Expanding the Property Exemptions in a Chapter 7 Bankruptcy

California’s bankruptcy property exemptions, which are found in Chapter 700 of the Code of Civil Procedure, are unusually complex. The Golden State has two sets of property exemptions. Typically, property renters and recent buyers use Section 703 exemptions. Others generally use Section 704 exemptions. The listed exemptions, though detailed, are by no means complete. As outlined below, some obscure legal doctrines significantly expand these exemptions.

Almost any lawyer can fill out bankruptcy forms and submit them to the court. But only an experienced Irvine bankruptcy lawyer knows about informal bankruptcy exemptions that could be the difference between keeping treasured property and losing it in a bankruptcy liquidation sale.

The Mootness Doctrine

This doctrine often applies to consumable assets, like cash in a savings account or a financial windfall, like a large tax return or mortgage company escrow refund.

Usually, judges may only decide concrete matters and actual disputes. They typically cannot weigh in on “what ifs” and hypothetical questions.

Assume Sally and Jerry, who are unmarried, each claim they own a house. Ben files a suit to quiet title (have himself declared the owner). Before the judge considers the matter, the house burns down. Ownership of the house no longer matters, as the house itself has been destroyed.

Something similar could happen in bankruptcy. Assume Sally and Jerry, who are married, file a joint Chapter 7 bankruptcy petition. At the time they filed, they had $4,000 in a bank account. Usually, cash is non-exempt in bankruptcy, unless it’s in a long-term investment account, like a 401(k) retirement or 504 savings plan.

Since the money legally belongs to the bankruptcy estate and not Sally and Jerry, the trustee (bankruptcy manager) files a motion for turnover, commanding Sally and Jerry to “turn over” the $4,000.

However, before the judge considers the matter, Sally and Jerry spent the money on regular living expenses. Now, it doesn’t matter who owned the money, because the money is gone. So, the judge has no jurisdiction in this matter.

Best Interests of Creditors Rule

The ‘Best Interests of Creditors’ rule requires that the liquidation of a debtor’s assets under Chapter 7 bankruptcy ensures creditors receive at least as much as they would under other bankruptcy chapters. This principle often influences decisions on whether to liquidate nonexempt, non-consumable assets, like vacation cabins or sports collectibles, which formal exemptions might not cover. However, the trustee must consider if the net proceeds from selling such assets, after deducting costs like seizure, repairs, storage, and auction fees, would actually benefit the creditors. For example, if the sale of a debtor’s fishing boat, valued at $1,000, wouldn’t cover these costs and result in a meaningful distribution to creditors, the trustee may decide against selling it. This decision-making process reflects the rule’s emphasis on the creditors’ best interests, rather than the asset’s exemption status per se. In practice, disputes over asset liquidation often lead to settlements negotiated outside court, where both parties might ‘split the difference’ to reach a mutually acceptable agreement.

Reach Out to a Diligent Orange County Lawyer

Regardless of your financial problems, there’s usually a way out. For a free consultation with an experienced bankruptcy lawyer in Santa Ana, contact The Law Office of Charles A. May. We routinely handle matters throughout the Golden State.