Many people are afraid that a bankruptcy will leave them with nothing. That’s not true and not the way the law works. The idea behind bankruptcy is to give you a fresh start, so the government allowed states to create exemptions.
What are exemptions?
An exemption is how much stuff you’re allowed to keep. When you file for a chapter 7 bankruptcy a trustee is appointed who collects all your assets and sells them to pay your creditors to the extent that there is money available. Any remaining debts are discharged (with a few exceptions).
However, they don’t want to leave you with nothing. So the government created exemptions. A good attorney knows the exemption laws in California and can maximize the amount of assets you can keep. The government will not touch exempt assets and only sell assets that are above the exemption limit.
Here are a few examples of exemptions.
Under one system in California you can exempt real property up to $75,000 if you’re single, $100,000 for families, $175,000 if you’re 65 or older.
Trustees can only sell nonexempt assets. For instance, if you have a house worth $500,000 that has a mortgage of $450,000, you only own $50,000 worth of your home. This is also known as equity. If you’re single, you’ve got a $75,000 exemption. That covers the $50,000 in equity, which means you can keep your home. The same principle applies to cars with auto loans.
But what happens if you have an asset that is over the exemption? The asset is sold, and you’re paid the amount of the exemption. The rest goes to your creditors.
IRA’s and 401k’s are completely exempt, which means you can keep all of it.
There are exemptions for furniture, jewelry, clothes, computers, equipment, tools of the trade, etc.
Again, a good attorney knows the exemption laws in California and maximize the amount of assets you can keep. This is where a good attorney earns his salt. If you see ads out there for cheap bankruptcy services, you get what pay for. A lousy attorney or paralegal will cost you way more in the end. Because you will lose assets that a good attorney would help you keep.
The above is for informational purposes only and does not constitute legal advice. Please seek advice from counsel.
