The Two California Bankruptcy Exemption Systems
Today we are going to talk about bankruptcy exemptions. Exemptions are a fancy word for a list of things you are able to keep inside and sometimes outside of bankruptcy that creditors cannot reach.
In California we have two systems,. One set of exemptions is what we call the “standard system.” The other exemption system is referred to as the “wild card” system.
The difference is that the wild card system can only be used in bankruptcy where the standard system can be used both inside and outside of bankruptcy.
How The Bankruptcy Exemption Systems Works
The chief benefit of the standard exemptions are that, if you have significant equity in a home, the standard exemption system is what you are going to have to use to protect that home. That equity protection is $75,000 for an individual, $100,000 for a husband and wife, and $175,000 for senior citizens, disabled people and low income individuals 55 or older.
The problem with this system is that it has less benefits for most other things you own, especially vehicles. As an example, if you have a car with $5,000 equity and you wanted to keep it, you will not be able to keep it without making a deal with the trustee, if possible to buy back the unprotected equity.
The bankruptcy trustee will says “Gee, I like your car with $5,000 equity. Under the standard exemptions you can only protect $2,900. I will sell the car and use the other $2,100 to pay your creditors.” Not a very good result.
If you have stocks, bonds, non IRA, non 401(k) things, checking accounts, savings accounts, tax refunds etc, none of those can be protected under the standard exemption system.
California Bankruptcy Exemption Systems: Wild Card Exemption
Now let’s go over and take a look at the wild card system. The difference is striking. Let’s say you don’t have a house or you have a house that has nominal equity in it. To the extent you do not use the homestead exemption, which in the Wild Card System is $25,575, you get to use it on other things. It gets thrown in with another $1,350 for a total of $26,925 of what I refer to as “monopoly money” you can use to protect other things that would otherwise have to be given to the Bankruptcy Trustee for your creditors.
Let’s say for instance you have that same car with $5,000 equity. it is fully exempt by the wild card vehicle exemption. Why that vehicle exemption is $2,900 under the standard exemption system but it is for $5,100 under the wild card system makes no sense but that is the law.
Let’s say you have something that does not have its’ very own exemption. You have excess unprotected value in a car or cash or a savings account or a tax refund coming next year. None of those things are protected by their own exemption just as they would if they were in the standard system. The nice thing is that we have that $26,925 of monopoly money. So if you had $5,000 in a checking account you would protect it out of the wildcard and keep it. Then you have $21,925 of monopoly money left ($26,925 – $5,000 = $21,925.) If you had a tax refund of $1,000 coming you then have $20,925.
There is a lot of leeway in the Wild Card system that is not available in the standard system.
The key thing in doing this not just knowing how the exemption systems work but what you can do to legally change things to get a better result before you file your case. This is called pre-bankruptcy planning.
For example, if you had $1,000 cash and you were under the standard system or you were in the wild card system but all your wild card had been used, you could take that cash and buy $1,000 of groceries before the case was filed. You may not keep the cash but you keep the same value in a different form. The money was not exempt but the $1,000 groceries would be.
In the wild card system we could protect literally $26,925 in cash if we did not need the wild card to protect other non-exempt things.
We will get into details about the specific exemptions in a future post on this blog, but for today, you now have a basic understanding on how the California bankruptcy exemption systems works. To compare the California Standard System side by side with the Wild Card System click here.