Category Archives: Chapter 7 vs. Chapter 13

California Bankruptcy Exemptions May Increase Soon


In California we have two set of exemptions to protect assets against collection efforts by creditors. There are limits to what can be protected and how much of the value of the asset can be protected. Under CCP Section 703 the defining feature of this set of exemptions is the Wild Card exemption that can be applied to anything under Section 703.14(b)(5) totaling $26,925.00. This Wildcard exemption can be used to protect equity in a home too. The other set of California exemptions under CCP Section 704 include homestead exemptions with higher limits. Recently the California State Senate passed SB 308 that proposes a number of great changes to California’s exemptions. One of the most important proposed changes is the exemption that protects equity in a primary residence. Right now the homestead exemptions in California to protect equity in a primary residence are: (1) single person $75,000; (2) married or have dependent children living in residence ($100,000); and (3) debtor is a senior 65 or older; disabled, or 55 years of age or older and has limited income. California Senate Bill 308, among other things, would change California’s exemptions to give everyone a $300,000 homestead exemption to protect equity in their primary residence. If California’s exemptions are changed as proposed in SB 308 California’s residence in financial distress will get little more help in recovering or staying afloat.

California Homestead Exemption Changes Under CCP Section 704 Exemptions

1. Homestead Exemption Limit Increased To $300,000

This is probably the most dramatic proposed change to the California exemption system. As the current limits are listed above an increase to $300,000 for everyone is a significant increase, especially for a single person. At the same time California’s exemptions have not kept pace with inflation and the cost of living in California. If you review the history of the increases in California’s exemptions you will clearly see the increases have not kept pace with California’s cost of living and inflation.

2. Removes The Six-Month Reinvestment Requirement

Right now CCP Section 704 homestead exemptions requires after sale of the home and the former owners receive the exemption amount of the proceeds they will lose the entire exemptions if they do not reinvest the proceeds in a new home. So if the bankruptcy trustee sells the home the debtors have six months from the sale date to reinvest the proceeds. Okay, but they just filed for bankruptcy and that means they most likely do not have the best credit. So how is someone supposed to qualify to purchase a new home? This is a badly needed change also. I far as I know exemptions are meant to protect assets to help someone in financial distress. Pulling the rug out from under someone in financial distress six months later does not seem to be consistent with the underlying goal of having exemptions to begin with.

Increase The Vehicle Exemption to $6,000 For Everyone

Right now under the CCP Section 703 vehicle exemption the limit of the exemption is $5,100 and under CCP Section 704 the vehicle exemption limit is only $2,900. These exemptions are badly in need of an increase. As a society we need everyone to be able to move about with reliable transportation period. It does not do anyone any good to someone with a car that cannot allow them safely to and from work or transport children. A $6,000 vehicle is usually just on the line of reliability anyway and getting up there if miles. This proposed increase will provide a modest increase in the type of vehicle that can be protected and is badly needed.

New Exemption for Small Business Owners

Right now a small business owner does not have a specific exemption to protect cash or deposit accounts, accounts receivable and business inventory up to $5,000 for debtors using the CCP Section 704 exemptions. For small business owners choosing the 704 exemptions this will be valuable addition to help them continue to operate their business and achieve success after bankruptcy. The limit of the proposed exemption is extremely reasonable at $5,000. This amount should not result in giving a windfall to a small business owner.

Amends California Code Section 2983.3 Regarding Vehicle Loans

Right now the law provides a person with a vehicle loan when filing bankruptcy has three options regarding the loan. They can surrender the vehicle to satisfy the loan, enter into a reaffirmation agreement and continue payments, or redeem the vehicle for its fair market value under Section 721 of the bankruptcy code and keep the vehicle. What is not supposed to be allowed anymore is someone just continues to make the payments and does not do either of the three options listed above. They are current with the payments, but technically under the law the lender can repossess the vehicle since the loan was not reaffirmed. This change would make the filing of bankruptcy not grounds for repossession if the person is current with their payments.

What Will These Proposed Changes Mean To Bankruptcy Attorneys and Their Clients?

