Many people just can’t believe that they can file bankruptcy, keep all or most of their assets and still discharge all or most of their burdensome debt. In most cases, that is what Chapter 7 of the Bankruptcy Code was designed to do. Here’s how it works:
The purpose of filing Chapter 7 Bankruptcy is to get a “fresh start” by discharging your debts and keeping important assets so that you can go on with your life instead of constantly fighting a losing battle trying to pay an overwhelming debt balance to creditors. To make this happen, the Bankruptcy Code has provisions that will discharge most debt. It also has provisions called “exemptions” that keep assets from being turned over to creditors.
Exemptions under the Bankruptcy Code start with section 522 of the Code (11 USC §522). That part of the Bankruptcy Code says that a person filing bankruptcy can exempt certain assets from being taken by the trustee. While it provides for a list of property that can be claimed as exempt, it also allows each individual state to pass laws that allow or require a person filing bankruptcy to use the exemptions provided under that state’s laws. That is what California has done. Although bankruptcy cases are filed in Federal Court, in California you must use exemptions provided by California Law.
One of the extremely important factors in being allowed to claim exemptions, added to the Bankruptcy Code in 2005, is the concept of “domicile”. You must establish that your “domicile” is in the state whose exemption laws you want to use. Normally, this is the state where you have resided continuously over the past 2 years, but this can become complicated if you have moved during the past 2 years. It can become very complicated if you have moved more than once, so getting the advice of an experienced bankruptcy attorney is vital.
In California, there are two “lists” of exemptions to choose from. You may use any exemption in either list, but you can’t mix them up or use both lists. In some cases it is easy to decide which list to use. Generally, if a person has equity in a residence, they use one list; if they have no equity in a residence, they use the other list.
An experienced bankruptcy attorney can not only help you decide which list of exemptions to use, but with knowledge of the exemptions laws can also make sure that you have utilized every possible exemption to which you are entitled. See the article “What Property is Exempt” for more details.