Bankruptcy exemptions protect the equity in your property from creditors and the bankruptcy court—preventing the equity from being used to pay your creditors. Equity is the value of property after you subtract the amount of any liens against the property from its fair market value.

The equity in your home is one such asset in bankruptcy. And bankruptcy exemptions—including the homestead exemption—allow you to protect the property you will need to maintain a home and employment after bankruptcy.

Bankruptcy exemption amounts vary by state, so the amount you will be able to protect will depend on where you live and the type of bankruptcy you file (Chapter 7 or Chapter 13).

In California, bankruptcy exemptions play a crucial role in both Chapter 7 and Chapter 13 bankruptcy filings. These exemptions allow individuals to retain certain assets, with the homestead exemption being particularly significant for homeowners. The homestead exemption protects a certain amount of equity in the debtor's primary residence. As of the knowledge cutoff in 2023, California offers two sets of exemption systems (System 1 and System 2), and debtors can choose the one that best protects their assets. System 1 has a larger homestead exemption, which varies based on the debtor's age, family status, and income, while System 2 provides a lower homestead exemption but offers a wildcard exemption that can be applied to any property. The exact amounts of these exemptions are subject to periodic adjustments for inflation. It's important for debtors to consult with an attorney to determine which set of exemptions is most advantageous for their specific situation and to understand how the exemptions apply to their property and equity.