The ramifications will most likely be far reaching and help thousands of California residents live happier and healthier lives by obtaining a fresh start. Regarding the increase in the homestead exemption, most bankruptcy attorneys will most likely see a decrease in the number of Chapter 13 cases they file given that same bankruptcy filer can protect more equity in their home and still file a Chapter 7 case. Currently one of the reasons to file a Chapter 13 case is to protect equity in a home while reorganizing debts and not have to liquidate the home in a Chapter 7 case. More people should qualify to file a Chapter 7 case if the homestead exemption is increased. At the same time the dynamic between someone’s assets and the available exemptions is complicated and there are compromises that have to be made given the limits to the amounts of the exemptions. Then you factor in the differences between the two sets of exemptions, CCP Section 703 and CCP Section 704, and bankruptcy lawyers will have a whole new evaluation to make when discussing which set of exemptions would be most advantageous.

In all these proposed increases will not provide windfalls, but make California’s exemptions consistent with the real world we live in. When pondering a perfect world I believe the exemption limits should be based upon a county by county measurement of income and cost of living. To truly treat everyone fairly based upon their circumstances we need to look at their circumstances more closely at the county level. In California the median income and cost of living vary widely throughout our huge state. Creating exemptions by county would be a huge undertaking and probably unmanageable by the bankruptcy courts. For now the increases of California bankruptcy exemptions proposed in California State Senate Bill 308 would be a huge and long needed improvement.

The Argument For Not Filing an Asset Chapter 7 Bankruptcy Case


First let us establish what an asset Chapter 7 bankruptcy case is.  An asset Chapter 7 bankruptcy case means that there are assets that cannot be exempted from the bankruptcy estate and creditors are entitled to the value of these unexempt assets.  The Chapter 7 trustee assigned to the case will administer the bankruptcy estate for the benefit of creditors.

So what is the argument against filing an asset Chapter 7 bankruptcy case?  The issue is what is in the best interest of creditors, or those who are owed money?  Let’s say the assets available to creditors’ totals about $20,000.  The Chapter 7 trustee will receive 25% of the first $5,000; 10% of the next $45,000; 5% of the next $950,000; and 3% of the balance.  This is a sliding scale.  So an estate totaling $20,000 the Chapter 7 trustee will get approximately $3,500.  These fees are statutory.  In contrast a typical Chapter 13 trustee will receive about 10% of the estate for administering the case depending upon the jurisdiction.  So if the estate totals $20,000, the Chapter 13 trustee will receive approximately $2,000 for administering the estate.

So what is the problem here?  There is not a huge difference in the trustee fees right?  Well, in the Chapter 7 case the trustee will most likely hire an attorney to assist with the case.  Most attorneys that work for trustee’s charge anywhere from $300 to $600 an hour.  If the attorney for the Chapter 7 trustee spends a mere 10 hours on the case in the example above, the attorney for the Chapter 7 trustee would receive around 25% of the total estate of $20,000.  So the Chapter 7 trustee gets about $3,500 plus their attorney fees of $5,000 equals $8,500 in fees.  This represents almost half of the money available to creditors.  In contract the Chapter 13 trustee only receives about $2,000 total.  What is in the best interest of the creditors then?

To be fair, most bankruptcy attorneys must charge higher fees for a Chapter 13 given the additional work that is required.  So the bankruptcy attorney fees in theory could equal what the Chapter 7 trustee’s attorney may charge.  But most jurisdictions cap what can be charged for a basic Chapter 13 case.  These caps can vary widely depending upon the jurisdiction.  Also to be fair, some Chapter 7 cases absolutely need the trustee to hire an attorney to help administer the bankruptcy estate.  This is especially true when there are issues regarding the value of assets and what assets are part of the bankruptcy estate or not.  Recent there has been news from major news organizations about the amount bankruptcy professionals charge in Chapter 11 reorganization cases.  Some of the hourly rates are as high as $1,000 an hour.  It is hard to balance what is in the best interest of creditors, especially when most creditors do not participate in small asset Chapter 7 cases and Chapter 13 cases.