Texas Bankruptcy Laws and Exemptions: What to Expect



Texas Bankruptcy Laws and Exemptions: What to Expect

Filing for bankruptcy can be a scary thing. You may be worried about losing all your stuff and having to start completely over. But that’s usually not how it works – bankruptcy is meant to give people a fresh start, not take everything away. Texas bankruptcy laws include exemptions that allow you to keep certain assets, like your home, car, and personal belongings up to a certain value. This article will explain how the Texas bankruptcy exemptions work so you know what to expect if you file.

Choosing Between Texas and Federal Exemptions

One of the nice things about filing bankruptcy in Texas is that you get to pick whether to use the Texas state exemptions or the federal bankruptcy exemptions. You can’t mix and match – it’s one set or the other. But it’s good to have options!

Usually Texas exemptions are more generous, especially when it comes to protecting your home. But federal exemptions offer something Texas doesn’t – a “wildcard” that lets you protect any property up to a certain value. So you really need to compare your specific situation to both sets of exemptions and figure out which one allows you to keep more of your stuff.

The Wildcard Exemption

The federal bankruptcy exemptions include a wildcard exemption that lets you protect any type of personal property up to $1,325 in value. This is useful for protecting things Texas doesn’t specifically exempt, like jewelry, collectibles, or recreational vehicles. Texas doesn’t have an equivalent wildcard exemption.

Homestead Exemption

When it comes to your home, the Texas homestead exemption is extremely generous. It allows you to fully protect your home regardless of value if it’s your primary residence. The federal exemption only protects up to $26,925 of home equity.

So if you have a lot of equity built up in your home, the Texas exemptions are definitely the way to go. You get to keep your house! The federal exemptions would force you to sell your home to pay creditors and only let you keep $26,925 of the profits.

Personal Property Exemption

For personal property like furniture, clothing, appliances, etc., Texas allows you to exempt up to $50,000 as a single adult or $100,000 for a family. The federal exemption is $13,400 per person. So for individuals, the federal exemption may provide more protection for personal items.

Retirement Accounts

Retirement accounts like 401(k)s and IRAs are fully protected in bankruptcy under both state and federal law. So no matter which exemptions you use, your retirement savings are safe.

Making the Choice

As you can see, there are pros and cons to both sets of exemptions. If you own a home with lots of equity, the Texas exemptions are likely better since they fully protect your house. If you rent and have more personal property, the federal exemptions may allow you to protect more of your stuff.

It’s best to sit down with a bankruptcy attorney and discuss your specific assets and debts. They can help analyze your situation and determine which set of exemptions is right for you.

How Much Personal Property You Can Keep

Under Texas bankruptcy exemptions, the amount of personal property you can protect depends on your family status:

  • Single adult – Up to $50,000 in personal property
  • Family – Up to $100,000 in personal property

This includes things like furniture, clothing, appliances, jewelry, firearms, and more. Texas does not limit exemptions by item type – it’s just a total dollar amount cap. However, some specific items like health aids and heirlooms may be fully exempt with no dollar limit.

One thing to note is that the $50,000 and $100,000 caps apply to the fair market value of your personal property, not what you paid for it. So you’ll want to estimate what your items would sell for at a garage sale or on Craigslist to see if you fall under the limit.

Also, the more valuable an item, the more a trustee may scrutinize it and argue it’s not fully exempt. Things like expensive jewelry and recreational vehicles may get pushback. So be conservative in claiming exemptions on big ticket items.

Protecting Your Vehicle

Texas allows you to fully exempt one vehicle per family member up to a total value of $50,000. If you file as a single person, you can fully protect one car worth up to $50,000 – for example, a $20,000 SUV. If you’re a family of four, you could protect four vehicles worth up to $200,000 total – so maybe two $50,000 SUVs and two $20,000 sedans.

The trustee will look at the fair market value of your vehicle to determine if it’s fully exempt or if there is non-exempt equity that can be taken. If your car is worth more than your available exemption, you may have to pay the trustee the non-exempt portion of the value or surrender the vehicle.

