When you file for Chapter 7 bankruptcy, you will be required to undergo
a process known as “liquidation.” During this process, a trustee
will review your assets to see if any of them cannot be protected with
an exemption. Any assets that cannot be protected can be sold off and
the funds will be distributed to your creditors on a prorata basis. However,
you are allowed to protect certain types of property with special rules
known as exemptions. California’s exemptions are very generous and
most people are able to easily protect everything, including their home
and their car.
How Exemptions Work
Exemptions essentially allow you to protect property you own that is valued
up to a certain amount. Let’s use your car as an example for how
this works. Say you own a modest car (like a Toyota Corolla) that you’re
current with your payments on, but still are struggling with debt and
The first step is to determine how much your Corolla is worth. Let’s
make it easy and say it’s worth $8,000. Once you know your car’s
value, you can determine the amount of
equity you have in it. If you own your car outright, the equity the same as its
value. However, if you’re making payments on your car, the equity
is the amount of money you would have leftover if you sold your car for
its market value and paid off your loan. Say you still owe $3,000 on your
loan—if you were to sell your car and then pay off your loan, you
would have $5,000, which means you have $5,000 in equity.
When you declare Chapter 7 in California, you can protect either up to
$3,050 or up to $5,350 depending on whether you use System 1 or System
2 rules (speak to an attorney to learn which is right for you –
there are very important distinctions between the 2). Let’s say
you use System 2. Because you have less equity in your car than the exemption
limit, you can exempt all of your equity, which means your car is protected
and can’t be sold!
Now let’s say you were further along in your loan and had $6,500
in equity. That would leave you with $1,150 in non-exempt equity. If you
couldn’t exempt any further value, you’d be forced to sell
your car to pay off your debts. However, California also has a
wildcard exemption which can be used to cover any other types of property, including your
car. System 2’s wildcard allows you to cover up to $28,225 of additional
equity, which would fully cover the remaining $1,150 and allow you to
keep your car (and a whole lot of other stuff).
Do you need assistance with filing for Chapter 7 bankruptcy? At
San Diego Legal Pros, our team is dedicated to helping you seek the financial relief you need
by putting the law on your side. We are motivated by your success, and
can help you navigate the stressful process to come to the best possible
conclusion. Our San Diego bankruptcy attorneys pride themselves in helping
all of our clients get the best possible result from their bankruptcy
cases, and can help you protect your most important possessions to the
maximum extent the law allows.
Find out if bankruptcy is the right option for you! Call San Diego Legal
Pros today at 888-875-9190 for a
free consultation to get started.