If Your Ship is Sinking, Don’t Give Away Your Life Vest!

One of the saddest things is when a person comes into my office explaining that they have waited to come in until they have used up all their savings, retirement funds, equity in their home and/or have gotten a loan on their car just to keep paying their credit cards and other debts.  This just breaks my heart because it was completely unnecessary.

The Bankruptcy Code does not want or encourage people to wait until they have used up all of their assets to file bankruptcy.   In fact, the Bankruptcy Code and California law discourages these actions by specifically protecting certain assets in a bankruptcy case from the reach of creditors.  So what  are some of the assets which are generally protected and what actions should you be taking to protect these assets?

Retirement Accounts- All private retirement plans and profit sharing plans are exempt.   Also, exempt are IRAs, IRA rollovers, Roth IRA and Keogh plans held by self employed individuals to the extent necessary for the support.   Therefore, you should not be using retirement accounts to pay credit cards, bringing home loan payments current on a house that is underwater or other bills which could be discharged in a bankruptcy.  Every withdrawal from a retirement account will be taxed on both federal and state levels as well as incurring the 10% penalty for early withdrawal unless it falls under an exception for early withdrawals.  If you are in your 30’s-40’s, a withdrawal of $1,000 will amount to a loss of $10,000 in retirement income.  If you are in your 20’s, a withdrawal of $1,000 will amount to a loss of $20,000 in retirement income.  The withdrawal of even smallest amount will be a huge reduction in retirement income later.

Homestead Exemption- The California homestead exemption applies to your principal “dwelling” on the date the bankruptcy petition is filed.  The minimum homestead exemption in California effective January 1, 2010 is $75,000.  The exemption is increased to $100,000 if the you or your spouse reside in the homestead or at least other one member of the family resides in the residence and does not own an interest in the residence.  The homestead exemption is increased to $175,000 if you or your spouse meets the minimum age of 65, is disabled or meet the “low income” qualifications’.  Therefore, if you still have equity in your home, do not use it to pay dischargeable debt such as credit card or personal loans.

Personal Property, Cars and Jewelry-   A person can generally exempt all household furnishing and goods, wearing apparel, appliances, books, animals, crops or musical instrument held primarily for personal, family or household use as long as any individual items could not be sold at a garage sale for more than $525.00.  In addition, a person can have  equity in a car and certain amounts of jewelry depending on the exemptions used in the Bankruptcy case.  Therefore, no loans should be taken out on a vehicle which is paid off.

Wildcard Exemption-  If the homestead exemption is not used as discussed above, a person can have in addition to the car, jewelry and household goods and furnishing exemptions, retirement accounts and the other exemptions provided under California law, a person can have up to $23,250 in cash and other assets at the time of the bankruptcy petition which will be exempt.  That means there is no reason to sell the RV, boat or use up your savings unless that is really want you want to do so.  However, if you are not going to be paying your credit card or other installment debt, you should make sure that you are not putting money in a bank or credit union where you have debt.  Many banks and credit union have agreements that allow set-offs if a loan is in default from other checking or savings accounts.

Personal Injury and Workers Compensation Awards-  Personal injury settlements are generally exempt under “lost compensation” and future earning awards are exempt to the extent reasonably necessary for support.  In addition, Workers Compensation Awards are exempt.

Life Insurance-  Term Life Insurance is generally exempt and Universal or Whole Life up to a cash value of $11,800.  Therefore, term life/whole life insurance should not be cancelled since it is much more expensive to obtain as you get older.

The purpose of the Bankruptcy Code is to provide people with a fresh start.  A fresh start does not mean empty cupboards, empty retirement accounts, empty savings accounts or no equity in a car or home.  We are all living longer and we will need food in our cupboards, money in our retirement accounts and a car that is paid off. 

If you do not have sufficient income to pay your bills as they come due and owing, you should seek legal counsel before withdrawing any monies from a retirement account, savings account or taking a loan against your home or car.  These are difficult times, but do not miss the help and protection provided by the Bankruptcy Code and California law by waiting too long.   Just because this ship is underwater does not mean that you should give up your life vests that you will need to keep you afloat!  


© 2010 Joan Grimes