🛡️ Bankruptcy: Understanding Your Options

Bankruptcy is one of those words that can make people feel embarrassed before they even understand what it actually means.

But financial difficulty doesn't always come from irresponsible spending.

Someone can spend decades paying bills on time, maintaining good credit and doing everything they thought they were supposed to do — and then experience:

Job loss
Business failure
Divorce
Major medical expenses
Loss of a spouse's income
Reduced income later in life
Rising mortgage or household expenses
Lawsuits or judgments
Unexpected tax problems
Large amounts of unsecured debt

Sometimes the problem isn't that you're unwilling to pay your bills.

The numbers simply no longer work.

Bankruptcy is a federal legal process designed to give qualifying individuals and businesses financial relief. The U.S. Courts describes bankruptcy as a way for people who can no longer pay their debts to obtain a fresh start, either by discharging qualifying debt or creating a repayment plan.

It isn't automatically the right choice for everyone.

But it also shouldn't automatically be viewed as financial failure.

THE TWO MAIN TYPES FOR INDIVIDUALS

For most individuals, the two chapters you'll hear about are:

CHAPTER 7

Liquidation / Discharge

and

CHAPTER 13

Court-Supervised Repayment Plan

They work very differently.

CHAPTER 7 BANKRUPTCY

Chapter 7 is commonly called liquidation bankruptcy.

The primary purpose is to eliminate personal liability for qualifying debts and give the debtor a financial fresh start.

A Chapter 7 trustee reviews your property, debts, income and exemptions.

Contrary to what some people believe:

Filing Chapter 7 does not automatically mean someone comes and takes everything you own.

Bankruptcy law allows debtors to protect certain exempt property.

In fact, the U.S. Courts notes that many Chapter 7 cases are considered “no-asset cases,” meaning there is no nonexempt property available for the trustee to distribute to unsecured creditors.

However, what property you can protect depends heavily on:

The state where you live
Which exemptions apply
Amount of equity in the property
Whether the debt is secured
Your individual circumstances

This is one reason bankruptcy should be reviewed with a qualified bankruptcy attorney before filing.

WHAT TYPES OF DEBT CAN CHAPTER 7 GENERALLY HELP WITH?

Many unsecured debts may potentially be discharged, including debts such as:

Credit cards
Personal loans
Medical bills
Old utility balances
Certain collection accounts
Certain lawsuit judgments
Certain deficiency balances
Other qualifying unsecured debts

However, not every debt can be discharged.

Examples of debts that may survive bankruptcy include:

Child support
Alimony
Certain taxes
Most government-funded or guaranteed student loans unless applicable discharge requirements are met
Certain debts arising from fraud
Certain criminal fines and restitution
Some other debts specifically excluded by bankruptcy law

The exact treatment of a debt depends on the circumstances.

WHAT ABOUT YOUR HOUSE AND CAR IN CHAPTER 7?

This is where people need to understand the difference between:

DISCHARGING YOUR PERSONAL LIABILITY

and

KEEPING PROPERTY THAT SECURES A LOAN.

A mortgage is secured by your house.

An auto loan is secured by your vehicle.

Bankruptcy may eliminate your personal responsibility for certain debts, but a valid lien can survive bankruptcy.

That means Chapter 7 does not automatically allow you to:

Stop paying your mortgage and keep the house forever

Stop paying your car loan and keep the vehicle forever.

Whether you can keep a house or vehicle depends on factors including:

Equity
Exemptions
Whether payments are current
Loan terms
What you decide to do with the secured debt
State law
Bankruptcy court requirements

WHO QUALIFIES FOR CHAPTER 7?

Chapter 7 has an income screening process commonly called the:

MEANS TEST

The means test is designed to determine whether a consumer debtor's financial circumstances qualify for Chapter 7 or whether filing Chapter 7 would create a presumption of abuse.

The first comparison generally looks at your household income compared with the median income for a household of your size in your state.

The U.S. Trustee Program publishes the official numbers used for this calculation, and they change periodically.

EXAMPLE: TEXAS 2026 MEDIAN INCOME

For cases using the current 2026 median-income figures, the Texas annual median family income figures are:

1-person household: $66,837

2-person household: $86,714

3-person household: $99,273

4-person household: $117,962

For households larger than four, an additional amount is added according to the current federal table.

These numbers can change, so always check the current U.S. Trustee figures before relying on them.

DOES BEING OVER THE MEDIAN MEAN YOU CANNOT FILE CHAPTER 7?

No.

This is very important.

Being above your state's median income does not automatically disqualify you from Chapter 7.

If your income exceeds the applicable median, additional calculations are performed using allowable expenses and other factors.

The means test considers things such as certain:

Housing expenses
Utilities
Transportation costs
Taxes
Health care expenses
Secured debt obligations
Other allowable expenses

The calculation determines whether enough disposable income remains to create a presumption that Chapter 7 would be inappropriate.

So you should not look at the median-income chart and automatically say:

“I make too much money to file Chapter 7.”

Let a qualified bankruptcy professional actually run the numbers.

IS THERE A MINIMUM AMOUNT OF DEBT REQUIRED FOR CHAPTER 7?

There generally isn't a simple rule saying:

“You need at least $20,000, $50,000 or $100,000 of debt before you can file Chapter 7.”

Bankruptcy is more about whether the financial circumstances justify the filing than reaching a particular dollar amount.

Someone earning $40,000 with $30,000 in unmanageable unsecured debt could be in a far worse position than someone earning $200,000 with the same $30,000 debt.

Income, expenses, property and the type of debt all matter.

CHAPTER 13 BANKRUPTCY

Chapter 13 works very differently.

Instead of generally seeking a relatively quick discharge of qualifying unsecured debt, Chapter 13 creates a court-approved repayment plan.

The plan usually lasts:

3 to 5 years.

During the plan, the debtor generally makes payments to a Chapter 13 trustee, who distributes the money according to the approved plan.

Chapter 13 is designed for individuals who have regular income and can afford to make the required plan payments.

