Exempt Property – Assets Protected

ASSET PROTECTION

Providing the honest debtor with a “fresh Start” (DISCHARGE) is the core principle of bankruptcy law. In order to make the “fresh Start” a reality, the law is very generous about the assets that a person in bankruptcy is allowed to keep. The categories of protected property are called EXEMPTIONS because such property is “exempt” from being taken to pay the creditors. However, the available exemptions do not necessarily cover everything that the debtor might own. Assets that are NON-EXEMPT may be taken by the TRUSTEE.

Another important note about EXEMPTIONS IS

that they must be claimed properly by you and your lawyer when you file your PETITION. If not, you will face additional problems, costly delays or even the loss of property that may have been exempt. As you will see below, the EXEMPTION rules and requirements are detailed so you will want to have a lawyer that is very experienced at making the correct EXEMPTION claims on your behalf.

ASSET TRANSFERS PRIOR TO FILING BANKRUPTCY

People will sometimes transfer assets prior to filing bankruptcy because they think this is how to protect assets from being taken away. This is not asset protection and it will cause harm or complications for you and others involved in the transfers.

This is a good example of a costly legal mistake that people often make, which an expert would easily have avoided. Do not attempt to omit such assets from the BANKRUPTCY SCHEDULES. Do not hide, conceal, transfer, or falsely encumber NON-EXEMPT assets.Here's why:

Doing so carries the risk of being prosecuted for committing bankruptcy crimes. It is likely to result in the denial of a bankruptcy discharge, and the trustee can still recover the property, or its value, from whomever received it.

And it gets worse. If transferred property is recovered by a trustee, the debtor is not allowed to claim it as exempt, even if it could have been properly exempted before the transfer. This means that you would lose the property and you would lose the right to keep some of its value if it would have been exempt.

Surrendering nonexempt assets is a price the debtor pays for the privilege of seeking relief under Chapter 7. If the price is too steep (i.e., you don’t want to risk losing the assets), then don’t file or else consider filing under Chapter 13. One of the requirements for gaining confirmation of a Chapter 13 Plan is that the Plan pays creditors the same value that they would have received from nonexempt assets if the case was administered under Chapter 7.

LEON’S TIP: Understand which assets are Non-Exempt. Consult with a bankruptcy specialist before you file to see if any of your assets are NON-EXEMPT. Do not engage in schemes to hide, transfer or conceal assets. Inexperienced people and lawyers can’t help but trip over the maze of new rules and regulations.

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 lists 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 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, especially when doing appropriate exemption planning.

LEON’S TIP: you cannot “mix and match” by combining exemptions from one list with any of the exemptions on the other list. Always check with an expert before taking any legal action, as the laws sometimes change, and court rulings will occasionally affect the manner in which these laws are applied and interpreted.

RISK OF LOSING ASSETS

Exemptions may protect property up to certain dollar limits. 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 pay 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 have priority and are paid first before other creditors receive anything. These priority claims include unpaid family support and most types of tax claims. They will be paid before 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.

WERE TO FIND THE LIST OF EXEMPTIONS

Below is a link for the exemptions that are available to debtors who file a bankruptcy case in California. The California debtors can choose between the two separate sets of exemptions. Depending on the kind of assets that the debtor owns, one set of exemptions may be much more favorable to a particular debtor than what is available under the other set. Exemption planning is an art and the exemption planning is best performed under the guidance of an experienced bankruptcy attorney. The two lists of California Exemptions are linked here.

JEFF’S TIP: Sometimes your state of residence before bankruptcy will affect exemptions you get to use. Special exemption rules are a good example of why you need expert help. The bankruptcy law also places certain exclusions on property that can be claimed as exempt where the debtor has not been domiciled (residing) in the same state for at least 730 days before the filing of the bankruptcy case. Under these exclusions, the debtor may be required to use the exemptions of the state where the debtor used to live, instead of the state where the debtor now lives.

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