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 July 22, 2020
Bankruptcy exemptions can play a large role in deciding whether or not you want to file a case. Many people believe that when you file a case you will have to give up all of your possessions. This, however, is generally not the case, because exemptions function as built in protection. Debtors are usually able to avoid turning over most, if not all of their property by the proper use of 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. This is offset, however, by exemption laws, which are laws that allow you to protect all of some of your property. When you file an individual bankruptcy case, whether it is a Chapter 7 or a Chapter 13, it is important to understand what exemption laws apply.
In many states you have the opportunity to choose whether to apply the Federal Exemptions or State Exemptions. Texas is a state that gives you this option. Do keep in mind, however, that whichever set of exemptions you elect has to be limited to that set. You cannot pick and choose which you prefer in specific scenarios. The choice is for the set of exemptions as a whole, so it is important to review both sets completely.
Federal exemptions offer protections for both real and personal property. We will highlight some of the most commonly-used exemptions in this article, and you can access the full set in the Bankruptcy Code.
For real property there is a homestead exemption which protects equity in your residence. Equity is the value which exists after you take the Fair Market Value (FMV) of your home less any mortgage(s) or other liens (such as property taxes or a water bill.) Under Federal Exemptions as of April 1, 2019 you can protect $25,150 of equity in your home. If you are married and filing jointly you can double that amount. The homestead exemption will only apply to your residence. It does not apply to any rental or investment properties.
For personal property there are varying amounts depending on the item that you’re allowed to protect. In Federal Exemptions, as of April 1, 2019, you can protect up to $4,000 of equity in a car, $1,700 for jewelry, and up to $13,400 in household goods. Federal Exemptions also offer protections for tools of the trade, personal injury recovery and health aids. The Bankruptcy Code also allows you to apply the “wildcard exemption” for any property that might not already be covered under another exemption. Under the wildcard exemption, you are allowed to protect up to $1,325 plus up to $12,575 of unused homestead exemption.
Texas State Exemptions
Texas State Exemptions, as a whole, are much more favorable than the Federal Exemptions. As an example, for real property, the homestead exemption is unlimited for a residence 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. Keep in mind, however that there is a residency requirement of having lived in Texas for at least 40 months before you can claim the full Texas homestead exemption.
Texas motor vehicle exemptions are also more favorable than Federal motor vehicle exemptions. Under Texas exemptions 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 in that you cannot exceed $50,000 as a single adult or $100,000 as a family. Texas also lays out specific exemptions for up to 2 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. Any proceeds from legal claims, however, are not exempt, and Texas does not have a specific wildcard exemption as a catch-all.
Bankruptcy is designed as a remedy to aid a person or couple in financial difficulty and get them back on their feet. It is intended to offer a fresh start, so it make sense that there are exemption laws that allow you to protect your possessions up to varying amounts. It would be very difficult to start over from nothing. The intent of the remedy is not to strip you of everything you own.. Exemptions allow you to keep many, if not all, of the important items you will need in your next chapter.