April 6, 2017
In California, you can choose between two sets of state exemptions in bankruptcy (commonly referred to as California Exemption System 1 and System 2). (Learn more about California’s two bankruptcy exemption systems.) Each system lets you protect a certain amount of property and assets in Chapter 7 bankruptcy. Which exemption system you choose can also impact the amount that you must repay in your Chapter 13 repayment plan.
Which system is best for you will depend on:
While California gives debtors the choice between System 1 and System 2 exemptions, you can’t mix and match exemptions from the two systems. Depending on which exemption system will allow you to keep more of your property, you must pick either System 1 or System 2.
In general, you'll need to compare how much property you'll be able to exempt under each system to determine which one is right for you. (To get a complete list of the exemptions in each system, see California Bankruptcy Exemptions.) Here are a few scenarios that favor using the System 1 exemption scheme.
The most common reason that debtors choose System 1 over System 2 is that they have a large amount of home equity in their principal residence. Both California exemption systems have a homestead exemption you can use to protect a certain amount of equity in your principal residence. But System 1 has a much more generous homestead exemption than System 2 in California. (Learn more about California’s homestead exemption.)
Depending on certain individual factors (such as your age, health, and whether or not you have a family), using System 1 (also known as 704 exemptions) may allow you to exempt up to anywhere from $75,000 to $175,000 of equity in your home. In contrast, System 2 (also known as 703 exemptions) only allows debtors to exempt up to $26,800 in home equity.
However, while System 1 has a higher homestead exemption than System 2, System 2 will typically allow you to keep more of your personal property (due to protecting a higher amount of equity in your car and a generous wildcard exemption). This means that System 1 will generally be in your best interest if you have a lot of home equity but little other property. If you also have a significant amount of personal property, however, protecting your equity using System 1 can be burdensome. For instance, you might have to give up substantial property in a Chapter 7 case. Either way, make sure to thoroughly compare both systems to see which one is right for you.
Under California’s Exemption System 1, you can typically exempt your:
In System 2, your personal bodily injury recovery is typically exempt up to $26,800. If you're expecting to receive a large recovery from a workers’ compensation or personal injury claim, System 1 might be more generous in some cases than System 2.
But keep in mind that the interaction between your injury claim and your bankruptcy can be complex. For this reason, talk to a knowledgeable bankruptcy attorney in your area to learn your options before filing your case.
Unless you have a lot of equity in your home, System 2 will typically allow you to exempt more property than System 1. Below are some of the most common situations that might lead you to choose System 2.
System 2 has a lower homestead exemption amount than System 1. But when it comes to protecting your personal property (such as your car or cash in the bank), System 2 exemptions are typically more generous and flexible.
In general, System 2 allows debtors to keep more of their personal property with its motor vehicle and wildcard exemptions (discussed below). For this reason, debtors who have no equity in their home (or who don’t own a home) typically choose System 2 over System 1.
Both System 1 and System 2 have a motor vehicle exemption you can use to exempt a certain amount of equity in your vehicle (such as a car, truck, or motorcycle). System 1 offers debtors a $3,050 motor vehicle exemption.
But under System 2, you can exempt up to $5,350 of equity in one or more of your motor vehicles. In addition, if System 2’s exemption is not enough to cover the equity in your motor vehicle, you'll be able to exempt the rest with the wildcard exemption (discussed below). (Learn more about California’s motor vehicle exemption.)
California’s System 2 exemptions contain a wildcard exemption that you can use to protect your equity in any type of asset in bankruptcy. (Learn more about the wildcard exemption in bankruptcy.)
System 2’s $1,425 wildcard exemption allows debtors to protect equity in any type of property. Additionally, debtors can use any unused amount of the homestead exemption. For debtors who don’t have any home equity, this means that they can exempt up to $28,225 ($1,425 plus the unused homestead exemption amount of $26,800) of equity in any type of property they have (such as money in their bank accounts, a boat, or an otherwise nonexempt collection).
System 1 has no such wildcard exemption. For this reason, most debtors prefer System 2 over System 1 unless they are trying to protect a large amount of home equity in bankruptcy.
Recognize that other scenarios might lead you to prefer one of California’s exemption systems over the other. There are many factors that you need to take into account, and your situation is unique. For this reason, make sure to research all of California’s exemption laws carefully and talk to a knowledgeable bankruptcy if you are not sure which system is right for you.