WHY WOULD SOMEONE CHOOSE CHAPTER 13?

Chapter 13 can be especially useful when someone has assets they want to protect or needs time to catch up on certain obligations.

For example, Chapter 13 may be considered when someone is:

Behind on mortgage payments
Facing foreclosure
Behind on vehicle payments
Facing repossession
Unable to qualify for Chapter 7
Trying to keep property that could be at risk in Chapter 7
Dealing with certain tax obligations
Managing secured and unsecured debts together

The U.S. Courts specifically notes that Chapter 13 is often preferred when a debtor wants to keep a valuable asset, such as a house, while repaying creditors over time.

CHAPTER 13 MAY HELP SOMEONE SAVE A HOME

Suppose someone has a regular income and can afford the current mortgage payment, but they are:

$20,000 behind on the mortgage.

They may not have $20,000 available today to stop a foreclosure.

A Chapter 13 plan may allow qualifying mortgage arrears to be addressed over time while the debtor continues making required ongoing payments.

This can make Chapter 13 extremely important for someone whose problem is:

“I can afford my house going forward, but I can't come up with everything I'm behind all at once.”

However, Chapter 13 is not a free house.

The debtor must be able to afford the required payments under the plan.

THE AUTOMATIC STAY

One of bankruptcy's most important protections is called the:

AUTOMATIC STAY

Filing a bankruptcy petition generally stops many collection activities while the bankruptcy case is pending.

Depending on the situation, this can temporarily stop or restrict actions such as:

Collection lawsuits
Wage garnishments
Collection calls
Foreclosure proceedings
Repossession efforts
Other collection activity

There are exceptions, and creditors can sometimes ask the bankruptcy court for permission to continue certain actions.

So the automatic stay should not be treated as an unlimited or permanent shield.

But for someone facing an immediate foreclosure, garnishment or repossession, timing can be extremely important.

WHO QUALIFIES FOR CHAPTER 13?

Chapter 13 is designed for an individual with regular income.

That can include someone who is:

Employed
Self-employed
Operating an unincorporated business
Receiving other sufficiently regular income

The debtor must have enough income to fund a feasible repayment plan.

There are also debt limits.

As of 2026, an individual generally qualifies for Chapter 13 only if:

UNSECURED DEBT IS LESS THAN:

$526,700

AND

SECURED DEBT IS LESS THAN:

$1,580,125

These limits are established by federal bankruptcy law and can change periodically.

WHAT IS SECURED VS. UNSECURED DEBT?

SECURED DEBT

Debt backed by property.

Examples:

Mortgage
Auto loan
Certain financed property

The creditor generally has a lien or security interest in the property.

UNSECURED DEBT

Debt that generally isn't backed by specific collateral.

Examples:

Credit cards
Medical bills
Many personal loans
Many collection accounts

Understanding the difference matters when evaluating Chapter 13 eligibility.

INCOME MATTERS DIFFERENTLY IN CHAPTER 13

Chapter 13 doesn't work by simply saying:

“You make too much money, so you can't file bankruptcy.”

In fact, people with higher incomes sometimes use Chapter 13 specifically because they do not qualify for Chapter 7.

For Chapter 13, the key questions become:

Do you have regular income?

and

Can you afford the required repayment plan?

Income also influences how long the plan generally lasts.

If current monthly income is below the applicable state median, the plan is generally three years unless the court approves a longer period for cause.

If income is above the applicable median, the plan generally lasts five years.

A Chapter 13 plan cannot extend beyond five years.

CHAPTER 7 VS. CHAPTER 13 — SIMPLE COMPARISON

CHAPTER 7

Think:

DISCHARGE

Often used when someone has substantial qualifying unsecured debt and doesn't have enough disposable income to realistically repay it.

Typical case:

Several months

May discharge many qualifying unsecured debts.

Means testing applies to many consumer filers.

Property exemptions are extremely important.

CHAPTER 13

Think:

REPAYMENT + REORGANIZATION

Used when someone has regular income and needs a structured way to deal with debt.

Typical plan:

3–5 years

Can be especially useful for catching up on mortgage arrears or protecting certain property.

Debt limits apply.

The debtor must be able to fund the repayment plan.

A SIMPLE EXAMPLE

Consider two people who each owe:

$75,000 in unsecured debt.

PERSON A

Income: $45,000

Renting

Little property

Unable to make minimum debt payments

This person might explore Chapter 7.

PERSON B

Income: $110,000

Owns a home

Behind $25,000 on mortgage

Can afford current mortgage payments going forward

Has substantial equity they want to protect

This person might explore Chapter 13.

Same amount of unsecured debt.

Completely different financial circumstances.

That's why:

“How much debt do you have?”

is only one bankruptcy question.

BANKRUPTCY DOESN'T MEAN YOU HAVE NOTHING

Another common misunderstanding is:

“Bankruptcy is only for people who have absolutely nothing left.”

Not necessarily.

Waiting until:

The house has already been foreclosed
The vehicle has already been sold
Wages have been garnished for months
Retirement money has been used unnecessarily
Every credit account has gone into default

may reduce the options available.

Someone experiencing serious financial difficulty should consider getting professional advice before the situation becomes irreversible.

BANKRUPTCY ALSO DOESN'T MEAN EVERY DEBT DISAPPEARS

Neither Chapter 7 nor Chapter 13 should be presented as:

“File bankruptcy and everything is gone.”

Some debts may not be dischargeable.

Some liens may remain.

Some debts may have to be paid through a Chapter 13 plan.

Some property may be at risk depending on exemptions.

Each case is different.

WHAT ABOUT CREDIT?

Bankruptcy will affect your credit.

A Chapter 7 bankruptcy can generally remain on a credit report for up to 10 years, while Chapter 13 is generally removed sooner under the nationwide credit bureaus' reporting practices.

But credit score should not always be the only factor in deciding whether to file.