It’s also important to note that any amount you still owe on an auto loan reduces the vehicle’s exempt value. For example, if you have a $30,000 car but still owe $15,000 on the loan, only $15,000 of value is exempt since the creditor owns the other $15,000.

Using Exemptions Requires Planning

To take full advantage of Texas bankruptcy exemptions and protect as much property as possible, it’s important to do some pre-planning.

For instance, you may want to pay down vehicles and other assets before filing so there is minimal non-exempt equity for the trustee to take. Or you may want to purchase exempt assets like household furnishings instead of non-exempt assets like jewelry or collectibles.

A good bankruptcy attorney can provide specific guidance on how to arrange your assets to maximize Texas exemptions. Proper planning can sometimes mean the difference between keeping an asset or having to surrender it to the trustee!

Texas Exemptions Get Adjusted Periodically

The dollar amounts for many Texas bankruptcy exemptions get adjusted periodically based on inflation. For example, the personal property exemption for single adults was increased from $30,000 to $50,000 in 2015. So be sure to check for the latest exemption amounts when filing.

Federal bankruptcy exemptions also get periodically adjusted for inflation. The last update was in April 2022. So compare the current dollar amounts for federal vs Texas exemptions when deciding which to use.

Exemptions for Retirement Accounts

Retirement accounts like 401(k)s, 403(b)s, IRAs, and pensions are fully exempt in bankruptcy under both Texas and federal law. That means creditors cannot touch your retirement savings no matter how much they are worth.

However, you cannot make excessive contributions to retirement accounts in the months before filing and still retain full exemption protection. If the court finds you were hiding money from creditors, they may force you to turn over some of the funds.

Protecting College Savings Accounts

Texas provides strong protection for college savings accounts like 529 plans. Up to $100,000 per beneficiary is exempt from creditors in bankruptcy.

So if you’re saving for your kids’ education, that money will be safe. Just make sure additional contributions in the months leading up to bankruptcy are reasonable and consistent with prior contributions.

Keeping Term Life Insurance

Term life insurance policies with no cash value are fully exempt in a Texas bankruptcy. Whole life or universal life policies with cash value are only exempt up to $12,000 per person.

So consider switching to term life insurance if allowed by your policy. That way the full death benefit is protected and available for your family if something happens to you.

Exempting Tools of the Trade

Texas allows tradesmen and craftspeople to fully exempt up to $50,000 in tools, equipment, and inventory used in their trade or profession. This includes things like machinery, books, computers, software, office furniture, and more.

To qualify, you must be actively engaged in the trade as your primary occupation. Retirees or hobbyists may not be able to take advantage of this generous exemption.

Protecting a Homestead in Bankruptcy

Texas has one of the strongest homestead exemptions in the country. If you file bankruptcy in Texas, you can keep your primary home regardless of how much equity you have in it.

Even million dollar mansions are fully protected. Creditors cannot force the sale of your home to get access to equity under Texas law.

To qualify for the homestead exemption, you must have owned the home for at least two years before filing for bankruptcy. If you recently purchased or built the home, it may not be fully exempt.

Avoiding Liens on Your Home

While your home is fully exempt in bankruptcy, secured creditors can still foreclose if you don’t keep up with mortgage, HOA, and tax payments. The exemption does not make those debts go away.

In Chapter 13 bankruptcy, you can cure missed payments over time through your repayment plan. This allows you to reinstate the mortgage and avoid foreclosure.

Beware the Homestead Cap

While there is no limit on the value of a homestead exemption in Texas, there is a cap on the size of the land it applies to. For lots under 10 acres, the home, improvements, and land are fully exempt. For larger lots, only the home, improvements, and 10 adjoining acres are exempt.

So if you have a 50 acre ranch, a creditor could force the sale of 40 acres while you keep the 10 acres surrounding the house. Just something to be aware of.

