 Exempt Property - Assets That Are Protected (Part 2 of 3)
Exemptions are provided under state law. The Federal bankruptcy laws allow each state to determine which assets a person is allowed to keep when a bankruptcy case is filed. California is one of the most generous of all states when it comes to exemptions. The state exemptions are set forth in two separate lists, which are found in California Code of Civil Procedure (CCP) §703 and §704.
California has two different sets of exemptions. The debtor is allowed to use the exemptions from only one “list” or “set” of exemptions. These are either California Code of Civil Procedure (CCP) §703 or §704. We cannot “mix and match” from the two. There are some similarities between these exemption lists, but also some major differences. Therefore, expert legal guidance is imperative for any person filing bankruptcy. The failure to correctly plan for the bankruptcy filing and use the correct exemptions can actually cause some people to lose property that they could have been protected.
Successful exemption planning. Proper exemption planning is essential to successfully accomplishing the Debtor’s goal of protecting assets. However, great care must be taken. Non-attorneys, such as the so-called legal document preparers, paralegals, or other non-attorneys, cannot be relied upon to properly guide a person through the legal maze of bankruptcy laws.
Risk of losing assets. If the property has more equity in it than can be covered by every applicable exemption, (sometimes an asset may be cross-covered covered by more than one exemption) the bankruptcy trustee may sell the property. When the trustee sells the asset, the trustee will pay the amount of the exemption to the debtor, and retain the non exempt amount of equity for the bankruptcy estate. Money kept by the bankruptcy estate is used to the expenses of bankruptcy administration, and the remainder is distributed to creditors.
Priority claims get paid ahead of other creditors from non exempt property. Money that is available in an estate to pay creditors is distributed according to a pro rata method of priority. Certain claims, such as family support and most types of tax claims enjoy priority, and are required to be paid ahead of non priority unsecured claims, such as credit card debts. If there is not enough money to pay all the allowed claims in full, you would see a situation where priority claims may receive a distribution and leave no money to pay anything to non priority unsecured claims.
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