Folks who file bankruptcy find relief when they leave behind their overwhelming debt and start living their fresh start. Before folks find their fresh start through bankruptcy though, a lot of them wonder what property they'll lose of they file. In this blog, we discuss the Texas bankruptcy exemptions and Federal bankruptcy exemptions, and what they protect in a Chapter 7 bankruptcy.
Outline
Do You Lose Everything if You File Chapter 7 Bankruptcy
Chapter 7 Bankruptcy Exemptions & How They Protect Property
What is the Role of the Trustee
Texas Bankruptcy Exemptions
Federal Bankruptcy Exemptions
Choosing Between Texas and Federal Exemptions
What if a Bankruptcy Exemption Doesn't Cover the Full Value
Do You Lose Everything if You File Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is sometimes referred to as a liquidation bankruptcy, and it's the most common form of bankruptcy in the United States. But just because it's sometimes referred to as a liquidation bankruptcy doesn't mean you lose everything you own just because you file.
While it's true that the bankruptcy trustee, who is appointed by the bankruptcy court, can sell your nonexempt property to pay off your creditors, there are exemptions in the bankruptcy code and Texas and Federal law that protect certain property. These exemptions enable individuals filing for Chapter 7 bankruptcy to retain certain assets and start anew with reduced debt.
Anyone considering bankruptcy should speak with our Austin bankruptcy lawyer or a bankruptcy attorney in your area who can explain the distinction between nonexempt property, which the trustee can sell, and exempt property, which the trustee cannot touch. Speaking to an Austin bankruptcy lawyer or a bankruptcy attorney in your area can help you understand how the different bankruptcy exemptions apply to your situation, and they'll help advise you on the right decision between filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
Chapter 7 Bankruptcy Exemptions
To be clear, the same bankruptcy exemptions exist in a Chapter 7 bankruptcy and a Chapter 13 bankruptcy, but the impact they have on you bankruptcy case will vary depending on which chapter of the bankruptcy code you choose to file under. Specifically, exemptions in a Chapter 7 bankruptcy protect property from being taken by the case trustee, while they're typically used in a Chapter 13 bankruptcy to determine the total dollar value of property that's not exempt to help calculate the minimum monthly payment for the Chapter 13 payment plan.
How Exemptions Protect Your Property
Simply put, exemptions play a crucial role in safeguarding certain property from being seized and sold off to repay creditors. They are essential for anyone filing for bankruptcy because they allow folks to keep certain property that is necessary for their economic survival and fresh start after bankruptcy.
The bankruptcy code provides guidelines on the exempt property, which varies depending on the state where the bankruptcy case is filed. Each state has its own exemptions, and some states allow debtors to choose between state exemptions and federal exemptions. These exemptions typically protect assets such as the debtor's homestead, vehicle, household goods, personal belongings, and certain income sources.
Because exemptions vary from state to state, it's important for folks in Central Texas to speak with a local Austin bankruptcy lawyer who can help them understand the exemptions available in our specific jurisdiction in Texas and can answer questions and guide them through the filing process.
Role of the Chapter 7 Case Trustee
A case trustee is appointed after your Chapter 7 bankruptcy filing is received by the bankruptcy court. Trustees play a crucial role in the bankruptcy process.
Their tasks begin with reviewing your bankruptcy petition and official forms as well as certain supporting documents, such as a copy of the tax return for the most recent tax year and often prior years too, your paystubs to verify your current monthly income (or a profit and loss statement if you're self employed), bank statements, and a copy of your drivers license and social security card. They ensure that you're bankruptcy forms and supporting documents are in compliance with the bankruptcy code and that you're being honest with your creditors and the bankruptcy judge. Some of the things they look for is to see if you have attempted to hide property or fraudulently transferred property to protect it while you're in bankruptcy.
They also conduct the meeting of creditors (aka 341 Meeting), where creditors have the opportunity to ask questions and assess the debtor's financial situation. After the 341 Meeting the trustee is typically able to determine your financial situation and decide whether there is any nonexempt property to be liquidated and proceeds distributed to creditors.
