcy exemptions even for those who no longer live in California.

Strange, when the homestead statute was state law originally written for Californians.

Two things have expanded its reach: bankruptcy “reform” and the concept of extraterritoriality.

The third driver, of course, is mobility: we seem much more likely these days to have moved between states.

I was reminded of the long reach of the homestead last week by a call from a couple in Colorado.

They used to live here, were filing bankruptcy in Colorado, and wondered if they could use the California homestead to protect their Colorado home.

The answer, on their facts, is YES.

So here’s how that works.

California exemptions for former residents

The 2005 amendments to bankruptcy law tried to limit debtors from moving to a state with more generous exemptions before filing bankruptcy.

Several states, most notably Texas and Florida, have an unlimited exemption for the value of your home. Shack or Taj Mahal, if you live there, it’s protected from creditors.

So the Congressional “fix” was to say that if you hadn’t lived for two years in the state where you filed bankruptcy, you must use the exemptions from the state in which you lived two years ago. (It has a few more wrinkles, but broadly, that’s the new law.)

The folks on the phone were California residents two years ago. They “must” use California exemptions to protect their home in Colorado, where they will file.

Instead of the $75,000 homestead in Colorado, they can claim the $100,000 exemption provided in California law.

Neat.

Homestead beyond California

Extraterritorial is a long word for the idea that the state law in question applies to property outside the territory of the state.

The concept gained importance with the 2005 changes to bankruptcy law. What if the state you lived in two years ago doesn’t allow extraterritoriality?

Some states hold their exemptions have extraterritorial effect; other deny extraterritoriality.

North Carolina, for example, limits use of its state exemptions to residents of North Carolina. See the lawyerly piece by my friend Billy Brewer.

By contrast, California’s exemption laws are available for property outside the state. The 9th Circuit case of Arrol, decided long before bankruptcy “reform”, allowed the debtor who had just moved back to Minnesota to claim a homestead the Michigan house in which he lived in a bankruptcy filed in California.

More on where you file and what you claim exempt

Bankruptcy law required that he file in California, having just moved back to Michigan less than six months ago. The appeals court said that California law, where his case was filed, applied to the home he was living in when he filed, even if it was outside the state of California.

California allowed extraterritorial application of its exemptions.

If Arrol had moved from North Carolina to California, he couldn’t use North Carolina exemptions because they don’t apply to non residents. The laws of North Carolina aren’t extraterritorial.

In that case, the debtor can use the federal bankruptcy exemptions if the exemptions of the required state aren’t available.

Home truths

The moral of this piece is bankruptcy can be complicated for the well-traveled debtor.

Choose an experienced bankruptcy lawyer; share the tale of your travels; and explore your exemption options.

California homestead is a superpower

A homestead isn’t what you think

Secret bankruptcy exemptions

Double Dipping On Retirement Savings

By Cathy Moran

Any time you can double your savings and protect your money from creditors is a good time of the year.

The period between New Years and Tax Day is my favorite time of the year, just for that reason.

You can make contributions to your IRA last year AND contribute to this year’s IRA allowance.

You get a scoop of last year’s tax benefits, topped with a scoop of this year’s tax break.

You don’t have to be filing bankruptcy for this to be important. But, this trick is a favorite of mine when I have my bankruptcy-lawyer hat on.

IRAs in bankruptcy

My goal is to maximize the value a bankruptcy client can keep through the case.

Everyone in bankruptcy can protect over a million dollars in IRA savings. Not that I’ve seen an IRA anywhere near that number. But Congress says IRA savings are a good thing, and beyond the reach of your creditors.

And I’ve never faced challenge from a bankruptcy trustee when a client contributed the maximum allowed by tax law to a retirement account, even if they sold other assets to make the contribution.

IRAs for all

Tax advantaged retirement plans are grounded in federal tax law and are available to the solvent as well as the insolvent.

IRA’s are asset protection on the cheap

Too many Americans seem to want to live in a little bubble that tells us that old age will work out OK, (somehow) whether we take responsibility for making it happen or not.

That’s magical thinking at its worst.

Unless you expect to inherit a fortune, you need to take steps now so that you are financially independent then.

Tax break opportunity is fleeting

Old age is inevitable and the tax code has an annual limit for how much you can contribute to a retirement vehicle to grow tax free. If you don’t make a contribution equal to the limit for last year, that unused tax break is lost forever.

Between now and April 15th, take two scoops of retirement savings. Or seed your retirement account with any tax refund from this year.