It’s a commonly-held belief that when a person files for bankruptcy relief under Chapter 7, that person loses his or her property. This simply isn’t true. While some debtors may have to surrender an asset, most do not lose any property when they file a Chapter 7 case.
Unfortunately, that misconception prevents many people from seeking legal advice from an experienced Texas bankruptcy lawyer. In fact, federal or state bankruptcy exemptions usually protect all property in a Chapter 7 bankruptcy filing.
What Are Bankruptcy Exemptions?
The purpose of filing for bankruptcy is echoed in the 1934 Supreme Court ruling in Local Loan Co. v. Hunt. The court stated that the purpose of bankruptcy was to give an “honest but unfortunate debtor” a chance to move forward without the burden of pre-existing debt. Essentially, filing for bankruptcy relief is intended to provide a fresh start.
However, lawmakers understood that when they drafted the Bankruptcy Code, the process often left a debtor in even worse financial standing after filing a Chapter 7 bankruptcy case.
This is why they included bankruptcy exemptions to protect a certain amount of equity in the debtor’s property. In short, any bankruptcy-exempt property cannot be seized by the Chapter 7 trustee and sold to pay unsecured creditors.
What Assets are Protected Under Chapter 7 Federal Exemptions?
Because Federal laws govern the bankruptcy process, anyone filing should consult the Federal Bankruptcy Code to determine what assets are exempt in Chapter 7.
Federal bankruptcy exemptions cover many different types of property and are adjusted periodically. Some property is protected in full while other Chapter 7 bankruptcy exemptions protect a certain amount of equity in a specific type of asset.
These are the most commonly-used federal bankruptcy exemptions:
- Homestead Exemption — Equity in real estate or personal property defined as a residence — $23,675.
- The debtor’s interest in one motor vehicle — $3,775.
- Household goods and personal items — $600 in value for a specific item or $12,625 in total value.
- Jewelry — $1,600.
- Tools of the trade (items and devices used in your job) — $2,375.
- The unmatured value of a life insurance contract owned by the debtor, except for credit life insurance policies.
- Health aids that are professionally prescribed for the debtor or a debtor’s dependent.
- Most government assistance, including Social Security, unemployment, veteran’s benefits, disability benefits, and local assistance.
- Alimony and child support payments.
- The full value of most retirement accounts.
- Wildcard exemption used to exempt property in bankruptcy — $1,250 plus up to $11,850 of the used homestead exemption.
For Texas residents in the Dallas-Fort Worth area, a bankruptcy attorney will review a client’s property and interest in assets to determine what assets are exempt in Chapter 7. Depending on the person’s specific assets, there could be additional Chapter 7 federal exemptions that can protect the property.
Why You Should Claim Chapter 7 Bankruptcy Exemptions
You cannot protect your property in bankruptcy unless you claim the bankruptcy exemptions. Because Chapter 7 exemptions can be confusing, it’s a good idea to consult a Chapter 7 lawyer before filing a bankruptcy petition.
Once you file a Chapter 7 petition, you cannot simply dismiss the case if the Chapter 7 trustee wants to seize assets. If you are not thorough when choosing the right bankruptcy exemptions in your case, you could lose property.
Chapter 7 Exemptions by State
The Federal Bankruptcy Code permits states to enact their own bankruptcy laws. Some states require residents who file for Chapter 7 debt relief to exclusively use state bankruptcy exemptions. Others allow residents to choose between federal and state exemptions.
Additionally, some states have more comprehensive bankruptcy exemptions than others. Ultimately, it is up to individual legislatures to determine how much equity in property may be protected by Chapter 7 state bankruptcy exemptions.
About Texas Homestead Exemptions
Texas allows its residents to choose between federal and state bankruptcy exemptions to protect property in a Chapter 7 case. Whether you choose federal or state exemptions depends on which set of bankruptcy exemptions protect the most equity in your assets.
In many cases, Texas bankruptcy exemptions are preferred over federal ones as the state has generous policies, such as homestead exemptions.
In short, a homestead exemption allows you to protect an unlimited amount of equity in your home. However, there are limitations based on its acreage and location. For instance, rural residences have a broader acreage limitation compared to homes in urban areas.
Other Chapter 7 Bankruptcy Exemptions for Texans
In addition to the homestead exemption, debtors who file bankruptcy in Texas can also claim Chapter 7 exemptions which include:
- Personal Property Exemptions in Texas. Instead of listing property by category (i.e. vehicles, household goods, clothing, jewelry, etc.), Texas groups most personal property under a $50,000 bankruptcy exemption ($100,000 for a family with two spouses).
- The full value of most retirement accounts and pensions. Texas bankruptcy exemptions cover additional types of accounts that are not covered by the federal exemptions, such as local public sector pensions and ERISA-qualified government or church benefits.
- The cash value or interest in most insurance policies.
- The full value of public benefits, alimony, child support, prescribed health aids, and current wages.
This is not an exhaustive list of all Texas bankruptcy exemptions. You may be entitled to claim other property exempt in bankruptcy.
Choosing Between Federal or Texas Bankruptcy Exemptions
Many of the Chapter 7 exemptions are covered in the federal and state codes, such as public benefits, domestic support, and other accounts. However, Chapter 7 exemptions in Texas are more generous regarding the homestead exemption and the personal property exemption.
On the other hand, the wild card exemption available under federal bankruptcy exemptions could be useful in certain cases.
A thorough analysis of your assets and financial situation must be conducted before deciding which bankruptcy exemptions provide you with the best asset protection in Chapter 7.
Protect Your Property & Call Leinart Law Firm
Are you worried about losing property if you file a Chapter 7 bankruptcy case? Do you need to file for debt relief under Chapter 7? To learn more about federal bankruptcy protections and how to guard your assets, fill out the evaluation form on this page or speak to our bankruptcy lawyers in Dallas and Fort Worth for a free consultation.