Consider someone who is:

90 days late on multiple accounts
Maxed out on credit cards
Receiving collection notices
Facing lawsuits
Facing foreclosure
Unable to reduce principal balances

Their credit may already be deteriorating dramatically.

The better question may eventually become:

“What gives me the best chance of becoming financially stable again?”

rather than:

“How do I avoid having bankruptcy on my credit report at all costs?”

BANKRUPTCY SHOULD BE A FINANCIAL DECISION — NOT AN EMOTIONAL ONE

Don't file bankruptcy simply because you're frustrated with your bills.

But don't refuse to consider bankruptcy solely because you're embarrassed by the word.

Look at the numbers.

Ask:

What do I owe?

↓

What is my reliable monthly income?

↓

What are my necessary living expenses?

↓

Can I realistically repay these debts?

↓

Am I falling further behind every month?

↓

Am I at risk of losing my home or vehicle?

↓

Would repayment take many years even if nothing else went wrong?

↓

What assets do I need to protect?

Then talk with a qualified bankruptcy attorney about your actual options.

IMPORTANT

Bankruptcy laws are complicated.

Income limits, exemptions, debt limits and other rules can change.

Your eligibility can also depend on:

State
Household size
Income
Type of income
Expenses
Assets
Equity
Type of debt
Previous bankruptcy filings
Timing
Other individual circumstances

This information is educational and should not be used to decide which bankruptcy chapter to file without professional legal advice.

Sometimes bankruptcy is inappropriate.

Sometimes another solution makes more sense.

And sometimes bankruptcy is exactly the legal protection someone needs to stop an impossible financial situation from becoming worse.

The purpose is not to “beat” your creditors. The purpose is to create a legal path toward financial stability when the debt can no longer realistically be managed.

WHAT HAPPENS TO YOUR HOUSE, CAR, RETIREMENT, BANK ACCOUNT & PERSONAL PROPERTY IN A TEXAS BANKRUPTCY?

One of the biggest fears people have about bankruptcy is:

“They're going to take everything I own.”

That is not automatically what happens.

Bankruptcy law provides exemptions that can protect certain property from creditors and the bankruptcy estate.

Texas is known for having significant property exemptions, particularly when it comes to a qualifying homestead and certain personal property.

However, there is an important difference between:

PROPERTY BEING EXEMPT

and

PROPERTY BEING PAID FOR.

If a bank has a valid lien against your house or vehicle, bankruptcy generally does not erase that lien simply because the property itself may qualify for an exemption.

Let's break this down.

FIRST — WHAT IS AN EXEMPTION?

An exemption is a law that allows you to protect certain property from being taken and sold for the benefit of unsecured creditors.

When filing bankruptcy, you must disclose your assets.

You don't simply leave something off the paperwork because you believe it's protected.

You generally:

LIST THE PROPERTY

↓

LIST ITS VALUE

↓

LIST WHAT YOU OWE ON IT

↓

CLAIM THE APPROPRIATE EXEMPTION

Your bankruptcy attorney can determine which exemptions apply to your situation.

TEXAS OR FEDERAL EXEMPTIONS?

Texas is unusual because qualifying bankruptcy filers may have a choice between:

TEXAS EXEMPTIONS

FEDERAL BANKRUPTCY EXEMPTIONS

You generally choose one exemption system rather than picking individual exemptions from each system.

Which one is better depends on what you own.

Someone with substantial equity in a Texas homestead may have a very different exemption strategy from someone who rents and has significant cash or other assets.

There are also special residency rules.

If you recently moved to Texas, don't automatically assume you're entitled to use all Texas bankruptcy exemptions.

Federal bankruptcy law contains domicile requirements that can affect which state's exemptions you are allowed to use.

YOUR HOUSE

Texas provides one of its strongest protections for a qualifying:

HOMESTEAD

A Texas homestead can generally include:

URBAN HOMESTEAD

Up to 10 acres, which may consist of one or more contiguous lots.

RURAL HOMESTEAD

Up to 200 acres for a family

Up to 100 acres for a single adult

when the property otherwise meets the requirements for a rural homestead.

Texas's homestead exemption generally focuses on the property's qualifying homestead status and acreage rather than imposing the type of ordinary dollar cap found in many state exemption systems.

That can be extremely important for someone who has owned a Texas home for many years and accumulated substantial equity.

EXAMPLE

Suppose someone bought a Texas home many years ago.

Today:

Home Value: $400,000

Mortgage Balance: $100,000

That person has approximately:

$300,000 IN EQUITY

Someone might assume:

“If I file bankruptcy, I'll lose that $300,000.”

Not necessarily.

If the property qualifies for the applicable Texas homestead exemption and all bankruptcy requirements are satisfied, substantial homestead equity may be protected.

BUT THERE ARE FEDERAL BANKRUPTCY LIMITATIONS

Do not interpret the Texas homestead exemption as:

“Move to Texas, buy an expensive house and immediately file bankruptcy.”

Federal bankruptcy law contains restrictions designed to prevent that type of exemption planning.

For example, special federal limitations can apply to certain homestead equity acquired during the 1,215 days — approximately 3 years and 4 months — before filing bankruptcy.

As of 2026, one applicable federal homestead limitation is $214,000, subject to statutory exceptions and the particular circumstances.

There are also rules involving fraudulent transfers and other conduct.

This is one of the reasons someone with significant home equity should speak with a bankruptcy attorney before transferring money, selling property or filing bankruptcy.

YOUR MORTGAGE DOESN'T DISAPPEAR

This is extremely important.

Suppose your home is protected as an exempt Texas homestead.

That does not mean:

“I can stop paying my mortgage and keep the house.”

Your mortgage lender has a lien against the property.

A valid lien generally survives bankruptcy unless it is specifically avoided or otherwise treated under bankruptcy law.

If you want to keep the home, you generally must deal with the mortgage.

CHAPTER 7 & YOUR HOUSE

If you're current on your mortgage, your equity is properly exempt and you can continue meeting the required obligations, you may be able to keep your home in Chapter 7.

