Do it Yourself Bankruptcy: How to Keep Your Property, Part I

Some people think that when they file for bankruptcy all their property will be sold to pay their creditors and they will be left with nothing. Not true. There are state and federal laws which “protect your stuff.” In most cases, you get to keep everything, and what allows you to do that is called an “exemption.”

What is an Exemption.   The legal definition of an exemption in a bankruptcy proceeding is a privilege allowed by law to a debtor, by which (s)he may keep real and personal property worth up to a certain amount.  The amount varies depending on the state you live in, the type of property and other factors in the debtor’s financial situation.

A More Practical Definition   Think of it this way, if all of your property were plates of food on a picnic table, an exemption would be like a roll of plastic wrap that you could cut and put over each plate to protect it from any insects which might eat the dishes.  In this analogy, potato salad might be your car, and the hungry bugs wanting to gobble it up would be the bankruptcy court.

How to Protect Your Property   Of course, knowing the best roll of plastic wrap, how much to use and on which foods is the secret for keeping hungry pests from devouring your delicious edibles, in the case of a bankruptcy, which exemptions to use to protect you valued possessions from being sold by the bankruptcy trustee to pay your creditors.

Determine the Value of the Property   First you have to know how much the property (dish) is worth.  If it is real property, values can sometimes be obtained on line, but if you need a more exact value, asking a real estate agent may be the ticket.  If it is a unique parcel of property you may have to hire a certified appraiser. For automobiles there are several sources on the web to determine how much your car is worth. If you have collectables or antiques, consider consulting other collectors or antique dealers, or finding similar items on eBay or similar sites. When valuing your personal effects,  use a “thrift shop” value, not what you paid when you bought them.

Choosing the Proper Exemption   Once you’ve determined how much your picnic dish is worth, you have to find the proper roll of plastic wrap to cover it. Just as different dishes require different rolls of wrap, you should choose the exemption that best fits your property.  You can make this choice by reviewing the law and making up you own mind, or you can consult a lawyer.  However, you cannot let a paralegal or petition preparer do it for you. Exemption choices are “legal decisions” and a non-lawyer is not allowed to make it on your behalf.

703 or 704?   There are two “sets” of exemptions used in California bankruptcies which are located in sections 703 and 704 of the California Code of Civil Procedure. Choosing between the two depends on whether you have real property with equity or not.  Generally, the 704 exemptions are used for debtors with equity in real property and the 703 set is for those who either have no equity or no real property. If you choose the exemptions from one “set”you cannot use those in the other set.

Protecting Your Property   After deciding between the two sets of exemptions you then have to use the appropriate exemption in that set for each item of property you have.  To follow the analogy, you have to tear off enough plastic from the roll to cover the dish.  If you have an 8 inch apple pie on the picnic table, you have to rip off an 8 inch long section of “desert” wrap.  If your car is worth $4500, you have to take the same amount of the “automobile” exemption, which at the date of this blog is a maximum of $4,800 in the 703 exemptions and $2,300 in the 704 exemptions.  If you’re wondering what happens if the property is worth more than the exemption will allow, read the next installment of this blog.

 Disclaimer.   The law surrounding exemptions is complicated and only a lawyer can advise you on the proper application in a bankruptcy case after analyzing your particular circumstances.  No two cases are alike.  The information stated in this blog is informational only and not intended to apply to any individual matter.

Next Blog: the “Wild Card” Exemption

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