Bankruptcy Laws in Texas
Texas really has everything, doesn’t it? Are you young and liberal and working in tech? Forget about San Francisco, go to Austin. Do you love exercising your Second Amendment rights and consider yourself a real American — down to the Ford F250 in the driveway and the flag on a pole in your front yard? Well, you know there are plenty of people like you in Texas. There are cities, there are countless idyllic rural paradises, there is the oil industry, there is so much to do and eat and people to meet — Texas has everything America has to offer, without any of the insanity of California or New York City.
Yes, Texas does everything big — from the trucks to the borders, to the steaks, to the bankruptcy exemptions. Wait, what? Yeah, we had to get to the boring law at some point, and if you are one of the many Texans who is struggling to make ends meet, you may be thinking about filing bankruptcy in order to get a fresh start. You are not alone, and we are here to help you gather some knowledge about what this means for your treasured home, car, and personal belongings before you go in to talk to an attorney.
Read on to find out which Texans are eligible to file a Chapter 7 bankruptcy and how much of their property Texan bankruptcy filers will be able to keep.
Federal Law for Courts and Forms, Texas Law for Eligibility and Property
if you are looking to file bankruptcy, you won’t head to your local county courthouse steps — you have to look for your nearest federal bankruptcy court, which is typically in larger cities. This is because most bankruptcy laws are set at the federal level — bankruptcy started with a federal constitutional provision and evolved into the complex system that we have today.
However, despite being mostly a federal issue, some issues are handled at the state level: eligibility and property exemptions. While nearly all of the informational articles on this website apply to everyone in the United States — a bankruptcy in Texas looks very much like a bankruptcy in Wyoming — there are a couple of rules that are specific to your state that we will describe below, primarily rules addressing the amount of property that is exempt from being sold to pay off debts and the amount of income you can make before you become ineligible to file.
Texas Means Test
When most people think of bankruptcy, they think they file some paperwork and their debt disappears. Indeed, that is a pretty close simplification of what Chapter 7 bankruptcy filings are. And these filings make up the majority of bankruptcy cases.
In Chapter 7, your debt is eliminated after your excess assets are sold off to pay down some of your debt. (The far less popular Chapter 13 bankruptcy is essentially a repayment plan to pay back the debt you owe over multiple years, and even these filings often end up being converted to Chapter 7 when the payment plans fail.)
However, Chapter 7 filings are not available to everyone: you must first pass either part of two means tests. The first part of that test is based on household income: as of May 2022, a single person filing in Texas must make less than the median household income of $55,441, more for families.
If you make more than that, you have to look at the second component of the means test. Under this second test, the court will analyze your last six months of income and expenses to determine how much money you have left over after covering the essentials — your disposable income, in other words. If that disposable income is minimal, you will likely be eligible for Chapter 7 filing. But before you start gathering paperwork and trying to file on your own, you should check with your attorney to verify your eligibility and whether Chapter 13, with its hidden benefits, might be a better alternative.
Texas Bankruptcy Property Exemptions
Most Texans have a lot of pride. That pride makes the idea of having their properties sold off on the courthouse steps to pay down part of their debt absolutely embarrassing. While these courthouse step auctions pretty much don’t happen anymore — those were the old days where the primary form of transportation was a horse, not a Ford, it is still uncomfortable to part with your treasured possessions and have them sold off to pay down your debt.
With that being said, if you do a Chapter 7 filing, you will get to keep more of your property than you might expect, especially here in Texas where the exemptions are higher than in most other states and you get the added flexibility of being able to choose the federal exemptions if you feel like those are a better fit for your finances and property. So while you will lose some property, you will emerge from bankruptcy with a fresh financial start and hopefully enough assets to get you a strong footing on your new path.
Some states do not allow you to keep your home when you file for bankruptcy. Other states will allow you to protect some equity (the value of your home after you subtract what you owe on it) but have limits on that equity.
Texas? They allow you to protect an unlimited amount of equity in your primary residence (with only one restriction: an acreage limit of 10 acres max in a city, or 100 acres in rural areas).
Compared to the federal limit, which is a mere $27,900, most people who own their own homes are better off playing by state rules, rather than federal ones.
One place where the Texas rules fall short is the wildcard exemption — Texas has none.
The feds, on the other hand, allow a person who is not using the homestead exemption to protect any piece of personal property up to $13,950 as a general wildcard exemption — a car, a boat, art… anything you want.
It is hard to get a fresh start on your financial future if you can’t get to work. So it is odd that so many states have such a low exemption for automobiles. Even the federal exemption is particularly stingy, at $4450 or less — an amount that can barely buy a running car today.
Fortunately, Texas once again comes through with more generous rules: you can protect the full value of one vehicle per licensed driver in your household. This means if you have parents or children who live at home as part of your household, and they have a driver’s license, you can keep one car per person (not just one per filer, or one barely running hooptie for yourself).
Personal Property Exemption
Texas has a long list of personal property that you can keep during a bankruptcy filing, but each category has its own limits. For example, you can keep only two firearms. And you can only keep jewelry worth up to $12,500 for a single filer (double if you are married). All combined, with everything from athletic equipment to clothing to furniture, you can keep up to $50,000 worth of personal property total.
Compare that to the federal rule, which again comes up short: protection for up to $14,875 and household goods and miscellaneous promotional property, though no single item can be worth more than $700.
Wages, Cash, and Pensions
You should be aware that the majority of pension and retirement accounts are shielded from liquidation if you are a retiree who is considering bankruptcy. All of your traditional retirement funds, such as a 401(k), 403B, 414H, IRA, profit-sharing plans, and private pensions, are included in this. Additionally, pensions and other retirement benefits for teachers, public employees, firefighters, and police officers are probably excluded as well.
As always, talk to a bankruptcy lawyer about your pension or retirement accounts before filing, and presuming exemptions will preserve that income since retirement plans can vary widely based on the employer and your continuous income is essential to your financial recovery after filing.
Exemptions are Complex: Get Professional Help
You can’t get a fresh start with no money, no credit, and no property. Fortunately, Texas offers very broad exemptions that prevent the sale of your house, car, retirement funds, and a large portion of your personal property in order to settle your debts. Even though you will leave with less property, you will still have some assets to help you get started on your new course. When it comes to making the most of those asset exemptions, professional guidance from a bankruptcy attorney can truly pay off. Your lawyer can help you make the most of the exempt property available to you and position you for a prosperous financial future after filing. Make an appointment for a consultation with a lawyer in our network for professional guidance.