But every situation is different.

Issues can arise involving:

Mortgage arrears
Home equity
Tax liens
HOA liens
Judgment liens
Second mortgages
Recent home purchases
Recent transfers
Exemption eligibility

Don't assume the house is automatically safe simply because it's located in Texas.

CHAPTER 13 & YOUR HOUSE

Chapter 13 can be especially useful when someone has the income to maintain their home going forward, but has fallen behind.

For example:

Current mortgage payment:

$2,000 per month

Mortgage arrears:

$24,000

The person can now afford the regular $2,000 payment but cannot suddenly produce $24,000 to stop foreclosure.

A Chapter 13 plan may allow qualifying arrears to be addressed over the repayment-plan period while the homeowner continues making required ongoing mortgage payments.

This is one reason someone facing foreclosure should get legal advice before the foreclosure sale occurs.

Once the home has already been sold, the options can be very different.

YOUR CAR

Texas personal-property exemptions can protect qualifying motor vehicles.

Under the Texas exemption system, the exempt personal-property categories can include:

One two-, three- or four-wheeled motor vehicle for each member of a family or single adult who holds a driver's license.

The statute also provides protection in certain circumstances for a person who doesn't hold a driver's license but relies on another person to operate the vehicle for that person's benefit.

But again:

EXEMPT DOESN'T MEAN FREE

Suppose your vehicle is worth:

$30,000

and you still owe:

$27,000

Your approximate equity is only:

$3,000

The lender still has a lien against the vehicle.

Bankruptcy does not normally allow you to stop paying a secured auto loan and keep the vehicle indefinitely.

IF YOUR CAR IS PAID OFF

Now consider:

Vehicle Value: $15,000

Loan Balance: $0

You have:

$15,000 OF EQUITY

If you're using Texas exemptions and the vehicle qualifies, the vehicle may potentially be protected as part of your Texas personal-property exemptions.

However, the total value of applicable personal property must still be considered.

TEXAS PERSONAL-PROPERTY LIMITS

Texas currently provides an aggregate exemption for qualifying personal property of up to:

$100,000

for property provided for a family

$50,000

for a single adult who is not a member of a family.

These amounts are based on the property's fair market value excluding liens and other qualifying encumbrances.

The $100,000 or $50,000 isn't cash the government gives you.

It is an exemption limit covering qualifying categories of personal property.

WHAT PERSONAL PROPERTY CAN TEXAS PROTECT?

Qualifying categories can include things such as:

Home furnishings
Family heirlooms
Food and provisions
Clothing
Certain jewelry
Athletic and sporting equipment
Bicycles
Qualifying motor vehicles
Tools and equipment used in a trade or profession
Certain farming or ranching equipment
Household pets
Certain livestock
Other specifically protected property

Jewelry has an additional limitation under the Texas personal-property exemption.

This doesn't mean every single thing you own is automatically protected.

The type of property, its value and the applicable exemption rules matter.

WHAT ABOUT YOUR BUSINESS EQUIPMENT?

This can be especially important for someone who is self-employed.

Texas's personal-property exemptions can include:

Tools, equipment, books and apparatus used in a trade or profession.

That can potentially help protect property someone actually uses to earn a living.

For example, depending on the facts and applicable exemption rules, this could involve certain:

Tools
Professional equipment
Work equipment
Books
Business apparatus
Qualifying work vehicles

However, don't assume that everything owned by your business automatically becomes your exempt personal property.

Business structure matters.

Property owned personally by a sole proprietor is different from property legally owned by an LLC or corporation.

Someone who owns a business should tell the bankruptcy attorney about:

LLC ownership
Business bank accounts
Inventory
Equipment
Accounts receivable
Business vehicles
Business debt
Business value

YOUR RETIREMENT ACCOUNTS

This is another area that scares people unnecessarily.

They may think:

“I'll have to empty my retirement account before I can file bankruptcy.”

Do not make that assumption.

Many retirement assets receive significant protection under federal and/or Texas law.

Texas law provides protection for many qualifying savings and retirement arrangements, including certain:

Employer retirement plans
Pensions
401(k)-type plans
Government retirement plans
Church retirement plans
Self-employed retirement plans
SEP plans
Traditional IRAs
Roth IRAs
Inherited IRAs
Certain annuities
Health Savings Accounts
Certain education savings accounts
529 plans
ABLE accounts

Different accounts can be governed by different rules.

DON'T CASH OUT RETIREMENT JUST TO PAY CREDIT CARDS WITHOUT GETTING ADVICE

Imagine someone has:

$80,000 in credit-card and medical debt

and

$150,000 in a protected retirement account.

They become frightened and withdraw $100,000 from retirement to pay unsecured creditors.

Then they discover that much of the retirement account might have been protected if they had filed bankruptcy.

Now they may have:

Reduced retirement savings
Possible taxes
Possible penalties
Less money for their future
Debt that might otherwise have been dischargeable

This is exactly why someone experiencing serious financial trouble should consider talking with a bankruptcy attorney before liquidating retirement assets.

YOUR BANK ACCOUNT

Bank accounts require more careful planning.

People sometimes hear that Texas has generous exemptions and assume:

“All the money sitting in my checking and savings accounts is automatically protected.”

Don't assume that.

Cash and ordinary money sitting in a bank account don't necessarily receive the same broad treatment as a Texas homestead, qualifying retirement account or specifically listed personal-property category.

The source of the money can also matter.

Certain funds may have separate protections, such as qualifying:

Social Security benefits
Veterans benefits
Retirement benefits
Support payments
Other legally protected funds

But once money moves between accounts or becomes mixed with other money, tracing and exemption issues can become more complicated.

THE BANK BALANCE ON THE DAY YOU FILE CAN MATTER

Suppose someone normally has:

$1,000

in checking.

Then payday arrives and the account temporarily contains:

$7,000

The person files bankruptcy immediately after the deposit.

That bank balance becomes part of the financial information that must be disclosed.

