Chapter 7 Bankruptcy in California: What You Need to Know

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Bankruptcy Exemptions Chapter 7 Bankruptcy Consumer Laws by State

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Posted by: M. Erik Clark

Chapter 7 Bankruptcy in CaliforniaLast updated July 31, 2017.

Ahh, California. The Golden State. Home of beautiful beaches, year-round gorgeous weather, and a ton of innovative companies, from Apple to Disney. It’s the first state to ever become a $1 trillion economy in a gross state product, and in 2015, California surpassed France to become the sixth-largest economy in the world.

However, California also has one of the highest poverty rates in the nation. Its high cost of living is a major reason for decreasing economic output and increasing poverty. Those struggling with debt may have somewhere to turn, however — bankruptcy.

Since bankruptcy law is federal, many of the same principles apply in bankruptcy cases regardless of where the case is filed. For example, whether you’re filing in California or Texas, a bankruptcy estate is created when bankruptcy protection is sought. For the time that you’re in the bankruptcy system, the court will have some say over what you do with your property.

However, exactly what happens to your property once you enter the jurisdiction of the bankruptcy court is another matter entirely. Each state, including California, has its own set of laws that dictate how much property debtors can shield from their creditors both inside and outside of bankruptcy. These laws are called exemption laws.

California’s Bankruptcy Exemption Laws Complicate Matters for Debtors

In California, the exemption laws are slightly more complicated than in other states because there are two sets of exemptions, and California is what is known as an “opt-out” state, meaning federal exemptions are not available. If you’ve lived in California for two years or more, you’ll need to decide between the exemptions outlined in sections 703 and section 704 of the California Code of Civil Procedure.

As you read through California’s exemption laws, keep in mind that claiming property as exempt really means claiming equity as exempt. For example, you may own a car worth $30,000, but if it also has an outstanding loan balance of $40,000, you’re underwater and there is nothing there to exempt. Trustees and creditors can’t attack negative equity. Your property is only vulnerable to the extent it has value over and above any outstanding loans.

What does it mean when your property is “vulnerable” in bankruptcy? In a Chapter 7 case, it means that your stuff could be sold as part of a liquidation sale by the trustee. You may have heard Chapter 7 referred to as a “liquidation,” and this is technically true. In a Chapter 7 case, any property you own that exceeds the applicable exemption limit could be subject to sale by the trustee. As a practical matter, most people keep their stuff through the Chapter 7 process; however, now you know what it means when we say your stuff could be vulnerable.

Chapter 13 bankruptcy works differently than Chapter 7. The trustee won’t sell your non-exempt stuff, but you’ll have to pay the non-exempt value to creditors as part of your re-payment plan.

OK, with all that being said, now on to the nitty gritty of the California exemptions.

California Bankrupty Exemptions

The top 5 exemptions under California law's two systems.
Type of exemptionCalifornia System 1 (704)California System 2 (703)
Homestead$75,000-$175,000$26,800
Personal property$8,000 in tools of the trade; $8,000 in jewelry, heirlooms, and art; $3,200 in Social Security bank deposits; plus household items and medical aids$675 per clothing, household, furnishing item, plus $8,000 in tools of the trade, $1,600 in jewelry, and a wildcard exemption of $1,425 plus any unused homestead or burial exemption
Vehicle$3,050$5,350
WagesUp to 75% if paid within 30 days before filing for bankruptcyNone
Pension/retirementExempt, with some limitationsExempt, with some limitations

California Exemption System 1: Protect Your Home

Section 704 is most commonly used by debtors who wish to protect personal property in their homestead. The homestead exemption applies only to a home that you live in as your primary residence; investment property is not protected by homestead exemptions. California Code Civ. Proc. § 704.010

Please note that neither exemption path allows married couples to double their exemptions, while in some states, you can.

I’ve included the highlights of the 704 exemptions below. Please note that the list below is not complete and figures are updated every three years, for both exemption systems. For additional details, contact a California licensed lawyer.

Homestead

The homestead protection offered by section 704 is far greater than 703, with single debtors under 65 able to protect up to $75,000 of home equity. Married couples and heads of households can exempt up to $100,000, and section 704 provides a whopping $175,000 of protection for persons over age 65, disabled persons, or certain low-income individuals over the age of 55 who have creditors seeking to force the sale of their home.

Personal Property

Personal property includes household items and health aids; building materials to repair or improve your home ($3,200); jewelry, heirlooms, and works of art worth a total of $8,000; tools of the trade, including a commercial vehicle, worth $8,000; and $3,200 ($4,800 if married) in Social Security bank deposits.

