Exemptions are things that your unsecured creditors can not get. If you file for relief for bankruptcy protection, you can chose either Texas or Federal exemptions. If you do not file bankruptcy, you have Texas exemptions only.
(These exemptions are available even if you do not file bankruptcy)
Homestead: Article 16 of the Texas Constitution provides for a Homestead Exemption for Texans. A city homestead has 10 acres of land and the home on it. A rural homestead has two hundred (200) acres of land, and the structures on them. You may have either a city or rural homestead, but not both.
The only types of liens that are good against a homestead are:
- Liens for purchase money loans (money that you borrowed to buy the property);
- liens for home improvements;
- home equity loans; and
- liens for taxes
Accordingly, general creditors cannot seize the homestead and it does not pass to a trustee in bankruptcy. You must continue to pay the creditors with legitimate liens on the homestead or they can foreclose.
Also, contrary to what some people believe, a creditor who has a judgment does not have a lien that is good against a homestead. But, when you go to sell your homestead, you may have a problem. If there are judgments against you, a title company probably will refuse to issue a title policy unless the judgments are removed or the funds escrowed with the title company to pay the judgments. It is usually the title company’s position that it does not know whether the property is really homestead or not. It simply will not take the risk that the property is not homestead.
For the property to be homestead, it is not necessary that you have claimed it as such for the purposes of property taxes. You should reside in the property or maintain your business there. In addition, homestead is a “state of mind.” That is, you should intend that the property is your homestead. Even if you currently live elsewhere or have temporarily rented the homestead, it may not lose its homestead character if you intend to return.
Only certain types of creditors can obtain a lien on “homestead property” – many more types of creditors can obtain a lien on “exempt personal property.” Essentially, any creditor that you chose to grant a lien can obtain a lien on exempt property. Generally, a creditor cannot obtain an involuntary lien on the property. That is, the property may not be seized by an ordinary judgment creditor to satisfy its judgment. It also means that exempt property will not go to the trustee to be liquidated for the benefit of creditors in a bankruptcy.
Personal Property: In addition to the homestead, the State of Texas allows certain personal property exemptions. The personal property exemptions – usually simply called “exempt property” or “exemptions” are limited to a total amount to $50,000 of fair market value for a single person or $100,000 for a family, but the property must fall into certain categories. The value is to be determined after deducting the amount of any liens or mortgages on the property. The term “fair market value” means the price that a willing buyer would pay a willing seller for the property. It usually is much less than the “replacement value” that you may have used for your insurance purposes. In addition, property is not exempt to the extent that it has a lien or mortgage on it. Accordingly, the value claimed as exempt is probably only the equity in the property.
To be exempt, the non-homestead property must fit into certain categories. Section 42.002 of the Texas Property Code, provides that the following personal property is eligible for the exemption:
- home furnishings, including family heirlooms;
- provisions for consumption;
- farming or ranching vehicles and implements;
- tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;
- wearing apparel;
- jewelry not to exceed 25% of the aggregate limitations (Jewelry is limited to $12,500 for a single person or $25,000 for a family);
- two firearms;
- athletic and sporting equipment, including bicycles;
- a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver’s license or who does not hold a driver’s license but who relies on another person to operate the vehicle for the benefit of the non-licensed person;
- the following animals and forage on hand for their consumption:
- (A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;
- (B) 12 head of cattle;
- (C) 60 head of other type of livestock; and
- (D) 120 fowl;
- household pets; and
- the present value of any life insurance policy to the extent that a member of the family of the insured or a dependent of a single insured adult claiming the exemption is a beneficiary of policy.
In addition to the above, and not subject to being included in the $50,000 / $100,000 limit, are the following:
- current wages for personal services, except for the enforcement of court-ordered child support payments; and
- professionally prescribed health aids of a debtor or a dependent of a debtor.
- Unpaid commissions for personal services not to exceed 25% of the aggregate limitations are exempt. (Commissions are limited to $12,500 for a single person or $25,000 for a family)
- All money or benefits, including policy proceeds and cash values, to be paid under any policy of insurance or annuity contract issued by a life, health or accident insurance company.
- Your interest in a stock bonus, pension, profit-sharing, annuity, or similar plan (including an IRA) may be exempt if the plan qualifies under the provisions of the Internal Revenue Code.
As you can see, the Texas laws are very generous on exemptions. Accordingly, especially because of the Texas Homestead Exemption, we would usually claim exemptions under Texas law. However the Bankruptcy Code also provides exemptions. These exemptions, while generally more limited than the Texas exemptions, do contain some categories that are different from those allowed by our state statute. Accordingly, especially if you do not have a homestead, you may wish to explore the possibility of claiming exemptions under Federal law.