This is another reason bankruptcy timing should be discussed with an attorney.

Do not:

Hide cash
Withdraw money to conceal it
Transfer money to relatives
Move money into someone else's account
Leave accounts off your bankruptcy paperwork

Trying to hide assets can turn a financial problem into a much more serious legal problem.

YOUR FURNITURE

No, filing bankruptcy does not ordinarily mean someone arrives at your house and starts carrying away:

Your sofa

Your bed

Your dining table

Your refrigerator

Your television

Texas specifically includes home furnishings among its qualifying personal-property exemptions.

The realistic fair market value of used household property is generally what matters—not what you originally paid for everything brand new.

YOUR CLOTHING

Texas includes wearing apparel among qualifying exempt personal property.

Bankruptcy is designed to provide financial relief, not leave someone without basic clothing.

YOUR JEWELRY

Jewelry can qualify under the Texas personal-property exemption, but there is a specific limitation.

Texas law currently limits jewelry to no more than 25% of the applicable aggregate personal-property exemption.

That means valuable jewelry should always be disclosed and properly valued.

A wedding ring isn't something you simply leave off the paperwork because it has sentimental value.

YOUR PERSONAL BELONGINGS

Everything still needs to be disclosed.

That can include:

Electronics
Furniture
Appliances
Collectibles
Firearms
Jewelry
Recreational equipment
Vehicles
Tools
Business equipment
Other valuable property

Whether the trustee actually has an interest in something is a separate question from whether you are required to disclose it.

WHAT ABOUT PROPERTY WITH VERY LITTLE EQUITY?

Equity matters.

Remember:

EQUITY = PROPERTY VALUE − DEBT SECURED BY THE PROPERTY

For example:

Vehicle value:

$25,000

Auto loan:

$23,000

Equity:

$2,000

The bankruptcy analysis is generally concerned with your ownership interest—not pretending the entire $25,000 vehicle is free and clear.

CHAPTER 7 — THE BIG PROPERTY QUESTION

In Chapter 7, the basic concern is:

DO YOU OWN NONEXEMPT PROPERTY THAT A TRUSTEE COULD ADMINISTER FOR CREDITORS?

If everything is properly protected by applicable exemptions, the case may be a:

NO-ASSET CHAPTER 7

That means there is no nonexempt property available for the trustee to distribute to unsecured creditors.

Many Chapter 7 consumer cases are no-asset cases.

CHAPTER 13 — THE PROPERTY QUESTION IS DIFFERENT

Chapter 13 generally allows a debtor to keep property while making payments under a court-approved plan.

But that does not mean property values become irrelevant.

The amount of nonexempt property can affect how much unsecured creditors must receive under the Chapter 13 plan.

So:

“Chapter 13 lets me keep everything”

doesn't mean:

“The value of everything I own doesn't matter.”

WHAT IF YOU OWN A SECOND HOUSE?

The strong Texas homestead protection applies to the property that qualifies as your homestead.

Don't assume the same protection automatically applies to:

Vacation home
Rental property
Second residence
Investment property
Vacant land
Property you inherited
Other real estate

Someone with additional real estate needs individualized bankruptcy advice.

WHAT IF YOU OWN MULTIPLE VEHICLES?

Texas doesn't simply say:

“Every car you own is exempt.”

The motor-vehicle exemption is tied to the statutory rules concerning qualifying family members or a single adult.

If you own:

Extra vehicles
Classic cars
Recreational vehicles
Boats
ATVs
Motorcycles
Other valuable transportation

have the attorney review each asset.

WHAT IF YOUR SPOUSE ISN'T FILING?

Don't assume:

“It's in my spouse's name, so bankruptcy doesn't care about it.”

Texas is a community-property state.

Property ownership and marital-property rules can become important even when only one spouse files bankruptcy.

Federal bankruptcy forms also require financial information concerning a non-filing spouse in certain circumstances.

Tell the attorney about all marital property and debts rather than deciding on your own what “counts.”

DON'T GIVE PROPERTY AWAY BEFORE BANKRUPTCY

This deserves its own warning.

Do not decide:

“I'll put the car in my daughter's name.”

“I'll transfer the house to my son.”

“I'll give my sister the money to hold.”

“I'll sell this $20,000 item to my cousin for $500.”

and then file bankruptcy.

Bankruptcy requires disclosure of certain transfers made before filing.

Trustees can investigate transfers, and certain transfers can potentially be reversed.

Intentional concealment can create far more serious consequences.

DON'T REPAY FAMILY MEMBERS FIRST WITHOUT GETTING ADVICE

Suppose you owe:

Mom — $10,000

and

Credit Cards — $50,000

You receive $10,000 and repay Mom right before filing bankruptcy.

Payments to certain creditors shortly before bankruptcy can raise preference issues, and special rules apply to payments involving insiders such as relatives.

Before making unusual large payments when bankruptcy is being considered, speak with an attorney.

DON'T HIDE ANYTHING

A bankruptcy attorney can potentially protect property using legitimate exemptions.

The attorney cannot properly protect an asset you don't disclose.

Tell the attorney about:

EVERYTHING.

Even something you believe is irrelevant.

Let the professional determine whether it matters.

BEFORE FILING — MAKE AN ASSET LIST

Write down everything you own.

REAL ESTATE

☐ Primary residence

☐ Rental property

☐ Vacant land

☐ Inherited property

☐ Other real estate

VEHICLES

☐ Cars

☐ Trucks

☐ Motorcycles

☐ RVs

☐ Boats

☐ Other vehicles

BANK & CASH

☐ Checking

☐ Savings

☐ Cash

☐ Money market

☐ Certificates of deposit

☐ Payment-app balances

RETIREMENT

☐ 401(k)

☐ 403(b)

☐ Pension

☐ IRA

☐ Roth IRA

☐ SEP/SIMPLE or self-employed retirement

☐ Government retirement

☐ Other retirement account

PERSONAL PROPERTY

☐ Furniture

☐ Electronics

☐ Jewelry

☐ Collectibles

☐ Firearms

☐ Tools

☐ Business equipment

☐ Inventory

☐ Other valuable property

OTHER ASSETS PEOPLE FORGET

☐ Tax refunds owed to you

☐ Money someone owes you

☐ Lawsuit or legal claim

☐ Insurance proceeds

☐ Inheritance

☐ Security deposits

☐ Business ownership

☐ Cryptocurrency

☐ Stocks/investments

☐ Valuable online accounts or digital assets

THEN ASK:

For each item:

WHAT IS IT WORTH TODAY?

