California and federal law allows a person to bring some assets through bankruptcy, by allowing exemptions. We the people want citizens to be able to make a fresh start without needing to go begging on the streets; but if we are going to stiff creditors, we don’t want the debtors to gorge on expensive assets while shedding debt. You get to keep your 10-year-old beat-up Toyota; you don’t get to keep the brand-new Lexus that your sugar daddy gave you. How do the courts enforce this difference?
California has two exemption schemes. Under Type 1, at California Civil Code Section 704, a debtor may exempt a motor vehicle to the extent of $2,725. This means that, once the debtor files bankruptcy, the trustee may sell the debtor’s car, but only if the trustee will realize some dividend for the creditors after paying the exemption amount of $2,725 to the debtor. If the trustee can’t do this, or convince the judge she can do it, the debtor keeps the car.
If the car is used as a “tool of the trade,” for instance, because it belongs to a realtor who uses it only to ferry clients to house showings, the exemption increases to $4,850. If both spouses have business cars, the exemption is $9,700.
If the debtor chooses this Type 1 exemption scheme, he’s stuck with the entire scheme. The main advantage to Type 1 exemptions is that a married couple may claim a $100,000 exemption in their homestead. The main disadvantage is that there is no “wild card” exemption.
Type 2 exemptions allow a debtor to exempt $3,525 in any single car. In addition, the debtor may exempt up to $2,200 in tools of the trade. So the realtor’s car could conceivably have an exemption of $5,725.
Type 2 exemptions also allow a debtor to exempt up to $24,425 in any kind of property, the “wild card” exemption. Using this exemption, the debtor could protect almost $30,000 of value in a car, if he wanted to keep nothing else.