April 7, 2017
California allows debtors to choose from two different sets of bankruptcy exemption schemes. They are informally called System 1 and System 2. To learn more about what exemptions are and how they work in bankruptcy, see Bankruptcy Exemptions – What Can I Keep When I File for Bankruptcy?
Below we discuss some of the major differences between California's two exemption systems. For a detailed list of the exemptions in each of California's exemption systems, see California Bankruptcy Exemptions.
Differences Between System 1 (Section 704) and System 2 (Section 703) Exemptions
There are lots of differences between the exemptions allowed in California's System 1 and System 2. Here are some of the big ones.
Married Couples - System 1 allows married couples filing jointly for bankruptcy to each claim the amount of the exemption for some, but not all, exemptions (which means as a couple, they get twice the amount of the listed exemption). This is called "doubling." System 2 does not allow married couples filing jointly to double.
Homestead Exemption - Generally debtors who own their homes prefer System 1 as the value of the homestead exemption allowed under System 1 is up to $75,000 for single filers; $100,000 for a family; $175,000 if the homeowner is 65 or older or physically or mentally disabled; and $175,000 if the debtor is 55 or older and has a low income. Under System 2, the homestead exemption is $26,800.
Wage Exemption - No wage exemption is permitted under System 2 while System 1 allows an exemption of at least 75 percent of the wages received by the debtor within 30 days of the bankruptcy filing.
Jewelry - System 1 allows debtors to exempt up to $8,000 of jewels, heirlooms, and art. System 2 caps the value of this exemption at $1,600.
- Child Support and Alimony - All funds for child support and alimony can be exempted under System 2, but not under System 1.
- Wildcard - Under System 2, you can exempt up to $1,425 of any property plus an unused amount of the homestead exemption (which is $26,800). System 1 doesn't have a wildcard. For this reason, many bankruptcy filers that do not own a home (or who have a home with no or low equity) find System 2 to be most advantageous.
Other reasons exist for favoring one system over the other, as well. You should consult with a knowledgeable bankruptcy who practices in your area to be sure that you are properly protecting your assets.