↓

HOW MUCH DO I OWE AGAINST IT?

↓

HOW MUCH EQUITY DO I HAVE?

↓

WHO LEGALLY OWNS IT?

↓

IS IT EXEMPT?

↓

WHICH EXEMPTION SYSTEM SHOULD I USE?

That is the conversation to have with a bankruptcy attorney.

THE BIGGEST LESSON

Someone can potentially file bankruptcy in Texas and still keep:

Their home

Their vehicle

Their retirement

Their furniture

Their clothing

Their tools

Their personal belongings

depending on the property, equity, exemptions, liens and individual circumstances.

Bankruptcy isn't automatically:

“Give up everything you worked your whole life for.”

Sometimes it can be the exact opposite.

It may provide a legal way to protect qualifying assets while addressing debt that has become impossible to manage.

BEFORE YOU SELL, WITHDRAW OR TRANSFER ANYTHING — GET ADVICE

If bankruptcy is even a serious possibility, consider speaking with a qualified bankruptcy attorney before:

Cashing out retirement
Selling your home
Transferring your home
Selling a vehicle
Giving away property
Paying large amounts to relatives
Moving money between accounts to hide it
Taking large cash advances
Running up credit cards
Taking out a home-equity loan to pay unsecured debt

A decision made today can change what happens in a bankruptcy filed later.

REMEMBER

The question isn't simply:

“WILL BANKRUPTCY TAKE MY STUFF?”

The better questions are:

WHAT DO I OWN?

↓

WHAT IS IT WORTH?

↓

WHAT DO I OWE AGAINST IT?

↓

WHAT EQUITY DO I HAVE?

↓

WHAT EXEMPTIONS APPLY?

↓

WHAT DEBTS ARE SECURED BY THE PROPERTY?

↓

WOULD CHAPTER 7 OR CHAPTER 13 BETTER PROTECT MY FINANCIAL FUTURE?

Bankruptcy law is complicated, and exemptions are especially dependent on individual circumstances.

Do not make major financial decisions based solely on this educational information. Have a qualified bankruptcy attorney review your actual assets, debts, income and exemptions before you file.

EXEMPT VS. NONEXEMPT PROPERTY — WHAT DOES THAT MEAN?

These two words are extremely important when discussing bankruptcy.

EXEMPT PROPERTY

Exempt means the law allows you to protect the property, or a certain amount of its value, from being taken by the bankruptcy trustee to pay your unsecured creditors.

Depending on which exemptions apply to you, examples could include qualifying:

Homestead
Vehicle
Retirement accounts
Household furniture
Clothing
Tools used for work
Certain personal belongings

Think of EXEMPT as:

“The law allows me to protect this property or value.”

NONEXEMPT PROPERTY

Nonexempt means the property, or some of its value, is not protected by an available exemption.

In a Chapter 7 bankruptcy, a trustee may be able to sell nonexempt property and use the proceeds to pay creditors.

Possible examples might include:

A second home
Investment property
Extra vehicles
Valuable collectibles
Certain investments
Large amounts of unprotected cash
Valuable property exceeding an applicable exemption limit

Whether something is actually nonexempt depends on your circumstances and which exemption system applies.

Think of NONEXEMPT as:

“This property or value may not be protected.”

HERE'S A SIMPLE EXAMPLE

Suppose you own something worth:

$20,000

You owe:

And the exemption available to protect that type of property is:

$12,000

You could potentially have:

$12,000 — EXEMPT

$8,000 — NONEXEMPT

The $8,000 portion is the amount that may potentially be exposed in a Chapter 7 case.

This is only a simplified example. Actual bankruptcy exemptions and trustee decisions are more complicated.

EXEMPT DOES NOT MEAN “PAID OFF”

This is another important distinction.

Something can be exempt and still have a loan against it.

For example:

Your car may qualify for an exemption, but if you financed the car, the lender may still have a lien against it.

The exemption protects qualifying equity from creditors.

It does not automatically eliminate the lender's lien or allow you to stop making required payments and keep the property.

WHY THIS MATTERS

This is why two people with the exact same amount of debt can have completely different bankruptcy situations.

One person may have:

$80,000 of debt + mostly exempt property

while another has:

$80,000 of debt + substantial nonexempt property.

Their Chapter 7 cases could look completely different.

Before deciding whether bankruptcy makes sense, you need to know:

WHAT DO I OWN?

↓

WHAT IS IT WORTH?

↓

WHAT DO I OWE AGAINST IT?

↓

HOW MUCH EQUITY DO I HAVE?

↓

IS THAT EQUITY EXEMPT OR NONEXEMPT?

Understanding exempt vs. nonexempt is one of the keys to understanding what you may be able to keep in bankruptcy.

HOW ARE EXEMPT & NONEXEMPT ASSETS DETERMINED?

You do not have to be completely broke or have $0 in the bank to file bankruptcy.

You can potentially have:

A house
Vehicles
Money in the bank
Retirement accounts
Investments
Stocks
Bonds
Business interests
Personal property

and still qualify for bankruptcy.

The important question is:

WHICH ASSETS ARE PROTECTED BY AN EXEMPTION AND WHICH ARE NOT?

WHO DECIDES WHAT IS EXEMPT?

Bankruptcy exemptions are established by law.

An attorney doesn't simply decide:

“We'll call this exempt.”

The attorney looks at the applicable Texas and federal bankruptcy laws and determines which exemptions can legally be claimed.