Protecting Prepaid College Tuition Plans

In addition to protecting 529 college savings accounts, Texas exempts prepaid tuition contracts like the Texas Tuition Promise Fund. These programs allow you to prepay future college tuition at today’s rates to hedge against inflation.

Your child’s prepaid tuition is safe in bankruptcy. Creditors cannot touch it or force you to liquidate the account and give them the money.

Keeping Annuities

Under Texas law, annuity payments you receive as retirement benefits are fully exempt from creditors in bankruptcy. However, the cash value of an annuity remains accessible to the trustee up to $12,000 per person.

So consider annuitizing a non-exempt annuity before filing bankruptcy. That converts it into exempt retirement income streams a creditor cannot touch.

Protecting IRAs

IRA retirement accounts receive unlimited protection in bankruptcy thanks to Texas laws and federal bankruptcy exemptions. This includes traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

So no matter how large your IRA balance, creditors cannot touch it in bankruptcy as long as the funds are reasonably accumulated for retirement.

Exempting Personal Injury Claims

Any claim for personal bodily injury that you file or settle outside of bankruptcy is fully exempt under Texas law. This includes car accidents, slip and falls, medical malpractice, and more.

However, claims for lost wages or property damage may only be exempt up to $30,000. And if you file the injury lawsuit after declaring bankruptcy, the proceeds become property of the bankruptcy estate.

Protecting Disability Benefits

Disability income you receive from government or private sources is fully exempt in a Texas bankruptcy. This includes Social Security disability, worker’s compensation, VA disability, and long-term disability insurance.

Creditors cannot garnish these benefits to collect on debts you discharge in bankruptcy. The payments are protected so you can cover basic living expenses.

Keeping Unemployment Benefits

Unemployment compensation from the Texas Workforce Commission is fully exempt in bankruptcy. Creditors cannot garnish these benefits to collect on discharged debts.

However, unemployment benefits can be garnished to pay child support, spousal support, and federal income taxes. Those specific debts are not dischargeable in bankruptcy.

If a creditor tries to garnish your unemployment benefits for a debt that was discharged, you can file a motion with the bankruptcy court to stop the garnishment and recover any funds already taken. The discharge order makes it illegal for creditors to pursue discharged debts.

Using Bankruptcy to Stop Wage Garnishment

If a creditor has obtained a court judgment against you and started garnishing your wages, filing for bankruptcy can quickly stop the garnishment.

The automatic stay that goes into effect after a bankruptcy petition is filed immediately halts wage garnishment and most other collection activities while your case is pending. Creditors who violate the stay can be sanctioned by the court.

In addition to stopping the garnishment, a Chapter 7 bankruptcy discharges most types of debts. This prevents creditors from resuming garnishment after the automatic stay ends. They no longer have a valid claim against you.

Chapter 13 bankruptcy stops garnishment and creates a repayment plan to catch up on missed payments. Once the plan is completed and you receive a discharge, the debts are eliminated.

Protecting Exempt Assets

Texas bankruptcy exemptions allow you to protect certain assets like home equity, vehicles, retirement accounts, household goods, tools of your trade, and more. Exempt assets cannot be taken by creditors or the bankruptcy trustee.

Properly claiming all your exemptions ensures you keep as much property as possible after filing. Texas is a very debtor-friendly state that allows you to protect extensive assets.

Discharging Medical Debt

Most medical debt, including bills from doctors, hospitals, and ambulance services, is completely dischargeable in Chapter 7 and 13 bankruptcy. The discharge wipes out the debt and protects you from further collection efforts.

Medical debts are unsecured, so there are no liens or repossession to worry about. And there is no limit on the amount of medical debt that can be discharged.

Eliminating Credit Card Balances

Credit card debt is generally one of the easiest types of consumer debt to discharge in bankruptcy. Filing Chapter 7 liquidation will eliminate your credit card balances, while Chapter 13 provides for repayment of only a portion of the debt.

The credit card companies cannot pursue you for discharged balances or penalize your credit. Bankruptcy provides a powerful tool to deal with burdensome credit card debt.

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