Bankruptcy Laws in California
California is a tough place to make it: you might be crashing on a friend’s couch in Sacramento, driving a barely running Ford with no air conditioning, and subsisting on a few dollars per day in Del Taco value meals. Or maybe you’re barely making the rent and buying dog food down in Long Beach, but at least you’re enjoying the sunshine and jugs with your puppy named Moose. It is easy for finances to get out of hand in one of the most expensive places in America to live.
On top of the high cost of living, surprises can come out of nowhere. One friend recently got T-boned in his perfectly reliable 15-year-old Camry and ended up with hospital bills and a bus pass with a four-hour round-trip commute to work the graveyard shift at an alarm company. Many great people are living check-to-check in a state as expensive as this. And when those surprises come, people get so far behind on their bills that they have no choice but to file bankruptcy and try to get a fresh start.
For their bankruptcy filing, most people choose a Chapter 7 filing. With a Chapter 7 filing, all of your excess property is sold off and the proceeds of those sales are used to pay off some of your unsecured debt – credit cards, medical bills, etc. Once that is done, the remainder of the debt is discharged, and you get a fresh start.
How do you determine excess property? While most bankruptcy law and procedure is set at the federal level, the rules for income qualification and the property you keep (exempt property) are set at the state level, for good reason. Not only is that how the laws have developed historically, but the cost of living and average wages in California are higher than they are in Montana, so it is only reasonable that there are different rules in different states.
One Set of Federal Rules for Courts, Fifty Sets of State Rules For Property.
The right to bankruptcy starts with a few passing words in the U.S. Constitution — yes, our founding fathers thought it was so important that they even put it into the Constitution. While it took a couple of hundred years to evolve into the present-day system, for the most part, bankruptcy is still almost entirely a federal issue – this means the rules in California are almost identical to the rules out in Montana.
However, federal law only extends to commerce and financial transactions across state borders, which is probably why they have left the rules about property exemptions up to the local lawmakers in your state. Specifically, here in California, there are a couple of rules that are specific to the Golden State that deal with the amount of property that is exempt from being sold to pay off debts and the amount of income you can make before you become ineligible to file.
California Means Test
Most bankruptcy filings are Chapter 7 filings, where your debt is eliminated after the quick liquidation of any assets you have beyond a few state-level exemptions. We will come back to those exemptions in a moment. But, before you can file a Chapter 7, you must first pass either part of a two-part means test. The first part of that test is based on household income: as of May 2022, a single person filing must make less than the median household income in California, which is $65,895 dollars, more for families.
Assuming your income falls below that level, then you’re in – you can file. If not, you then look at your disposable income for the second part of the means test. Disposable income is the money you have left over after your last six months of income and necessary expenses (rent, food, etc.). If your monthly disposable income is little to nothing, you will likely be eligible for Chapter 7. But you will want to discuss the means test with an experienced attorney before investing time and money preparing your filing paperwork, as the criteria can be complex and with fluctuations in income such as holiday bonuses, you may not be eligible now but may be eligible in a few months if you wait.
If you are not eligible, Chapter 13 might be an interesting alternative, as it allows you to catch up on your finances and reduce some debt, though not nearly as much as you might be able to discharge under Chapter 7.
California Bankruptcy Property Exemptions
Nobody wants to sell off their property in order to pay back bloodsucking dead collectors. Nobody wakes up in the morning and hopes that the court will have an auction on the courthouse steps, holding up your prized shoe collection, for a bunch of vultures to try to purchase it for pennies on the dollar.
The process obviously isn’t what we hoped for. But, once it is through, you walk away with a truly fresh start. Plus, you may be surprised at how much property you actually get to keep – state lawmakers have made exemptions to allow you to carry some property into your new financial life so that you don’t have a fresh start with no resources.
A quick fair warning: like everything else, California lawmakers have made exemptions stupidly complex. Plus, they have insisted that you follow their rules and ignore the federal rules. In many states, you have a choice between the state exemptions and the federal ones, but in California, you must use one of two possible choices for sets of exemptions – these are known as the 703 and 704 exemptions. These two sets of exemptions are very different, almost as if they were written by different states entirely, so you will want to examine them both closely and discuss them with an attorney before picking one or the other. Generally speaking, the 704 exemptions are more favorable towards the homeowners, while the 703 exemptions are better for those wishing to protect property other than a home. To help with readability, we’ll drop the two sets of exemptions into a comparison table below.
Also, while many states and the federal set of rules allow you to double your exemptions for married couples, California does not allow this – the limits are the limits.
Homestead (Equity up to the limit)
Up to $626,400, depending on where you live.
“Reasonable and Necessary”
$725 per item, no maximum number of items
75% of last month’s wages
Retirement and Pensions
“Reasonable and Necessary”
Social Security & Public Benefits are 100% Exempt
Social Security & Public Benefits are 100% Exempt
Tools of The Trade
$8,725 or $4,850 for a commercial vehicle. (This is the only exception that can be doubled for spouses and only if they are in a shared profession.)
$1,550 PLUS Unused homestead exemption
There are many more very specific exemptions (even one for a prisoner trust account) which are outlined in detail here, but the above exemptions are the most common.
Generally, if you own a home, the 704 exemptions allow you to keep such a massive amount of home equity that picking the 704 set makes sense for most people. But, if you do not own a home, the flexibility of the wildcard exemption — allowing you to protect almost $33,000 worth of miscellaneous property, is extremely appealing.
Exemptions are complex: get professional help
California has the most complex exemptions of any state, thanks to its choice of two rule sets. However, with great complexity comes great flexibility… maybe Uncle Ben said that.
In all seriousness though, this is where the help of an experienced bankruptcy attorney really makes a huge difference. Instead of assuming that one set or the other makes the most sense for you, talk over your options and the flexibility of the different choices with an experienced bankruptcy attorney who may be able to find exemptions or flexibility that you never considered. Doing so is the key to having a strong start to your new financial future, with as much property and assets in hand after your debt is discharged. For expert advice, schedule a consultation with one of our network attorneys today.