Texas Bankruptcy Exemptions and Law
COVID-19 Update: Most Texas bankruptcy courts are open on a limited basis. Filing clerks and records clerks are usually available. Visitors must generally abide by coronavirus restrictions, such as facemask and social distancing rules. Most judges are conducting hearings online. Most trustees (people who oversee bankruptcies for judges) are doing the same thing.
Other people are more concerned about how COVID-19 might affect an existing case. Some debtors are unable to make their monthly Chapter 13 payments. Others are unsure how a bank's coronavirus mortgage deferral might affect their payment amount. Texas Law Help provides more information about these issues.
Throughout the 2010s, federal courts and government bureaucrats eliminated many consumer debt protections. Midland Funding v. Johnson, a controversial 2017 Supreme Court decision, is a good example. This opinion watered down some key provisions in the Fair Debt Collection Practices Act. As a result, many debt collectors are now more aggressive than ever.
Because of these changes, families have fewer protections when the financial storms of life hit and cause debt delinquency. These storms include job loss, divorce or separation, business downturn, and serious injury or illness.
Bankruptcy offers families shelter from these storms. As outlined below, bankruptcy not only stops creditor adverse actions. It also eliminates the debt delinquency which caused problems in the first place.
Unfortunately, many people are afraid to file bankruptcy, mostly because they think they will lose most or all of their assets. In most cases, that's simply not true. Texas has some of the broadest bankruptcy exemptions in the country. Bankruptcy lawyers know how to maximize these exemptions.
Texas and Federal Bankruptcy Law
Federalism, which is a partnership between the federal government and state governments, is a basic principle of our democracy. Bankruptcy is a good example.
Article I, Section 8, Clause 2 of the U.S. Constitution authorizes Congress to create “Uniform Laws on the subject of Bankruptcies throughout the United States." This directive eventually became the Bankruptcy Code. States, including Texas, also make many of their own bankruptcy laws, especially regarding property exemptions. Most of Texas' bankruptcy laws are in Section 41 of the Texas Property Code.
The combination of federal and state bankruptcy laws gives the honest yet unfortunate debtor a fresh financial start.
When players file bankruptcy in Monopoly, they lose all their property. That's because there are no property exemptions in board games. Fortunately, the real world is different.
What Is an Exemption?
Many people work very hard for many years to do things like buy houses and build retirement accounts. Other people rely heavily on government benefits, such as VA disability benefits. If filing bankruptcy meant losing these things, the cure for financial problems would be worse than the disease. So, both federal and state laws protect assets in bankruptcy, even if creditors find some way around the automatic stay.
In many states, debtors cannot choose between state or federal exemptions. But the Lone Star State is rather unlike many other states, in more ways than one.
What are the State Exemption Laws in Texas?
Assume that, about a dozen years ago, Carole bought a large house. When the restaurant she owned closed due to COVID, she fell behind on mortgage payments. Now, she is afraid that she will not only lose her house but lose all the equity she has built up over the years.
People like Carole should consider filing bankruptcy and using state exemptions. The automatic stay stops foreclosure proceedings dead in their tracks. As for property exemptions, Carole can protect her:
- Home equity: Texas is one of the only states in the Union with an unlimited homestead exemption. If the house is on less than ten acres of land in the city, or less than 100 acres of land in the country, it is 100% exempt. Improvements, like a swimming pool, are included in this exemption. Texans can claim the state homestead exemption if they have lived in Texas for at least 1,215 days, which is about 3.5 years.
- Motor vehicle: This exemption is also unlimited. Additionally, debtors may exempt one motor vehicle for each licensed driver who lives in the household. A bankruptcy lawyer can often extend this exemption to other motor vehicles as well, if an unlicensed driver relies on one of them for transportation.
- Personal property: Texas law allows single filers to exempt up to $50,000 worth of furniture, firearms, jewelry, clothing, and other personal property. The exemption amount refers to the items' as-is cash value. Things like used furniture, electronics, and appliances usually have almost no cash value.
- Retirement accounts: Defined Contribution Plans, like IRAs and 401(k)s, as well as Defined Benefit Plans, such as pension plans and teacher retirement plans, are also 100% exempt. This exemption might be the most important one. Cash in a retirement account is a very tempting target for moneylenders who demand prompt payment.
Married filers can double the value-based exemptions. For example, if Carole and her husband William filed bankruptcy together, they could exempt up to $100,000 in personal property.
Can I Claim Federal Bankruptcy Exemptions in Texas?
Absolutely. You can choose between state and federal exemptions. In many cases, the federal exemptions are preferable to state exemptions. In other cases, the opposite is true.
Now assume Carole lives in an apartment. At the same time, she is saving money for a down payment on a house. So, she has several thousand dollars in her bank account. Since Carole has no home equity and she wants to keep her savings, federal exemptions might be best. These exemptions are:
- Home equity: Bankruptcy filers who claim federal exemptions may protect up to $25,150 in home equity. So, if you have less equity than that, the trustee cannot seize your home. The as-is cash value rule, which applies to personal property, also applies to real property. Frequently, a home's as-is cash value might only be a fraction of its fair market value.
