When a person files for bankruptcy, does this mean that he or she loses all of the property that they have, or they get to keep their property? Depending on the situation and the type of bankruptcy filing, the debtor (filer) may be able to keep certain personal items or real property throughout the bankruptcy proceedings.
Bankruptcy exemptions (protections) exist in these situations to help make the debtor’s life easier, but it is important that the debtor understands what these exemptions are and how they apply.
Type of Bankruptcy
Bankruptcy generally recognizes two kinds of property. “Exempt property” typically includes the homestead, auto, household goods, clothes, retirement accounts and life insurance policies that the debtor owns and will keep, even after the case is finished.
“Non-exempt property” may include rental properties, stocks and bonds, recoveries from lawsuits, and/or inheritances.
The first issue to consider is the type of bankruptcy being pursued. In a Chapter 7 bankruptcy case, the exempt property is retained but non-exempt property could be sold and the proceeds are then used to pay off the debtor’s debts.
In a Chapter 13 bankruptcy case, exemptions help determine the amount that the debtor will have to repay unsecured creditors through the repayment plan.
Bankruptcy Exemption State Laws
Every state has its own set of exemption laws. In most states, the debtor is required to use his or her own state’s exemptions. However, some states give debtors the ability to choose between that state’s exemption system and exemption laws set by federal bankruptcy law.
The debtor, with the assistance of counsel, will need to determine whether state or federal exemption law is best for debtor’s circumstances. Debtor must choose one or the other, not a combination of both.
Texas is one of the states where the debtor has the choice between using federal exemption statute instead of the Texas exemptions.
How Bankruptcy Exemptions Work
In the State of Texas, the exemption limit applies to whatever equity the debtor has in that property. Equity is determined by comparing the value of the property to the amount owed on the property. An exemption must be selected to protect the property.
However, if equity cannot be protected by the chosen exemptions, the trustee can sell the asset and distribute the proceeds to debtor’s creditors.
In some cases, if an item of property is considered non-exempt, the debtor may pay the trustee the value of the non-exempt property and keep his/her ownership interest in the property.
Married Couple Exemptions
If the debtors are a married couple and file a joint bankruptcy case, the couple is allowed to claim the exemption for any property owned jointly. That is, each spouse is allowed to claim the maximum amount allowed per person under the exemption laws.
Motor Vehicle Exemption
If the debtor wishes to keep his or her car, the state exemption law allows generally for protection of vehicles. The debtor may exempt the entire value of the car (one motor vehicle per household member who is licensed).
If the household has a member who does not hold a valid driver’s licensed, an exemption can still be used for that car if the individual relies on someone in that home to operate the car.
Retirement Accounts and Pensions
For the most part, tax-exempt pensions and retirement accounts (401(k), 403(b), 457, ESOP, TSP) are considered exempt in bankruptcy, under both the Texas state and federal bankruptcy exemption laws.
Personal Property Exemptions
Property exemptions can become more complicated when it comes to certain items of personal property. In Texas, the personal property a couple claims as exempt cannot be more than $100,000 or $50,000 for single adults without a family.
Anything above those amounts may be considered nonexempt during bankruptcy proceedings.
CONTACT AN ARLINGTON BANKRUPTCY ATTORNEY FOR A FREE CONSULTATION TODAY
An experienced Texas bankruptcy lawyer can help you apply bankruptcy exemptions in the best way possible and can help address any concerns you have about the bankruptcy process.
Call the Law Office of Marilyn D. Garner NOW at 817.381.9292 for a free consultation to discuss how bankruptcy may help you.