If you’re considering bankruptcy in California, you’re probably asking:
“Will I lose my home, my car, or my savings?”
The good news is that California has strong exemption laws designed to protect essential property. But California’s system is unique — and choosing the right exemption scheme is one of the most important decisions you’ll make when filing.
Here’s what you need to know.
California Has Two Exemption Systems (But No Federal Option)
Unlike many states, California does not allow most residents to use the federal bankruptcy exemptions.
Instead, California provides two separate state exemption systems, and you must choose one:
- System 1 (C.C.P. § 704) – Best for homeowners with equity
- System 2 (C.C.P. § 703) – Best for renters or those needing a large wildcard exemption
You cannot mix and match between the two.
System 1 (C.C.P. § 704): Strong Homestead Protection
System 1 is commonly used by homeowners because it provides a powerful homestead exemption.
🏠 Homestead Exemption (Very Strong)
California’s homestead exemption protects:
The greater of:
- $300,000
OR - The countywide median sale price of a single-family home (capped at $600,000)
This amount adjusts annually.
This means many California homeowners can protect hundreds of thousands of dollars in home equity.
Example:
- Home value: $850,000
- Mortgage balance: $500,000
- Equity: $350,000
If your applicable homestead exemption is $600,000, your equity is fully protected.
Other Protections Under System 1
System 1 also includes protections for:
- Household furnishings and appliances
- Clothing
- Jewelry (limited amount)
- Tools of the trade
- Retirement accounts
- Public benefits
However, System 1 does not include a large wildcard exemption.
System 2 (C.C.P. § 703): The Wildcard System
System 2 is often chosen by:
- Renters
- People with little home equity
- Individuals with significant cash, tax refunds, or non-home assets
🏠 Smaller Homestead Exemption
System 2 provides a much smaller homestead exemption (significantly lower than System 1).
This makes it less ideal for homeowners with substantial equity.
💰 Large Wildcard Exemption
The major advantage of System 2 is the wildcard exemption.
It allows you to protect:
- A base wildcard amount
PLUS - Any unused portion of the homestead exemption
This can total tens of thousands of dollars that can be applied to:
- Cash
- Bank accounts
- Tax refunds
- Vehicles
- Business equipment
- Investments
This flexibility makes System 2 extremely useful in the right circumstances.
Motor Vehicle Exemptions
Both systems provide protection for vehicle equity, though the amount differs depending on which system you choose.
If you owe money on your car, exemptions protect only the equity — not the total value.
Example:
- Car value: $22,000
- Loan balance: $18,000
- Equity: $4,000
Only the $4,000 must fit within your exemption limits.
Retirement Accounts Are Protected
Most retirement accounts are protected under federal law, including:
- 401(k)s
- IRAs (subject to federal caps)
- Pensions
- Profit-sharing plans
Retirement savings are generally safe in California bankruptcy cases.
How Exemptions Work in Chapter 7
In Chapter 7:
- A trustee can sell non-exempt property.
- Exempt property is protected.
- Many consumer cases are “no-asset” cases.
Choosing the correct exemption system (704 vs 703) is critical to avoiding unnecessary risk.
How Exemptions Work in Chapter 13
In Chapter 13:
- You keep your property.
- You enter a 3–5 year repayment plan.
- The value of non-exempt property affects how much you must repay unsecured creditors.
Even in Chapter 13, exemption strategy directly impacts affordability.
Important Rules to Know
1. Residency Requirement
To use California exemptions, you must have lived in California for at least 730 days (2 years) before filing. If you recently moved, special rules apply.
2. Exemptions Protect Equity — Not Full Value
Exemptions apply only to your equity in property.
3. Do Not Transfer Assets Before Filing
Transferring property before bankruptcy can result in serious consequences, including denial of discharge.
Is Bankruptcy Right for You?
Bankruptcy can:
- Stop foreclosure
- Stop wage garnishment
- Stop repossession
- Eliminate credit card debt
- Eliminate medical debt
- Provide a fresh financial start
But the decision — and the exemption system you choose — must be carefully evaluated.
Speak With an Experienced Bankruptcy Attorney
California’s dual exemption system makes bankruptcy planning more complex than in many states.
The right strategy depends on:
- Your home equity
- Your vehicle equity
- Your cash and bank balances
- Your business assets
- Your long-term financial goals
Before filing, make sure you understand which exemption system protects you best.
If you’re overwhelmed by debt in California, schedule a consultation to review your options and protect what matters most.