The trustee's primary duty is to maximize the return to the creditors by liquidating any nonexempt property and distributing the proceeds accordingly. When the trustee finds property to liquidate, they distribute the proceeds on a pro rata basis to all of the creditors who file a claim. This means that in cases where the trustee administers some of the debtor's property (i.e. liquidates it) the creditors who pay attention and file a claim in time will actually receive some repayment, although the actual amount may be very small in comparison to the amount of the actual debt. Any debt that is still unpaid after all liquidation proceeds are distributed gets discharged. After the trustee decides that there's no property left to be administered, they notify the judge that they're recommending a bankruptcy discharge.
In some cases, the trustee may also pursue legal actions to recover property and money that has been transferred or sold prior to bankruptcy, in an attempt to maximize the assets available for distribution to creditors. These actions are known as avoidance actions, and they aim to prevent dishonest debtors from hiding assets or transferring property for the purpose of evading creditors. Our Austin bankruptcy lawyer or a bankruptcy attorney in your area can help you spot any potential issues and provide guidance on how to resolve them before you file bankruptcy.
Chapter 7 Bankruptcy Exemptions in Texas
Folks filing Chapter 7 bankruptcy in Texas have the option to choose between the exemptions provided by the state of Texas or the federal exemptions. The following is a general description of most of the exemptions in Texas. You should speak with an Austin bankruptcy lawyer or a bankruptcy lawyer in your area to make sure you don't misapply any of these exemptions or overlook some of the nuances that can make them inapplicable in certain situations.
Texas Homestead Exemption
Texas is the envy of bankruptcy filers throughout the country because of our homestead exemption that's found in the Texas Property Code. This exemption allows most bankruptcy filers to exempt the entire value of their primary residence. One key point to note about the Texas homestead exemption, however, is that the Bankruptcy Code limits the Texas homestead exemption to $189,050.00 if the homestead was acquired within the 1,215-day period (roughly three years and four months) before the filing
Retirement Accounts in Bankruptcy
Most of the money saved in qualified retirement accounts is exempt, which is going to cover the vast majority of retirement accounts. Qualified accounts are include tax-deferred plans created by employers for their employees such as, 401(k), 403(b)s, profit sharing plans, IRAs and some social security benefits. IRA and retirement plans for the self-employed are exempt, up to the maximum contribution permitted by the IRS in any tax year. Local, State, and Federal employees with retirement specific retirement savings through their employment also enjoy exemptions under Federal and Texas bankruptcy law.
Personal Property Exemptions in Texas, Including Cars, Guns, and Jewelry
A individual filer in Texas can exempt up to $50,000 in personal property and joint filers can exempt up to $100,000. The following are personal property that falls under this exemption The items listed below is a list of property described in the Texas Property Code as falling under the "personal property" umbrella. It's important to note that $50,000 or $100,000 exemption amount is the limit for the combined total value of all of the property listed below, and it does not mean you can have $50,000 for each classification of property described below.
Home furnishings, including family heirlooms
Provisions for consumption
Farming or ranching vehicles and tools
Tools of the trade
Wearing apparel
Jewelry - up to $12,500.00 for a single person and $25,000.00 for a family
Two firearms
Athletic and sporting equipment, including bicycles
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 non-licensed person
Unpaid commissions for personal services not to $25,000.00 for a family and $12,500.00 for a single person;
The following livestock: two horses, mules, or donkeys and a saddle, blanket, and bridle for each; 12 head of cattle; 60 head of other types of livestock; and 120 fowl
Household pets.
Exemptions for Domestic Support
Texas bankruptcy exemptions allow you to exempt money you receive as child support or spousal support (aka alimony).
Income Exemptions in Texas
Income from Social Security, Social Security Disability, Unemployment, and Veteran's disability are all typically exempt in bankruptcy in Texas, as are current wages from employment for which you receive a W-2 at the end of each tax year.
United States Federal Bankruptcy Exemptions
For the period of April 1, 2022, to March 31, 2025, the federal exemptions are set at the values listed below, and keep in mind that the amount for each exemption doubles if you're married and filing a joint petition, and you and your spouse co-own the specific piece of property.