When bankruptcy is filed, the debtor lists assets and claims the exemptions believed to apply.

A bankruptcy trustee or another party can object if they believe an exemption was claimed incorrectly.

Ultimately, a bankruptcy court can decide a disputed exemption.

CAN YOU LOOK UP THE EXEMPTIONS YOURSELF?

Absolutely.

In fact, understanding the basics before meeting with an attorney can make the consultation much easier.

But there is a difference between:

EDUCATING YOURSELF

and

MAKING THE FINAL LEGAL DETERMINATION YOURSELF.

Someone considering bankruptcy can make a list of everything they own, estimate its current value, determine what is owed against it and review the available exemptions.

Then take that information to a bankruptcy attorney.

HOW IS THE VALUE OF PROPERTY DETERMINED?

Bankruptcy generally looks at fair market value.

In simple terms:

What could this property reasonably be sold for today?

Not necessarily:

“What did I pay for it?”

For example:

You bought a sofa for:

$4,000

five years ago.

That doesn't necessarily mean you currently own a $4,000 asset.

If similar used furniture would realistically sell for $600 today, its current fair market value may be much closer to $600.

The Bankruptcy Code defines value for exemption purposes as fair market value as of the filing date.

EQUITY IS ALSO IMPORTANT

For property with a loan against it, calculate the approximate equity.

EXAMPLE:

Current vehicle value:

$30,000

Loan balance:

$24,000

Approximate equity:

$6,000

The important property interest is generally the debtor's equity—not simply the $30,000 retail value of the vehicle.

HOW DO YOU DETERMINE WHETHER SOMETHING IS EXEMPT?

Think of it as four steps:

STEP 1 — IDENTIFY THE ASSET

What do you own?

STEP 2 — DETERMINE ITS CURRENT VALUE

What is it realistically worth today?

STEP 3 — DETERMINE YOUR EQUITY

Subtract any valid liens or secured debt when appropriate.

STEP 4 — FIND THE EXEMPTION

Does Texas or federal bankruptcy law provide an exemption that protects that particular asset or value?

If the applicable exemption protects all of your equity:

EXEMPT

If only part is protected:

PARTIALLY EXEMPT

If there is no applicable exemption protecting the asset:

NONEXEMPT

TEXAS HAS A VERY IMPORTANT PERSONAL-PROPERTY EXEMPTION

Under the Texas exemption system, qualifying personal property is currently protected up to an aggregate fair market value of:

$100,000 FOR A FAMILY

$50,000 FOR A SINGLE ADULT WHO IS NOT A MEMBER OF A FAMILY

The value is calculated excluding qualifying liens and security interests against the property.

But here's something extremely important:

THAT DOES NOT MEAN YOU CAN CHOOSE ANYTHING YOU WANT UP TO $100,000

Texas law identifies specific categories of personal property that qualify.

For example, qualifying categories include:

Home furnishings
Clothing
Certain jewelry
Tools and equipment used in a trade or profession
Qualifying motor vehicles
Certain sporting equipment
Household pets
Certain other specifically listed property

So don't interpret the $100,000 family exemption as:

“I can have $100,000 sitting in a regular savings account because I'm under the limit.”

That is not how the Texas personal-property exemption works.

NOW LET'S TALK ABOUT CASH & INVESTMENTS

This is where understanding exemptions becomes extremely important.

There is a major difference between:

$100,000 IN A 401(k)

and

$100,000 IN A REGULAR SAVINGS ACCOUNT

and

$100,000 IN A REGULAR STOCK BROKERAGE ACCOUNT.

They are all financial assets.

But bankruptcy law may treat them very differently.

401(k) & QUALIFIED RETIREMENT ACCOUNTS

Qualified retirement accounts generally receive very strong bankruptcy protection.

Texas law separately protects interests in many qualifying savings and retirement plans.

Depending on the account, this can include qualifying:

401(k)
403(b)
Pension
Government retirement plan
Deferred-compensation plan
SEP
SIMPLE IRA
Traditional IRA
Roth IRA
Certain inherited IRAs
Certain annuities
Other qualifying tax-advantaged retirement arrangements

Federal bankruptcy law also provides significant protection for qualifying retirement funds.

EXAMPLE

Someone might have:

$200,000 in a qualifying 401(k)

while also having:

$75,000 in credit-card and medical debt.

Having $200,000 in a properly protected retirement account does not automatically prevent that person from filing Chapter 7.

The retirement money may be exempt.

Eligibility for Chapter 7 still depends on the person's overall circumstances, including income and means-testing requirements.

DON'T CONFUSE RETIREMENT WITH AN ORDINARY INVESTMENT ACCOUNT

Suppose instead that the same person has:

$200,000 in an ordinary brokerage account containing stocks.

That's a very different situation.

A regular taxable brokerage account does not automatically receive the same protection simply because the money is invested for your future.

STOCKS

Stocks held in a regular taxable brokerage account are generally assets.

For example:

Apple stock

Amazon stock

Mutual funds

ETFs

Individual company stocks

Other securities

The account must be disclosed in bankruptcy.

Whether it can be protected depends on available exemptions.

Under the Texas exemption system, ordinary stocks held in a taxable investment account do not automatically receive the broad protection given to a qualifying retirement account.

BONDS

The same general issue applies to ordinary investment bonds.

Examples could include:

Corporate bonds
Treasury securities
Bond funds
Other investment securities

If held in an ordinary taxable investment account, they are generally assets that must be disclosed.

They don't automatically become exempt simply because they are a conservative investment or part of your retirement planning.

REGULAR SAVINGS ACCOUNTS

A regular:

Checking account

Savings account

is also an asset.

This is particularly important in Texas.

Texas has generous exemptions for certain property, but ordinary cash is not simply included as one of the normal categories under Texas's $50,000/$100,000 personal-property exemption.

That means someone using Texas exemptions should not assume:

“I can keep $50,000 or $100,000 cash because I'm under the personal-property limit.”

