There are two sets of bankruptcy exemptions available to California residents (if you have been domiciled in California for the required length of time). These are commonly referred to as the “703 exemptions” and the “704 exemptions.”
This post discusses the “703 exemptions.”
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703 Exemptions: General Information
- Bankruptcy exemptions are used to protect property when a person files bankruptcy. They make the protected property off limits to the bankruptcy trustee. This means the trustee cannot sell the protected (“exempted”) property to pay your creditors.
- When filing bankruptcy, you make a list of all of your assets. You then apply your exemptions to your various assets to tell the court how much of a particular asset you want to keep. Most people filing Chapter 7 bankruptcy keep 100% of their assets when they file.
- The exemptions have dollar amount limits. In California, these tend to be generous.
- Most people (basically all clients in our practice) have no trouble protecting everything they own with their exemptions when they file bankruptcy.
- The California 703 bankruptcy exemptions are adjusted every three years on April 1. The next adjustment is due on April 1, 2016.
- Because the exemptions amounts adjust fairly frequently, the amounts are not given in the body of the post below, but are linked here and at the end of the article.
- If you are filing for bankruptcy and you are married (and your spouse is not filing for bankruptcy), you may need a spousal waiver if using the 703 exemptions.
- If you use the 703 exemptions, you are still eligible to use the additional exemptions that are scattered throughout federal non-bankruptcy law. NOTE: these exemptions are NOT the same thing as the “federal bankruptcy exemptions.” The federal bankruptcy exemptions are not available to California residents.
703 Exemptions In Detail
The first exemption is made pursuant to section 703.140(b)(1). This section allows you to exempt a certain amount of your interest in real (e.g., house) or personal (e.g., motor home) property that you or your dependent use as a residence.
In other words, you only need to protect your interest (aka “equity”) in the property using your exemptions. You don’t need to exempt the full value of the property. For those of us with mortgages, there is a big difference between the value of the property and the value of your interest.
Section 703.140(b)(2) allows you to exempt equity in one motor vehicle. For the amount, please see list linked below.
Household Furnishings and Goods
Section 703.140(b)(3) permits a $650.00 exemption for the value of any household furnishings, goods, wearing apparel, appliances, books, animals, crops, or musical instruments. The items must be for primarily personal, family, or household use of the debtor or a dependent.
This exemption is sometimes referred to as “unlimited” because it can be used more than once. Specifically, it can be applied to more than one individual item, as long as each item does not exceed $650.00 in value.
For example: if you have ten pieces of furniture, and each item is worth less than $650.00, you can use the exemption ten times to exempt each item of furniture.
Section 703.140(b)(4) allows you to exempt your aggregate interest in jewelry that is for primarily personal, family, or household use of the debtor or a dependent.
Section 703.140(b)(5) is often called the “wildcard” exemption. This exemption permits you to exempt any type of property that you have an interest in. You can also use any unused amount of the residence exemption as part of your “wildcard” exemption.
Tools of the Trade
Section 703.140(b)(6) provides for an exemption in your aggregate interest in any implements, professional books, or tools of the trade or of a dependent.
Sections 703.140(b)(7) and (8) allow you to exempt your interest in life insurance.
Section (b)(7) allows you to exempt an unmatured life insurance policy (other than credit.)
Section (b)(8) protects your aggregate interest in unmatured life insurance contracts owned by the debtor, under which the insured is the debtor, or an individual of whom the debtor is a dependent.
Most term life insurance policies have a value of zero as long as the insured is alive. So, the life insurance exemptions are most often used to protect so-called “whole life” and annuity-based insurance products. These are products that have an insurance component and an investment component.
If you have an insurance policy that’s anything other than term life, it is very important to understand what you own and how it is valued so you can properly exempt it in your bankruptcy.
Section 703.140(b)(9) provides an unlimited exemption for professional prescribed health aids of the debtor or a dependent.
Right to Receive Certain Payments
Section 703.140(b)(10)(A)-(D) provides an unlimited exemption for the debtor’s interest in social security benefits, unemployment compensation, local public assistance benefits, veteran’s benefits, disability benefits, illness benefits, unemployment benefits, and alimony or support maintenance to the extent reasonably necessary to support the debtor and any dependent.
Section 703.140(b)(10)(E) provides an unlimited exemption for payments under a stock bonus, pension, profit-sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for support of the debtor and any dependent. For example, this may be a 401(k).
Note that a different exemption would apply for retirement accounts that are not yet in “payment mode.” For example, the 401K of a person who is still working and not eligible for retirement.
There are also several exceptions to the 703.140(b)(10)(E) payment exemption.
Section 703.140(b)(11) allows you to exempt property that you can trace to any of the following: (A) an award under a crime victim’s reparation law (unlimited), (B) payment on account of wrongful death of whom you were a dependent, to the extent reasonably necessary for support of debt and any dependent, (C) payment under a life insurance contract that insured the life of an individual of whom you were a dependent, to the extent reasonably necessary to support the debtor and dependents, (D) payment on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss of the debtor of whom the debtor is a dependent, (this amount is limited and reset every three years) and (E) payment in compensation for loss of future earnings of the debtor or an individual whom the debtor was a dependent, to the extent reasonably necessary to support the debtor and dependents.
These amounts will readjust on April 1, 2016.
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As mentioned above, some property is exempt in bankruptcy proceedings as a function of various federal non-bankruptcy laws. This means these “exemptions” can be used along with the 703 exemptions. You can read more about these here.
BUT, be very careful not to confuse these miscellaneous “exemptions” with the “federal bankruptcy exemptions.” The federal bankruptcy exemptions are not available to California bankruptpcy filers.