Federal Versus State Exemptions

Bankruptcy law is federal law. Some states follow the federal exemptions system, but many states have their own exemptions systems. California has two exemptions systems, and each debtor planning to file for bankruptcy can decide for him or herself whether to choose System 1 or System 2. Each system has its own advantages.

You must include a schedule of the exemptions you are claiming when you first file for bankruptcy. The schedule should list the asset you believe is exempt, the legal basis for the exemption, and its fair market value. Within 30 days of the creditor meeting after you file, creditors or the trustee may object to the exemptions you filed. It is the burden of the objecting party to prove your property is not exempt. If nobody objects, the listed asset cannot be liquidated during the bankruptcy.

System 1

System 1 tends to be more beneficial to those who own their principal residence because it has a large homestead exemption. A debtor can exempt $75,000 of the equity in their principal residence if he or she is single and up to $100,000 if he or she has a family and one family member doesn’t have an interest in the homestead. This figure goes up under other conditions. It is also larger if you are over 65 years of age.

Because the homestead exemption is so significant, the other exemptions within System 1 may not seem as generous. The motor vehicle exemption protects only up to $2,725 of the equity in your car or other vehicle. However, jewelry, heirlooms, health aids, tools of your trade, matured life insurance, and retirement accounts are subject to exemptions. 75% of the wages paid to you within 30 days before you filed for bankruptcy are also exempted.

System 2

System 2 exemptions are often thought to be closer to the federal exemptions. In this system, people who either do not own their homes or value other property more are able to protect other property that have similar amounts of equity to the homestead exemption in System 1.

In System 2, a homeowner who files for bankruptcy may exempt up to $24,060 in their home. There is no wage exemption for System 2. However, there are two aspects of System 2 that make it favorable for some people filing for bankruptcy. System 2 allows all funds for child support and alimony to be exempted. Also, there is what’s called a “wildcard” exemption in System 2, which is not available for those who file using System 1. The wildcard exemption allows you to exempt $1,175 of any property as well as an unused portion of the homestead exemption.