Answer: What property can I keep in bankruptcy?
What is protected from my creditors?The answer to this depends upon the type of bankruptcy that you file:
If Chapter 7:
Chapter 7 is the “straight” bankruptcy. It is used by individuals to get a “fresh start”. A trustee is appointed in a chapter 7 whose task it is to gather the debtor’s non-exempt assets and sell them to pay (sometimes) a portion of the creditors’ claims. The vast majority of cases do not have any property sold as Texas Exemptions are very broad and cover most property owned by a debtor and Federal Exemptions are also liberal in that regard. Businesses that wish to liquidate and terminate their operations also can use Chapter 7 to close up shop. Partnerships can also use Chapter 7 for debt relief.
If Chapter 13:
If you owe money to a creditor who has a lien on property (such as a car or title loan or a mortgage on your home), that creditor must continue to be paid. If not, it may recover its collateral(foreclose or repossess). Therefore, you must continue to make the payments on your house and cars if you wish to keep them. Also there are certain types of consumer purchases where you may have bought an item (for example, an appliance). The agreement may give the retailer a lien. In such cases, it may be necessary to pay for the value of the item in the bankruptcy, continue the payments or surrender the items. As an alternative, you may be able to redeem the item through the Chapter 13, that is, pay the creditor the value of the item instead of the actual debt you owe. If you believe that any collateral is worth much less than you owe on it, please discuss it with me.
Under the 2005 bankruptcy law amendments, it is very important to know how long you have lived in Texas and if you have resided in another state within the past 2 years, that state’s exemption laws may apply. You must inform our office immediately so that proper exemptions can be claimed.
Which exemptions do I get? If you have been a resident of the State of Texas for 2 years you have the option to choose between Texas Exemptions and Federal Exemptions if you file bankruptcy. Texas Exemptions are available whether you file bankruptcy or not. The limitations regarding 2 years residency are not applicable if you are not filing bankruptcy. Federal Exemptions are ONLY available if you file bankruptcy and are not available in the context of judgment creditors seeking collection from your assets.
Article 16 of the Texas Constitution provides for a Homestead Exemption forTexas residents. This exemption under the bankruptcy rules apply to those who have resided in Texas for 2 years. A city homestead is allowed to encompass 10 acres of land and the home on it. A rural homestead encompasses two hundred (200) acres of land for a couple and 100 acres for an individual, and the structures on them. You may have either a city or rural homestead, but not both. You may not have 2 homesteads. If you sell your homestead, the proceeds from that sale are protected from your creditors claims for a period of six months. If you acquire a new homestead in that 6 month time period, any excess from the prior proceeds not used to purchase that new homestead would no longer be exempt.
The only types of liens that are good against a homestead are:
(1) liens for purchase money loans (money that you borrowed to buy or refinanced the property);
(2) liens for home improvements; and
(3) liens for taxes.
Accordingly, general creditors cannot seize the homestead and it does not pass to a trustee in bankruptcy. You must continue to pay the creditors with legitimate liens on the homestead or they can foreclose.
Also, contrary to what some people believe, a creditor who has a judgment does not have a lien that is good against a homestead. But, when you go to sell your homestead, you may have a problem. If there are judgments against you, a title company probably will refuse to issue a title policy unless the judgments are removed or the funds escrowed with the title company to pay the judgments. It is usually the title company’s position that it does not know whether the property is really homestead or not. It simply will not take the risk that the property is not homestead.
For the property to be homestead, it is not necessary that you have claimed it as such for the purposes of property taxes. You often reside in the property or maintain your business there. In addition, homestead is a “state of mind.” That is, you should intend that the property is your homestead. Even if you currently live elsewhere or have temporarily rented the homestead, it may not lose its homestead character if you intend to return.
Under 2005 bankruptcy laws, there is a limit on how much equity can be claimed in a bankruptcy if the homestead was acquired within the last 3 years and 4 months or if was acquired by transferring non-exempt property into the home with an intent to hinder, delay or defraud creditors in the last 10 years. If so, then under certain circumstances the equity may be limited to $170350. Please let me know immediately if either of these fact situations may exist for you. If you are in doubt you need to ask me.
PERSONAL PROPERTY EXEMPTIONS:
Besides the homestead, the State of Texas allows certain personal property exemptions. The personal property exemptions – usually simply called “exempt property” or “exemptions” are limited to a total amount to $50,000 of fair market value for a single person or $100,000 for a family. The value is to be determined after deducting the amount of any liens or mortgages on the property. The term “fair market value” means the price that a willing buyer would pay a willing seller for the property. It usually is much less than the “replacement value” that you may have used for your insurance purposes. If the items are regular household goods and not antiques or unique in nature, then a garage sale value is generally used in determining what the assets are worth. In addition, property is not exempt to the extent that it has a lien or mortgage on it. Accordingly, the value claimed as exempt is probably only the equity in the property.
Only certain types of creditors can obtain a lien on “homestead property” as described above ‑ many more types of creditors can obtain a lien on “exempt property.” Essentially, any creditor that you chose to grant a lien can obtain a lien on exempt property. Generally, a creditor cannot obtain an involuntary lien on the property. That is, the property may not be seized by an ordinary judgment creditor to satisfy its judgment. It also means that exempt property will not go to the trustee to be liquidated for the benefit of creditors in a bankruptcy.
