Texas vs. Federal Bankruptcy Exemptions: Which Should You Choose?

Bankruptcy law is meant to give honest people a fresh start — not to strip them bare. When filing for Chapter 7 or Chapter 13 bankruptcy, one of the most important decisions you make concerns the use of exemptions: mechanisms that allow you to shield specific assets from creditors so that they cannot be seized to pay debts. There are two exemption systems: state and federal. You must select one or the other before you file and you cannot switch once the case begins. Picking the right system can dramatically affect how much property you walk away with after your case is over.

The biggest winners under the Texas exemption system are filers with sizable home equity and with substantial, categorically-protected personal property. These are the principal features:

• The Texas homestead exemption shields your primary residence from creditors, with no cap on dollar value (though there are acreage limits: up to 10 acres in a city or 100 acres in rural areas for an individual). This makes bankruptcy less risky for homeowners with significant equity.
• Texas also allows exemption of personal property up to a set value limit: $50,000 for individuals and $100,000 for families. This covers items like vehicles (one per licensed household member), household goods, tools of your trade, firearms and even livestock. 

Renters, individuals with cash or investments and those with valuable personal items but little to no home equity may benefit most from the federal system. These are the types of exemptions:

• The federal homestead exemption is much lower — currently $31,575. 
• Federal law shields certain retirement accounts, vehicles, household goods and tools of the trade and is often more protective of personal property than Texas law. 
• The federal system also allows for a “wildcard” exemption, which can be applied to any property. This is useful for protecting things like cash, bank balances, tax refunds or assets that don’t fit into other exemption categories. 

Choosing the right system means analyzing your entire asset picture before filing. Homeowners almost always opt for the Texas exemptions, but renters and those with a mix of assets, must weigh their options carefully. A common mistake is assuming Texas is always better, forgetting about jointly owned property and overlooking assets like tax refunds or lawsuit settlements. Careful planning can prevent unnecessary liquidation and secure the best possible outcome. An experienced bankruptcy attorney can compare both exemption systems and help you decide which one will maximize what you keep. 

The Law Firm of Richard L. Ellison, P.C. in Kerrville can provide effective counsel throughout your Chapter 7 or Chapter 13. To schedule a consultation, call my firm at 830-955-8168 or contact me online.