When a debtor files Chapter 7 bankruptcy to get a fresh start and eliminate unsecured debt, the bankruptcy code allows the debtor to use exemptions authorized by the debtor’s home state to protect assets from liquidation by the court-appointed Chapter 7 Trustee.
Each state either has its own set of exemptions, or the state can default to the federal exemptions.
California has two of its own sets of exemptions, which means a California debtor must choose one of the two sets of California exemptions. The debtor’s choice will usually be determined by whether they have a significant amount of equity in their home. One of the California exemption codes allows for a much greater home equity protection, while the other has better protections for other items such as bank accounts, motor vehicles, stocks, and other assets not related to home equity.
When a debtor files bankruptcy, they must disclose all their assets on the bankruptcy schedules, including assets they are entitled to receive (even if they have not yet received the asset). Thus, claims the debtor has against others, tax refunds, property settlements, and other such items must also be disclosed and exempted to avoid a liquidation by the Chapter 7 Trustee.
It is critical that the debtor inform their attorney of all their existing and potential assets before the case is filed. Not listing an asset does not insure protection, and can later give rise to a fraud claim if it is clear the debtor knew or should have known of that asset. The attorney should advise the debtor before the case is filed whether any of the debtor’s assets are at risk of liquidation.
While most Chapter 7 debtors have exhausted most or all of their assets to the point where their remaining assets are easily protected in a Chapter 7 bankruptcy case, it is still important to discuss asset protection with counsel before filing a case to avoid losing assets in a bankruptcy liquidation.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.