Vehicle

Under section 704, you can protect as many vehicles as you’d like, so long as their aggregate value does not exceed $3,050.

Wages

Up to 75% of wages paid within 30 days before filing for bankruptcy are exempt, in addition to public employee vacation credits.

Retirement/Pension

Per federal law, tax-exempt retirement accounts are exempt, in addition to IRAs and Roth IRAs, with some limitations. Public and private retirement benefits are exempt.

California Exemption System 2: Protect Your Personal Property

Section 703 contains California’s second exemption system, otherwise known as the “wildcard” exemptions. Typically, debtors without much home equity or who don’t own real estate at all elect to utilize section 703 because it provides greater protection for personal property. Code Civ. Proc. §703.140(b)

Here are highlights of the 703 exemptions.

Homestead

The homestead exemption in this system only applies to a home you live in, up to $26,800 in equity.

Personal Property

A burial plot of up to $26,800, if the homestead exemption isn’t taken, plus $675 per clothing, household, furnishing, animal, book, and crop item. Up to $1,600 in jewelry, $8,000 in tools of the trade, plus personal injury recoveries of $26,800. The wildcard exemption allows for $1,425 plus any unused amount of burial or homestead exemption in any property.

Vehicle

Section 703 allows you to protect up to $5,350 of value in one or more motor vehicles. Keep in mind though, that if your vehicle should exceed the exemption limit, you can utilize a portion of the wildcard to exempt the rest.

Wages

No exemptions.

Retirement/Pension

The same exemptions as under 704 apply, though fewer benefits for public employees.

Will I qualify for Chapter 7 bankruptcy in California?

Now that we’ve addressed treatment of property in a California bankruptcy, let’s delve into whether you even qualify to file for Chapter 7. The Bankruptcy Code evaluates candidates for Chapter 7 based on income. Those who earn income below the California median, for a family of the same size, are presumably entitled to file for Chapter 7. They can bypass a government test, known as the means test, which those who earn more than the state median are forced to take.

Currently, the California median income for a single earner is $52,416. For a family of four, it is $84,059. If you are below the median, you can file Chapter 7. If you earn more than the median, the means test will determine whether you can file for Chapter 7. To check the most up-to-date income brackets for the bankruptcy means test, click here.

If you have “too much” disposable income after expenses, the means test tries to force you into Chapter 13 bankruptcy with the idea that, if you can afford it, you should pay something back to your unsecured creditors. I don’t agree with this characterization, but that’s the theory behind the means test. The means test is complicated to administer — if you have specific questions, ask an attorney.

How much does it cost to file bankruptcy in California?

The cost to file Chapter 7 bankruptcy is $335 nationwide, but there is a catch. The $335 only covers the filing fee. If you want an attorney to represent you, which you should, you’ll have to shell out anywhere between $800 on the low end to $2,000 on the high end. These prices reflect a fairly reasonable range for a somewhat typical case.

If there are complicating factors such as significant assets or business holdings, the fee for a lawyer could easily go up. If you had to pin me down, I’d say the average cost to file Chapter 7 in California is about $1,500 for a lawyer, plus the filing fee. Of course, those fees will also vary based on the size of the market you live in, with fees in Los Angeles likely higher than in Fresno.

The Chapter 13 filing fee is $310, but cases themselves may be more expensive as you need to work out repayment plan with the court, which will take more of your attorney’s time.

California Bankruptcy Court Locations

As you may already know, bankruptcy law is federal law and the bankruptcy courts are located in federal courthouses. Each state is divided into federal districts, which are further divided into federal divisions. Typically, each division has its own courthouse to serve locals and to ensure that people aren’t forced to trek to far-away district courts when they file bankruptcy, bring a lawsuit, or participate in jury duty.

California is divided into four districts: the Eastern, Central, Northern and Southern districts. Below are links to each court’s bankruptcy website if you are looking for information on court locations in your area and their contact information.

Central District of California Bankruptcy Court

This is the largest bankruptcy court in the United States, with locations in Los Angeles, Riverside, Santa Ana, Santa Barbara, and the San Fernando Valley. Find your court here.

Northern District of California Bankruptcy Court

Divisional offices in Oakland, San Jose, Santa Rosa, and San Francisco. Find your court here.

Eastern District of California Bankruptcy Court

Divisional offices in Sacramento, Fresno, Modesto, and Bakersfield. Find your court here.

Southern District of California Bankruptcy Court

This includes the San Diego courthouse: 325 W. F St., San Diego, CA 92101, (619) 557-5620