- Motor vehicle: This equity exemption amount is $4,000. This exemption could apply to one vehicle. Or, you could spread it out over several vehicles. Typically, people have almost no equity in new cars or trucks. A used car or truck might be paid off, but it usually has practically no value.
- Personal property: Much like the state exemptions, federal exemptions allow debtors to protect home furnishings, clothes, life insurance benefits, and other personal property that is below a certain value. These values change periodically. The aggregate is usually about $25,000. Some personal property items, such as medical devices, have no value limitation.
- Retirement accounts: The law on this point is somewhat unsettled. Federal law limits IRA, 401(k), and other such exemptions to $1.3 million. However, in 2014's Clark v. Rameker, the Supreme Court implied that these assets are 100% exempt, regardless of their value. Uncertainties like these underscore the need for a Texas bankruptcy lawyer to protect your legal and financial rights.
- Government and FSO benefits: FSOs, or Family Support Obligations, include things like alimony and child support. Government benefits usually include Social Security, unemployment, disability, or medical benefits (i.e. Medicare or Medicaid). Generally, the payors remit these benefits monthly, like income. But for bankruptcy purposes, they are assets. Furthermore, they are 100% exempt, regardless of their financial value.
- Wildcard exemption: Carole's eyes probably drifted to this last bullet point. Federal law allows debtors to exempt up to $13,900 in otherwise nonexempt property. This property could be cash, a vacation home, a boat, an expensive new car, or any other item.
Most people do not fit neatly into federal or state exemption categories. For example, Clark, Carole's ex-husband, might own a home and be collecting alimony from Carole. A bankruptcy attorney can best evaluate these cases and recommend a course of action.
How Do I Start Bankruptcy in Texas?
Filing bankruptcy requires a petition and schedules. Many people file pro se (without an attorney). You can find some commonly-used bankruptcy forms here to find some commonly-used forms. Be forewarned that the petition and schedules are voluminous. They are much more complex and detailed than a tax return. Additionally, do-it-yourself filers are completely on their own. They have no idea what to expect at a 341 meeting or how to argue their cases in court.
A bankruptcy petition preparer helps debtors fill out the forms. They can offer no other assistance. They cannot tell you how to complete a form. They certainly cannot give you legal advice or represent you in court.
A professional relationship with a Texas bankruptcy attorney is the best filing option. A lawyer can break down your filing options between Chapter 7 and Chapter 13, and take care of the complicated paperwork. So, you have additional peace of mind during a very uncertain time. Finally, a lawyer can represent you at the critical 341 meeting and during the confirmation hearing or any other court appearances.
Where Do I File for Bankruptcy in Texas?
Texas has three bankruptcy court districts, the Northern, Southern, and Western. Each district has several locations. Generally, people who live in or near Dallas, Tyler, Waco, or Texarkana are in the Northern District. People who live in or near Houston, San Antonio, Austin, Corpus Christi, or Brownsville are typically in the Southern District. Everyone else is probably in the Western District.
Bankruptcy filing fees vary in different jurisdictions, but they are usually around $350. Some debtors can pay filing fees in installments. Others are eligible for fee waivers.
Bankruptcy professional fees, as well as the method of payment, vary in different areas as well. Most bankruptcy petition preparers require full payment upfront. Chapter 7 Texas bankruptcy lawyers usually offer partial payment plans. Typically, any fees must be paid prior to filing. A Chapter 13 Texas bankruptcy lawyer usually offers a full payment plan. These debtors usually include professional fees in their monthly debt consolidation payments.
All bankruptcy debtors must complete a pre-filing credit counseling course and a post-filing debt management course. Additionally, as mentioned, people who want to claim Texas exemptions must be long-term Texas residents. Federal exemptions have residency requirements as well, but these requirements are usually only a few weeks.
Chapter 7 Qualifications
Bankruptcy filers must meet the official and unofficial qualifications that are unique to a so-called “liquidation bankruptcy." Typically, people with crippling unsecured debts, like medical bills and credit cards, opt for Chapter 7.
The official qualification is the means test. The average income of a Chapter 7 bankruptcy filer must be below the average for their state. This amount changes every few months. Generally, the annual income level is about $88,000 for a family of four.
Chapter 7's informal qualification, which varies in different jurisdictions, focuses on Schedules I and J. These schedules declare the debtor's monthly income and expenses. Unless your expenses exceed your income, the trustee might ask some pointed questions about your reason for filing Chapter 7.
Chapter 13 Qualifications
Usually, people with delinquent secured debts, such as past-due mortgage payments, file Chapter 13 bankruptcy.
These debtors cannot exceed certain debt ceilings. The amounts change every year or so. Generally, Chapter 13 debtors cannot have more than $1.3 million in secured debt and $400,000 in unsecured debt. These figures include both current and delinquent obligations.
Chapter 13's unofficial qualification is usually the opposite of Chapter 7's unofficial qualifications. To show they can make a monthly debt consolidation payment, the debtor must have sufficient disposable income, as reflected in the totals for Schedules I and J. The amount of this payment varies in different cases. Usually, however, it is about the size of a rent or mortgage payment.
Connect with an Experienced Attorney
If you need to file bankruptcy, a Texas bankruptcy lawyer can file for you, stand up for your legal and financial rights, and protect your property from creditor seizure. The sooner you get started, the sooner your lawyer starts working for you.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.