Besides the dollar limitation on exempt property, the property must fit into certain categories. Section 42.002 of the Texas Property Code, provides that the following personal property is eligible for the exemption:
(1) home furnishings, including family heirlooms;
(2) provisions for consumption;
(3) farming or ranching vehicles and implements;
(4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;
(5) wearing apparel;
(6) jewelry not to exceed 25% of the aggregate limitations ($50,000 for a single person or $100,000 for a family); Jewelry for a single person can not exceed $12500 or for a family in the amount of $25000)
(7) two firearms;
(8) athletic and sporting equipment, including bicycles;
(9) a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver’s license or who does not hold a driver’s license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;
(10) the following animals and forage on hand for their consumption:
(A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;
(B) 12 head of cattle;
(C) 60 head of other type of livestock; and
(D) 120 fowl(yes, it really is there–it used to be 30 each of geese, guineas, chickens and turkeys and someone changed it around 20 years ago to the 120 number….);
(11) household pets; and
(12) the present value of any life insurance policy to the extent that a member of the family of the insured or a dependent of a single insured adult claiming the exemption is a beneficiary of the policy.
In addition to the above, and not subject to being included in the $50,000 / $100,000 limit, are the following:
(1) current wages for personal services, except for the enforcement of court-ordered child support payments; and
(2) professionally prescribed health aids of a debtor or a dependent of a debtor.
Unpaid commissions for personal services not to exceed 25% of the aggregate limitations ($50,000 / $100,000) are exempt.
Also your interest in a stock bonus, pension, profit-sharing, annuity, or similar plan (including an IRA or 401k) is exempt if the plan qualifies under the provisions of the Internal Revenue Code. There are no dollar limitations on the retirement amounts.
Tax refunds are not exempt under Texas exemptions. Cash and money in bank, mutual funds accounts are not exempt under Texas Exemptions. In addition if you are a signer on your parent’s accounts to help them pay bills or for whatever reason, you must tell me. It is probably protected but must be handled specially.
(Section 522, Bankruptcy Code)
Note: You cannot claim both the Texas and Federal Exemptions. You must claim one or the other. Some States do not allow Federal Exemptions as an Option
As you can see, the Texas laws are very generous on exemptions. Accordingly, especially because of the Texas Homestead Exemption, we would usually claim exemptions under Texas law. However the Bankruptcy Code also provides exemptions that we refer to as the Federal Exemptions. These exemptions, while generally more limited than the Texas exemptions, do contain some categories that are different from those allowed by our state statute. Accordingly, especially if you do not have a homestead, you may wish to explore the possibility of claiming exemptions under Federal law.
Generally stated, as of April 1, 2022 the Federal Exemptions allow each Debtor: (If you are married and file together these amounts are doubled)
1) Up to $27900 in homestead;
2) Up to $4,450 in equity in one motor vehicle;
3) Up to $700 in any particular item or $14875 in value, in household furnishings, household goods, apparel, appliances, books, animals, crops, or that are held primarily for personal, or household use;
4) Up to $1,875 in jewelry;
5) Up to $1475 plus $13950 of unused homestead exemption ‑‑ “catch all.”
6) Up to $2,800 in tools of trade;
7) Any unmatured life insurance contract;
8) Up to $14875 in cash value of life insurance;
9) Professionally prescribed health aids;
10) Your right to receive ‑‑
- a) Social security, unemployment or public assistance benefits;
- b) veterans’ benefits;
- c) disability, illness or unemployment benefits;
- d) alimony, support, etc. reasonably necessary for you or your dependents.
- a payment under a stock bonus, pension, profit sharing, annuity or similar plan on account of illness disability, death, age or length of service to the extent reasonably necessary for the support of the debtor.
- award under a crime victim’s reparation law;
- payment for wrongful death of an individual of whom you were a dependent ‑‑ to extent reasonably necessary for support;
- life insurance payment on death of an individual of whom you were a dependent ‑‑ to extent reasonably necessary for support;
- up to $27900 because of personal injury, not pain and suffering or compensation for actual monetary loss; or
- payment in compensation of loss of future earnings — to the extent reasonably necessary for support;
- Retirement funds to the extent that those funds are in a fund or account that qualifies under Internal Revenue Code.
If you chose Federal or State Exemptions, you are able to avoid a lien given to a finance company to the extent that:
(1) the lien is on your household goods or tools of the trade (not including vehicles);
(2) you did not use the money obtained from the finance company for the purchase of
As a rule, only specific property stated in Section 6334 of the Internal Revenue Code is exempt from levy by the Internal Revenue Service. Therefore, the above exemptions (both State and Federal) have no application to save property from seizure by the IRS.
Pursuant to Section 6334, the following property is exempt from levy:
1) Wearing apparel and school books. Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;
2) Fuel, provisions, furniture, and personal effects. If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock and poultry of the taxpayer, as does not exceed $1,650 in value.
3) Books and tools of a trade, business or profession. Books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed total $1,100 in value.
4) Unemployment benefits. State or United States unemployment benefits.
5) Undelivered mail(I know, isn’t that strange?)
6) Certain annuity and pension payments. Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force and Coast Guard Medal of Honor Roll and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.
7) Workmen’s compensation.
8) Judgments for support of minor children. If the taxpayer is required by a judgment entered before the date of the tax levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.
9) Minimum exemption for wages, salary, and other income.
a) Individuals paid weekly. The sum of
i)the standard deduction, and
ii)the aggregate amount of the deductions for personal exemptions,
iii)divided by 52.
b) Individuals paid on other than weekly. An amount determined by the IRS to be as close as possible to that amount that would be exempt if the taxpayer was paid weekly.
10) Certain service-connected disability payments.
11) Certain public assistance payments.
12) Assistance under job training partnership act.
13) Principal residence. This is misleading. The Internal Revenue Code provides that the taxpayer’s principal residence cannot be levied unless the district or assistant district director of the IRS personally approves the levy. It is our understanding, that the director routinely gives this approval and homes are routinely seized by the IRS.
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