BANKRUPTCY EXEMPTIONS (Section 522, Bankruptcy Code)
(These exemptions are available only if you file bankruptcy)
Note: You cannot claim both the Texas and Bankruptcy Exemptions. You must claim one or the other.
Generally stated, the Bankruptcy Exemptions allow you:
- Up to $23,675 in homestead;
- Up to $3,775 in one motor vehicle;
- Up to $600 in any particular item or $12,675 in value, in household furnishings, household goods, apparel, appliances, books, animals, crops, or that are held primarily for personal, or household use;
- Up to $1,600 in jewelry;
- Up to $1,250 plus $11,850 of unused homestead exemption — “wild card.”
- Up to $2,375 in tools of trade;
- Any un-matured life insurance contract;
- Up to $12,675 in cash value of life insurance;
- Professionally prescribed health aids;
- Your right to receive —
- a. social security, unemployment or public assistance benefits;
- b. veterans’ benefits;
- c. disability, illness or unemployment benefits;
- d. alimony, support, etc. reasonably necessary for you or your dependents.
- e. award under a crime victim’s reparation law;
- f. payment for wrongful death of an individual of whom you were a dependent – to extent reasonably necessary for support;
- g. life insurance payment on death of an individual of whom you were a dependent – to extent reasonably necessary for support;
- h. up to $22,975 because of personal injury, not pain and suffering or compensation for actual monetary loss; or
- i. payment in compensation of loss of future earnings — to the extent reasonably necessary for support.
(NOTE: The above Bankruptcy Exemptions generally double if a husband and wife file jointly.)
FEDERAL TAX EXEMPTIONS
As a rule, only specific property stated in Section 6334 of the Internal Revenue Code is exempt from levy by the Internal Revenue Service. Therefore, the above exemptions (both State and Federal) have no application to save property from seizure by the IRS.
Pursuant to Section 6334, the following property is exempt from levy:
- Wearing apparel and school books. Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;
- Fuel, provisions, furniture, and personal effects. If the taxpayer is the head of a family, so much of the fuel, provisions, furniture, and personal effects in his household, and of the arms for personal use, livestock and poultry of the taxpayer, as does not exceed an inflation adjusted amount (about $6,250).
- Books and tools of a trade, business or profession. Books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed total $3,125 in value.
- Unemployment benefits. State or United States unemployment benefits.
- Undelivered mail.
- Certain annuity and pension payments. Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force and Coast Guard Medal of Honor Roll and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.
- Workmen’s compensation.
- Judgments for support of minor children. If the taxpayer is required by a judgment entered before the date of the tax levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.
- Minimum exemption for wages, salary, and other income. A chart showing the amount of wages exempt from levy may be seen here.
- Certain service-connected disability payments.
- Certain public assistance payments.
- Assistance under job training partnership act.
- Principal residence. This is misleading. The Internal Revenue Code provides that the taxpayer’s principal residence cannot be levied unless the district or assistant district director of the IRS personally approves the levy. It is our understanding, that the director routinely gives this approval and homes are routinely seized by the IRS.
MATTERS AFFECTING EXEMPTIONS
New to Texas? If you have moved from a different state and lived in Texas for less than 730 days (2 years), you may be subject to the laws of your former state of residence in connection with what property you are allowed to keep in Chapter 7.
If you acquired your homestead within 1,215 days, you may be limited to $155,675 in equity in your homestead. However, this does not apply to funds transferred from a prior homestead. (This is “per debtor” so a husband and wife could double this amount.)
Recent Over-payments to Homestead: Any amounts that have been put into your homestead within the past 10 years for the purpose of keeping them from your creditors may not be exempt.
Liens: If you have given a creditor a lien on property, that lien may survive the bankruptcy. That means that you generally have to make a choice with respect to that debt:
- Give the property back to the creditor;
- Pay the creditor (in one lump sum) the value of the property; or
- Make another agreement with the creditor for a pay-out.
Neither you nor the creditor can be forced to make this type of agreement.
If such an agreement is made, the agreement would not be covered by the bankruptcy discharge and the creditor could sue you if you defaulted on it.
However, if —
- the lien is on your household goods or tools of the trade; and
- you did not use the money obtained for the purchase of the goods, you may be able to avoid it and not have to pay or surrender. If you have granted a lien on existing household goods, please advise your attorney. It may be possible to avoid that lien.
Call Lusky & Associates, P.C. for a FREE CONSULTATION (972) 386-3900