A homestead exemption of up to $27,900, which can be used to protect the debtor's primary residence.
Up to $4,450 for a vehicle, ensuring that debtors can retain their means of transportation.
Up to $14,875 in personal property, such as books, household items, and clothes, with a limit of $700 per item.
Up to $1,875 for jewelry, preserving sentimental or valuable personal items.
Up to $2,800 for tools of the trade, safeguarding the debtor's essential work equipment.
A wildcard exemption of $1,475 that can be used to add additional coverage to another exemption or to protect cash on hand or in the bank. It's also possible to add to the wildcard exemption, up to $13,950 of any unused amount of the homestead exemption.
Funds in tax-exempt retirement accounts, such as 401(k) or 403(b) accounts, providing financial security for the debtor's future.
Certain insurance benefits, such as up to $27,900 in personal injury claims, compensating debtors for accident-related injuries.
Exemptions for federal benefits, including Social Security, protecting debtors' income sources.
Choosing Between Texas and Federal Exemptions
If you're filing bankruptcy in Texas then you can choose the Texas bankruptcy exemptions or the federal bankruptcy exemptions. Although Texas has really great bankruptcy exemptions, there are unquestionably situations where choosing the federal exemptions makes sense.
For example, someone may choose the federal exemptions if they don't own a home and own a car with very little equity, but they have several thousand dollars in the bank. The federal exemptions may be the safest way to protect the cash in the bank from the trustee.
Ultimately the decision of which exemptions to choose depends on various factors, including what property you own, whether you value saving certain items or categories of property over others, which type of bankruptcy you file, and your specific bankruptcy case.
Consulting with our Austin bankruptcy lawyer will give you access to competent legal counsel to help you make the right decision for your specific situation.
Frequently Asked Questions
What if the Bankruptcy Exemption Doesn't Cover the Full Value?
This can be a tricky situation.
Let's say your filing individually and you have a ring valued at $13,000. If you elect to use the Texas exemptions then you can exempt $12,500 of the value of the ring. Since there's $500 of value in the ring that's not protected by the exemption, the trustee has a choice to make.
If they choose to liquidate the ring and they actually get $13,000 for it, then they'll have to give you the first $12,500 from the proceeds because you exempted that amount. The remaining $500 will get used to pay themselves for their efforts administering property of the bankruptcy estate, and the rest will get distributed the the creditors who timely file a claim.
In this example it could very will be the case that no one creditor or the trustee gets very much money at all, and so you may ask yourself why the trustee would choose to liquidate the ring in the first place. The answer to that is where things get a bit tricky, because not all trustees will choose to liquidate the ring in this situation.
Some trustees may see liquidation in under these circumstances as a waste of time with no real benefit for the creditors or themselves. However, other trustees wouldn't think to let any amount of non-exempt property go un-administered and wouldn't think twice about liquidating the ring.
This is yet another reason why it's important to speak with our Austin bankruptcy lawyer or a bankruptcy attorney to make sure that you get the guidance you need to protect yourself, your family, and your assets while getting your fresh start.
How Do You Qualify for Chapter 7 Bankruptcy
You must pass the means test, which looks at whether your regular income is at or below the median income for your state. You can also qualify to file Chapter 7 bankruptcy if the majority of your debt is not consumer debt, which commonly is the case for folks who have business debt from a small business.
Conclusion
In conclusion, Chapter 7 bankruptcy is a quick and powerful form of debt relief that helps folks get rid of unsecured debt such as credit cards and medical bills. Bankruptcy exemptions protect certain types of property, allowing you to keep them even after bankruptcy. If you're filing bankruptcy in Texas then you can choose between the Texas bankruptcy exemptions and the federal bankruptcy exemptions. This choice allows folks in many different types of financial situations to select the exemptions that provide the most protection for them. Before filing bankruptcy, you should consult with our Austin bankruptcy lawyer or a bankruptcy attorney in your area so you can make the best choices for you and your fresh start.
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