Exemptions are not automatic. To take advantage of exemptions, exempt property must be claimed as exempt on the bankruptcy form Schedule C, Property Claimed as Exempt; otherwise it will be sold to pay your unsecured creditors. First, determine — if you have a choice — whether to use state or federal exemptions.
State or Federal Exemptions
In most states, you will have no choice but to use the state exemptions, but some states allow you a choice of either state exemptions or federal exemptions, and California offers 2 sets of state exemptions, called System 1 and System 2. The best way to choose is to look at the value of the property that you most want to keep, then determine which exemptions will allow you to keep it or at least get the greatest value for it. Often, this would be your home, so you would want to know the value of the homestead exemption, to apply it to your unencumbered equity in your home. If you don't own your home or your unencumbered equity is nil, then your motor vehicle is likely to be the next most wanted item or maybe your business tools.
Another major factor to consider in choosing exemptions is the value of the wildcard exemption, which can be applied to any property. If the amount of the exemption isn't great enough to protect the property that you want, then it may be possible to apply a wildcard exemption to increase the amount exempted. Note, too, that the homestead exemption in the federal exemptions can be used as a wildcard exemption if it is not used to protect the equity of your home.
Federal Nonbankruptcy Exemptions
If you use state exemptions, or if you choose System 1 of California exemptions, then you can also use the federal nonbankruptcy exemptions, so-called because these exemptions are listed outside of Title 11, which is the United States code for bankruptcy. You cannot use these exemptions if you are using the federal exemptions or System 2 California exemptions. Most of these exemptions apply to specific groups of people, such as government or railroad workers. Also, if there are both state and nonbankruptcy exemptions for the same property, then they cannot be added together to increase the value of the exemption.
Schedule C – Property Claimed as Exempt
To claim an exemption, whether using state or federal exemptions, supply:
- a description of the property
- a citation to the law that allows you to claim the exemption (ex: 11 U.S.C. § 522(d)(4))
- the amount of the exemption that you are claiming
- the current market value of the property
If you are unsure what category a property should be classified as, then make the best guess. Either the trustee or a creditor has 30 days to file a formal objection to your classification, which isn't likely to happen unless the item has significant value.
Note that the amount of the exemption cannot exceed the exemption limit, but it can be less, and should be, if you intend to use the same exemption category for several items. Your total exemptions for any category cannot exceed the legal limit for that category, so if the limit is exceeded, you must decide what to keep, use a wildcard exemption if it is available, or pay the trustee the difference.
However, if there is no limit for the exemption category, then write "no limit" for the amount of the exemption. Even if there is no limit, however, still estimate the market value of the item, since the trustee may decide that the item was misclassified if the category isn't clear.
Your attorney can help you to fill out this form or you can consult books that specifically detail on how to file for Chapter 7 bankruptcy. A good book should have the legal citations for each state for each type of exemption and for the federal exemptions.
Determining Current Market Value
The hardest part of this form is determining the market value. If it's a financial account, such as a savings or checking account, then just list the amount in the accounts at the time of the filing, or give a close approximation.
If the item is valuable, such as jewelry, antiques, or other collectibles, but it is difficult to value, then try to get the opinion of an appraiser or use some other resource that could give an approximate value of your item. A good source of current market information is the Internet, especially sites that allow sellers to sell used goods, such as eBay.
If you have a motor vehicle then use the average retail price at the National Automobile Dealers Association website (https://www.nada.com). If the motor vehicle needs repairs, then you can deduct the estimated cost of the repairs from the market value, since the vehicle wouldn't be saleable otherwise.
When entering the current market value in Schedule C, ignore any liens, although liens will lower the amount of any sale, so the trustee will certainly consider it in deciding whether to sell the item.