STOCKTON, CA - Most people filing Chapter 7 bankruptcy in California are able to keep the majority of their property, but the level of protection depends almost entirely on which of the state's two exemption systems is selected at the time of filing. Stockton bankruptcy attorney Alia Khan Abedelal of Khan Law (https://akhanlawoffices.com/bankruptcy-exemptions/) explains how California's System 703 and System 704 exemptions work, which assets each system protects, and how choosing the right system can mean the difference between keeping and losing significant property.
According to Stockton bankruptcy attorney Alia Khan Abedelal, California has opted out of the federal bankruptcy exemption system under 11 U.S.C. section 522(b)(2), which means all Chapter 7 filers in the state must choose between System 703 under CCP section 703.140 and System 704 under the CCP section 704 series. The two systems cannot be combined, and the choice generally cannot be changed after the case is filed. "This is one of the most consequential decisions in a Chapter 7 case," Abedelal explains. "Choosing the wrong system can expose assets that would otherwise be fully protected."
Stockton bankruptcy attorney Alia Khan Abedelal notes that System 704 is typically the better choice for homeowners with significant equity, as it provides a homestead exemption under CCP section 704.730 that adjusts annually based on countywide median home sale prices. For renters and non-homeowners, System 703 generally offers stronger protection through a wildcard exemption under CCP section 703.140(b)(5), which provides up to $38,700 in protection that can be applied to any type of property when the full $36,750 residence exemption goes unused. Both systems protect up to $8,625 in motor vehicle equity, and System 703's wildcard can cover additional vehicle equity beyond that amount.
Attorney Abedelal points out that most employer-sponsored retirement plans, including 401(k), 403(b), and pension accounts, are protected under federal ERISA law regardless of which exemption system is chosen. Traditional IRAs and Roth IRAs are also protected up to the federal cap of $1,711,975 for cases filed on or after April 1, 2025. "One of the most common mistakes people make is withdrawing retirement funds to pay off credit card debt before consulting a bankruptcy attorney," she adds. "Those funds are likely protected in bankruptcy, and the withdrawal may trigger taxes and penalties on money that could have been kept."
Household furnishings, clothing, and personal effects are generally fully protected under both systems at their current resale value, which is typically far below any applicable exemption limit. Tools of the trade are exempt up to $10,950 under both systems, with a combined exemption of $21,900 available when both spouses work in the same trade. Social Security, SSI, and most public benefit payments are protected under both California law and federal statute.
When an asset's value exceeds the applicable exemption limit, the bankruptcy trustee has the authority to liquidate that asset, pay the exempt amount to the filer, and distribute the remaining proceeds to creditors. However, liquidation is not always the outcome. In many cases, an attorney and trustee can negotiate a buyback arrangement in which the filer pays the non-exempt equity in cash to retain the asset.
"Pre-filing planning is where cases are won or lost from a property protection standpoint," Abedelal observes. "Reviewing every asset, calculating equity, and selecting the right system before filing can eliminate non-exempt exposure entirely in many cases." Khan Law serves clients in Stockton, Lodi, Modesto, Tracy, and throughout San Joaquin County.
For those considering Chapter 7 bankruptcy in California, consulting a Stockton bankruptcy attorney before filing can help maximize asset protection and avoid costly mistakes in the exemption selection process.
About Khan Law:
Khan Law is a Stockton-based bankruptcy law firm dedicated to helping individuals and families protect their assets and evaluate debt-relief options under the Bankruptcy Code. Led by attorney Alia Khan Abedelal, a California-licensed attorney since 2007, the firm serves clients in Stockton, Lodi, Modesto, Tracy, and throughout San Joaquin County. For consultations, call (800) 419-8950.
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Company Name: Alia Khan Law
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Phone: (800) 419-8950
Address:11 S San Joaquin St
City: Stockton
State: California 95202
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Website: https://akhanlawoffices.com/
