One question that often comes up in connection with bankruptcy is “What will I get to keep?” The answer, surprisingly often, is “Everything.” But we need to look in more detail at “property exemptions” to see whether this answer likely applies to you.
Most of these exemptions are by dollar amount. In every case, these caps apply only to your equity in the property rather than its entire value. For example, If you own a car that is worth $10,000, but you still owe $7,000, then your equity is only $3,000. Only the $3,000 value of your equity counts toward the exemption cap, not the entire $10,000 value. Think of it this way – If the trustee took your car and sold it for the $10,000 it is worth, then the first $7,000 would go to the lender, and the trustee would be left with only the $3,000 of equity. Since only the $3,000 equity is being withheld from your general creditors, only $3,000 counts as what you are exempting.
Most exemptions fall into three broad categories:
- retirement accounts;
- homestead; and
- personal property.
The general rule of thumb is that retirement accounts are exempt from the claims of creditors if they have been given special tax treatment by the IRS. Common examples of exempt accounts are IRA’s, 401(k)’s, and the pension plans provided by most large corporations. Common examples of non-exempt accounts that creditors can still reach are savings accounts at a bank and U.S. savings bonds.
The classic example of a homestead is the one piece of real estate that you own that is also where you live. A lawyer can help you determine whether other types of property might in some cases still qualify as a homestead. This question can also get complicated if you own a mobile home.
In Texas, bankruptcy debtors can choose whether to use the “state exemptions” that also apply outside of bankruptcy, or to instead use the “federal bankruptcy exemptions.” The Texas homestead exemption is very generous and protects entire value of your homestead, even if it is paid off and worth a million dollars.
The federal homestead exemption is capped at a little more than $20,000 of equity for an individual, or $40,000 if both spouses file for bankruptcy protection. One of the first questions I ask a potential client is how much equity they have in their home. If there is $75,000 of equity, this amount exceeds the federal exemption cap, and only Texas exemptions will protect the entire house. But if there is only $500 of equity, then the federal exemptions are sufficient and will likely be preferred.
The Texas personal property exemption is governed by Texas Property Code chapter 42. This statute exempts personal property up to $30,000 in value for an individual, or $60,000 for a family. This cap is high enough that very few debtors run out of exemption unless they have paid off a very expensive vehicle or have a lot of jewelry.
The limitation of the Texas state exemption is that only protects certain kinds of property such as food, clothing, home furnishings, tools used in your employment, one vehicle per licensed driver, and a few animals. Other types of property, such as bank accounts, stock, and inventory are not exempt and may be reached by creditors.
What is likely to not be exempt? The five questions I routinely ask clients in order to spot potential issues are “Do you have …
- any real estate that you do not live on;
- more than one car per licensed driver including any motorcycles, ATV’s, boats, airplanes, or trailers;
- any stock outside your 401(k), including stock in your own little company;
- money, whether cash or in a bank account; or
- any other item of unusual value such as a baseball card signed by Babe Ruth?”
The federal bankruptcy exemption is governed by 11 U.S.C. §522(d). This statute has more categories with smaller caps. But again, this cap is high enough that very few debtors run out of exemption. The federal bankruptcy exemption caps do not automatically double for a family, but they do double if both spouses file jointly for bankruptcy. The federal personal property exemption protects roughly the same types of property as the state exemption.
The great advantage of the federal bankruptcy exemptions is the “wildcard exemption” found in §522(d)(1) and (5). The amount of this exemption is at least about $1,200. But it can go above $10,000 if a debtor has very little equity in their homestead. A couple with little equity in their home will have a combined wildcard exemption of more than $25,000. After all other exemptions have been applied to protect normally exempt property such as food, clothing, and vehicles, the wildcard can then be applied to protect anything else the debtor wants, including property that would normally be non-exempt. Thus the wildcard exemption can protect a boat, a large bank balance, or stock in your own personal business.
This only begins to cover the subject of exemptions. Many other rules also come into play. But this is enough to walk you through the first round of analysis performed by a bankruptcy attorney before asking “What else do you own, or maybe own, that has any value that you or anyone else would care about getting or losing?”