California Legislature Expands Exemption Rights In Bankruptcy

AB 929 was signed by the Governor on September 27, 2012 and it became effective January 1, 2013. It modestly expands a person’s exemption rights when filing for bankruptcy. Exemption rights protect property from being administered by a bankruptcy Trustee and usually means that these assets are retained by the debtor after a bankruptcy proceeding.

The Bill has been moving around Sacramento for the past several years. The Bill, as originally constituted, would have significantly expanded a person’s homestead rights. In some cases, it would have expanded by 250% the amount of equity a person could protect in their home. When the bill finally passed, many of these provisions were removed so that it now provides only modest, but still important, increases to exemptions.

Some of the more important provisions of the Bill are as follows:

1. Household Goods and Furnishings – The exemption for household goods was expanded from $550 to $600. While this might not seem significant, this exemption is per household item. Typically, any particular item in a person’s household would not bring more than this sum at a liquidation sale (garage sale).
2. Tools of Trade – The protection was increased from $2,200 to $7,175.
3. Cash Value in Life Insurance – The exemption was increased from $11,800 to $12,860.
4. Automobiles – The exemption was increased from $3,525 to $4,800. Additionally, the exemption now provides that this amount can be spread of two cars, if necessary. Theis protection was for equity in a vehicle. Individuals who make payments on cars general do not have equity in the vehicle as it depreciates at about the same rate of the loan balance.
5. Wildcard – The total exemption was increased from $22,250 to $25,340. The wildcard protects any assets within this dollar amount. Theoretically, a person could file bankruptcy with this amount of money in the bank and would still retain it through a bankruptcy proceeding.
6. Homestead – The bill increases the eligibility for the $175,000 homestead for persons over 55 who make less than $25,000 a year ($35,000 per year for married couples). Previously, the dollar limitations for this homestead exemption was $15,000 and $20,000. This change could perhaps could be the most significant contained in the new bill. As the population gets older, there are more and more people going through economic difficulties who will qualify for this enhanced homestead exemption. Current law with respect to other homestead amounts remains the same. That is, $75,000 for a single person, $100,000 for a married couple or a head of household and $175,000 for someone over 65 or disabled.

The new law provides that the exemption statutes will be adjusted for costs of living every three years. The first revision is scheduled to be this April.

The changes in the law are modest, but important. These issues can arise in any kind of debtor/creditor relationship, litigation, or even asset protection planning. This is especially true with the increased eligibility for persons over 55 claiming a homestead of $175,000. Finally, practitioners should keep their eyes open for the increases which will occur every three years starting this April.

If you would like a list of the exemptions in California, as amended, please send us an email and we will send you a free copy of our desktop reference entitled “Bankruptcy for Attorneys and Accountants.” The updated list of exemptions is contained in our desktop reference. Additionally, if you would like a copy of the text of AB 929, send us an email and we will send you a copy.