EXAMPLE

Consider two Texas Chapter 7 filers.

PERSON A

401(k):

$100,000

Checking:

$2,000

Furniture:

$5,000

Vehicle equity:

$5,000

PERSON B

Regular brokerage account:

$100,000

Checking:

$2,000

Furniture:

$5,000

Vehicle equity:

$5,000

Their net worth may look very similar on paper.

But their bankruptcy exemption analysis could be completely different because Person A's $100,000 is held in a qualifying retirement account while Person B's $100,000 is held in an ordinary investment account.

CAN YOU HAVE SAVINGS AND FILE CHAPTER 7?

Yes.

There is no rule saying:

“Your bank account must equal $0 before filing Chapter 7.”

But ordinary cash and savings may be exposed if they cannot be protected by an applicable exemption.

Someone with substantial cash should absolutely have an attorney review the available exemption options before filing.

DO NOT SPEND DOWN MONEY JUST TO QUALIFY

This does not mean:

“I have too much cash, so I need to hurry up and spend it.”

There are legitimate ways money may sometimes be used before bankruptcy.

There are also transactions that can create serious problems.

Do not:

Hide cash
Give money to relatives to hold
Transfer investments to someone else
Move money into another person's account
Repay selected relatives without getting advice
Buy assets simply to conceal money
Make fraudulent transfers

If substantial cash or investments exist, get legal advice before moving anything.

WHAT ABOUT CHAPTER 13?

Chapter 13 is different.

In Chapter 13, the debtor generally keeps property while completing a court-approved repayment plan.

That means someone can potentially have:

Savings
Stocks
Bonds
Investment accounts
Retirement accounts
Home equity
Other assets

and still file Chapter 13.

However:

KEEPING THE ASSET DOESN'T MEAN ITS VALUE DOESN'T MATTER

Chapter 13 has something commonly called the:

BEST INTERESTS OF CREDITORS TEST

In simplified terms, unsecured creditors generally must receive at least as much through the Chapter 13 plan as they would have received if the debtor's nonexempt assets had been liquidated in a Chapter 7 case.

SIMPLE EXAMPLE

Suppose someone has:

$40,000 of nonexempt investments

and wants to keep them.

A Chapter 13 case may potentially allow the person to keep those investments.

However, that $40,000 of nonexempt value may affect how much must be paid to unsecured creditors through the Chapter 13 plan.

This is why:

“Chapter 13 lets you keep your assets”

doesn't mean:

“Your assets don't count.”

CHAPTER 7 VS. CHAPTER 13 WITH INVESTMENTS

CHAPTER 7

Nonexempt stocks, bonds, cash or other investments may potentially be taken and liquidated by the trustee for creditors.

Exempt retirement accounts and other exempt property can generally be protected.

CHAPTER 13

You generally keep your property.

But nonexempt property can increase the amount that must be paid through your repayment plan.

WHAT ABOUT $100,000 IN SAVINGS?

Someone with $100,000 sitting in an ordinary savings account shouldn't assume:

“I have too much money to file bankruptcy.”

But they also shouldn't assume:

“Bankruptcy will let me keep all $100,000 and eliminate my credit cards.”

The source of the funds, exemption system, type of bankruptcy, other assets, debts and circumstances all matter.

WHAT ABOUT $500,000 IN A 401(k)?

Again, completely different question.

A person could potentially have substantial assets in a qualifying retirement account and still file bankruptcy because qualifying retirement funds can receive significant exemption protection.

The existence of a large 401(k) alone does not automatically mean:

“You can't file bankruptcy.”

Income eligibility and the treatment of assets are separate issues.

THIS IS WHY YOU DON'T CASH OUT A 401(k) FIRST

Consider:

401(k): $250,000

Credit Cards: $100,000

Someone thinks:

“I can't file bankruptcy because I have $250,000.”

So they withdraw $100,000 from their 401(k), pay the credit cards and potentially create taxes and penalties.

But the person later learns that the qualifying retirement account might have been protected in bankruptcy.

That could be an extremely expensive mistake.

AN ATTORNEY SHOULD REVIEW LARGE FINANCIAL ASSETS

You can absolutely educate yourself and make an inventory before meeting with an attorney.

Bring information showing:

BANK ACCOUNTS

Current balances

STOCKS & BONDS

Current market value

RETIREMENT ACCOUNTS

Type of account and current balance

REAL ESTATE

Estimated market value and mortgage balances

VEHICLES

Estimated market value and loan balances

BUSINESS INTERESTS

Ownership percentage and estimated value

OTHER PROPERTY

Estimated resale/fair market value

Then ask:

WHICH EXEMPTION SYSTEM WOULD APPLY TO ME?

WHICH ASSETS ARE FULLY EXEMPT?

WHICH ARE PARTIALLY EXEMPT?

WHICH ARE NONEXEMPT?

WHAT WOULD HAPPEN TO THEM IN CHAPTER 7?

HOW WOULD THEY AFFECT A CHAPTER 13 PLAN?

THE IMPORTANT LESSON

Having money does not automatically disqualify you from bankruptcy.

Having assets does not automatically disqualify you from bankruptcy.

Having a 401(k) does not automatically disqualify you from bankruptcy.

The questions are:

WHAT TYPE OF ASSET IS IT?

↓

WHAT IS ITS CURRENT VALUE?

↓

IS THERE A LOAN OR LIEN AGAINST IT?

↓

WHAT EXEMPTION APPLIES?

↓

HOW MUCH OF IT IS EXEMPT?

↓

HOW MUCH, IF ANY, IS NONEXEMPT?

↓

ARE YOU FILING CHAPTER 7 OR CHAPTER 13?

That is why two people who each have a net worth of $200,000 can have completely different bankruptcy outcomes.

In bankruptcy, where your money is held can sometimes be just as important as how much money you have.

This information is educational. Anyone with significant cash, investments, retirement funds, real estate or business assets should have a qualified bankruptcy attorney review those assets before filing or transferring money.