Bankruptcy Exemptions and the Importance of Disclosing Assets
by Matthew Grech | Feb. 29, 2016 | Article |
There is a common held belief that upon filing for bankruptcy protection, particularly under Chapter 7, that a person will be required to turnover his property to satisfy his debts. In most cases, as long as one is represented by a qualified attorney, nothing could be further from the truth. In other words, people generally get to keep all of their property upon filing for bankruptcy protection, whether it is under Chapter 7 or 13.
The primary reason that people are allowed to keep their property is because they are permitted to exempt, or exclude, from the bankruptcy estate certain property up to a certain dollar amount. This is accomplished through the use of exemptions, the purpose of which, simply put, is to allow people to protect and keep their property.
There are two general sets of bankruptcy exemptions, federal and state. While some states allow debtors to use federal bankruptcy exemptions, California is not one of them. Nevertheless, California does allow debtors to choose between two different “systems.” The choice is up to the individual debtor and that decision generally depends upon the nature of a person’s assets and the circumstances surrounding the bankruptcy filing. However, a person must choose one system or the other.
The exemption categories are many regardless of which system a person ultimately chooses, and although it goes beyond the purpose of this article to reference each one, it is nevertheless helpful for illustration purposes to detail some of the more popular exemptions. As a side note, and of particular importance, the exemption amounts listed below will adjust for inflation on April 1, 2016.
The first system is generally referred to as “System 1.” Under System 1 a debtor can protect the equity in her home up to $75,000.00 to $175,000.00 depending upon her age, disability status and annual income [California Code of Civil Procedure (“CCP”) § 704.730]. System 1 also allows a debtor to protect both public retirement benefits and private retirement plans (including IRAs and Keoghs) up to an unlimited amount [CCP §§ 704.110, 704.115].
The second system is referred to as “System 2.” By far, the most popular exemption under System 2 is the “Wildcard” or “Grubstake” exemption. The reason for its popularity is that it can be used to protect any asset up to $26,925.00 [CCP § 703.140(b)(5)]. For example, a debtor filing for Chapter 7 bankruptcy protection who has $25,000.00 in his savings account can protect this asset from his creditors as long as it is properly disclosed and exempted.
And this raises an important issue. There is a misconception held by some that the safest and surest way to protect their assets is to either transfer them out of their name prior to filing or simply not disclose them at the time of filing. Not only is this course of action extremely risky, but it is against the law and risks both the forfeiture of the asset(s) in question and a person’s right to a discharge of his debts. In other words, the safest and surest way to protect an asset is to simply disclose and exempt.