Bankruptcy Exemptions

The bankruptcy laws are designed to afford the honest debtor a fresh start.  So that you can truly have a fresh start after you file bankruptcy, you do not have to give up all of your property and assets.  You get to keep a certain amount of property and assets, as well as your personal items and personal effects. What, and how much, you get to keep when you file bankruptcy is determined by your bankruptcy exemptions.

Bankruptcy Exemptions in San Diego, California

Exemptions are a set of laws that spell out what property and other assets, and how much worth of equity in property and assets, you are allowed to keep when you file for bankruptcy relief.  Just what are bankruptcy exemptions, how do they work, and how are they applied to San Diego bankruptcy cases?

Choice for California Residents

The Federal bankruptcy laws give each State the right to either allow residents of the State to use the Federal exemptions, or, alternatively, the State can “opt out” of the Federal exemptions and enact their own set of exemptions.

The State of California has opted out of the Federal exemptions.  If you live in San Diego, California, then you have to use California’s exemptions.

California has actually enacted two sets of exemptions that you can choose from: (1) the California exemptions; or (2) California’s Federal-like exemptions, which for the most part mirrors the Federal exemptions.

How to Choose: California vs Federal

For simplicity purposes, California’s Federal-like exemptions will hereafter be referred to as simply the Federal exemptions.

When filing bankruptcy you must choose either the California exemptions or the Federal exemptions.  Determining whether the California versus Federal exemptions are more beneficial for your situation always requires the advice of an attorney based on a thorough analysis of your unique situation.

California Homestead Exemption

The California homestead exemptions provides a very generous homestead exemption that allows you to exempt and keep a large amount of equity in your home.  Prior to 2021, the exemption allowed you to protect either $75,000, $100,000, or $175,000 in equity in your home, depending upon your circumstances.  In 2021, the exemption significantly increased.

As of January 1, 2021, the California homestead exemption is now increased to the current median single-family home sale price in the county where a property is located, not to exceed $600,000.

For San Diego bankruptcy filers, since the current median home sale price in the county exceeds $600,000 as of 2021, this means that San Diego filers can now exempt a full $600,000 in equity in their home when filing bankruptcy.

Therefore, if you have significant equity in your home and you want to keep your home in bankruptcy you will benefit from using the California exemptions, which include the California homestead exemption.

California Personal Property Exemptions

Where the California bankruptcy exemptions fall short is their protection of your other assets such as financial accounts, vehicles, or other personal property assets.  The California exemptions provide a very small amount of vehicle exemption and very minimal amounts of other exemptions such as for money in your bank accounts.

Federal Homestead

The Federal exemptions, in contrast to the California exemptions, are not very generous when it comes to equity in your home.  The Federal homestead exemption pales in comparison to the California homestead exemption.  For 2021, the Federal homestead exemption allows you to exempt $29,275 in equity in your home.  This limit has been the same in both 2019 and 2020, and will remain the same through April 2022. But the Federal exemptions make up for the small homestead exemption by allowing you exempt property a large amount of personal property you would not be able to keep under the California exemptions.

Federal Personal Property and Wild Card

The Federal exemptions give you a “wild-card” exemption that you can apply to whatever property you want.  The wildcard exemption is quite generous.  For 2021, the wild-card exemption amount is $1,550 plus any amount of unused homestead exemption, resulting in a maximum possible wild-card amount of $30,825 that you can use to exempt any property.

For example, if your car has $10,000 equity (car value minus loan amount), you would not be able to keep your car if you chose the California exemptions.  Under the Federal exemptions, you could use part of your wild-card exemption and keep your car in bankruptcy.

You can even apply the wildcard exemption to the money in your bank account.  So, for example, you could, theoretically, apply all of your wildcard exemption to your bank account funds and keep $30,825 cash in your bank accounts when you file bankruptcy in San Diego.  However, this could raise an implication of lack of good faith in your filing.

As with most legal issues, there are nuances to most rules, so you cannot just assume that your assets will be protected without consulting with an experienced bankruptcy lawyer.

Non-Exempt Assets

Any assets that are not covered by your bankruptcy exemptions are referred to as your “nonexempt” assets. If some of your assets are nonexempt, then the San Diego bankruptcy trustee may exercise control over those assets, sell the assets, and distribute the sale proceeds to your creditors.

Even if you have assets that are nonexempt, the trustee may decide to abandon (not take control of) your assets if the nonexempt equity in your asset is very little or if it would be too burdensome or expensive for the trustee to market and sell the assets.  This is frequently the case in San Diego because due to the economy many people have little to no equity in their assets.

Usually, the San Diego bankruptcy trustees will also give you the option of buying back your nonexempt equity in the assets.  This means that if you have more assets than your exemptions allow you to keep, then you keep your asset if you are willing to pay the trustee an amount equal to the amount of your asset (equity in the asset) that exceeds your exemptions.

Forum Shopping

Because of California’s generous exemption scheme, including both the California homestead exemptions and the Federal-like exemptions, in the past people have moved to San Diego, California, in a move that is referred to as “forum shopping,” just to file bankruptcy in San Diego and take advantage of California’s exemptions.

As a result, the law has been changed to include a residency requirement for bankruptcy in San Diego, California, or for filing in any other state, to curtail forum shopping.