The intent of bankruptcy is not to strip you of everything you own. Exemptions allow you to keep many, if not all, of of your belongings.
Written by Attorney Eva Bacevice.
Updated April 1, 2022
Bankruptcy exemptions can play a big role in deciding whether or not you want to file a case. Many people believe that when you file a case you'll have to give up all of your possessions. But this generally isn't true because exemptions function as built-in protection. Debtors are usually able to keep most, if not all of their property by using exemptions.
When you file a bankruptcy case, your property becomes part of the bankruptcy estate. The trustee assigned to your case has access to your bankruptcy estate and can liquidate or sell the assets that are within the bankruptcy estate. But this is offset by exemption laws, which are laws that allow you to protect your property. When you file an individual bankruptcy case, whether it's a Chapter 7 or a Chapter 13, it's important to understand what exemption laws apply.
Filers in some states, including Texas, get to choose whether to apply the federal exemptions or state exemptions. But keep in mind you can only use one set of exemptions. You can't pick and choose which exemptions you prefer for different types of property. The choice is for the set of exemptions as a whole, so it's important to review both sets carefully.
Federal exemptions offer protections for both real and personal property. We'll highlight some of the most commonly used exemptions in this article.
Federal Homestead Exemption for Real Property
The federal homestead exemption protects equity you have real property you use as your primary residence. (Note that it doesn't apply to rental or investment properties.) To calculate your equity, you subtract what you have left to pay on your mortgage (plus any liens against your home) from your home's current fair market value. As of April 1, 2022 you can protect up to $27,900 worth of equity in your home. If you're married and filing jointly you can double that amount.
Federal Personal Property Exemptions
Different types of personal property are also protected under federal exemptions. For example you can protect up to $4,450 of equity you have in a motor vehicle and up to $1,875 of jewelry. You can also protect up to $14,875 worth of household goods, though no item in this category can exceed $700.
Federal exemptions also offer protections for tools of the trade ($2,800), personal injury recovery ($27,900), and health aids (fully protected). The Bankruptcy Code also allows you to apply a wildcard exemption for any property you own that's not covered under another exemption or that exceeds available exemptions. Under the wildcard exemption, you're allowed to protect up to $1,475 plus up to $13,950 if haven't fully used the homestead exemption.
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Texas State Exemptions
As a whole, Texas state exemptions are much more favorable than the federal exemptions. For example, the Texas homestead exemption is unlimited so long as your home sits on 10 acres or less in a city or 100 acres or less in the country (which can double to 200 acres for families). This means you could own your house and land outright (no mortgages or liens) and protect all of it. But keep in mind that you can claim the full Texas homestead exemption if you've owned the home for at least 40 months.
Texas' motor vehicle exemption is also more favorable than the equivalent federal exemption. In Texas, you can protect the entire value of one car per licensed household member, whether or not that household member actually drives.
Texas state exemptions for personal property are limited to $50,000 for single adults or $100,000 for families. Texas also lays out specific exemptions for up to two firearms, animals including pets and livestock (specifically 12 head of cattle and 60 head of other livestock), and athletic and sporting equipment.
Texas expands protections on retirement accounts (for those not already excluded from the bankruptcy estate) as well as on insurance. But any proceeds from legal claims aren't exempt, and Texas doesn't have a wildcard exemption.
Bankruptcy laws were designed to help people in serious financial distress get back on their feet. Bankruptcy is meant to give filers a fresh start, not to make them start over from nothing. That's why there are exemptions. Exemptions allow you to keep many, if not all, of the important items you'll need in your next chapter.
In Texas, you can choose whether you want to use the state's exemptions or the federal bankruptcy exemptions. To decide, you'll want to look at each set of exemptions as well as what property you own and want to protect.