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Bankruptcy in Texas, Part 2

Continued from Bankruptcy in Texas, Part 1


Median income vs. finding of abuse

The trustee is now charged with more areas of ensuring the accuracy of filings and the determinations made under the means test and the disposable income test.

Before BAPCPA, income had no bearing on eligibility for Chapter 7. What comes into play now is the state’s median income, as determined by the Census Bureau (see Texas QuickFacts, Census Bureau). Basically, if your household income is higher than the Texas median income, you must satisfy the criteria of the means test in order to file under Chapter 7. This also puts you in the category of being subject to provisions against “abuse” of the bankruptcy code, whereas pre-BAPCPA law was framed in terms of “substantial abuse.” If abuse is found–subject to an appeal hearing–the Chapter 7 case can be dismissed (thereby exposing you once again to creditors) or converted to a Chapter 13 (or Chapter 11) filing.

Safe-harbor provisions, IRS criteria

If your household income (also relative to number of dependents) is below the median for Illinois, you have what is known as “safe harbor” from the abuse provisions and allows you to file under either Chapter 7 or Chapter 13. A sidenote: although Chapter 11 is commonly perceived as restricted to business reorganization, individuals with unsecured debt more than $336,900 are not eligible for Chapter 13 but can file under the more expensive–and more flexible–Chapter 11.) The means test uses the IRS national and local collection standards for determining household and living expenses.

Federal versus state exemptions

Texas is one of the fifteen states (plus Washington D.C.)  that allow Chapter 7 debtors to choose between the exemptions in the bankruptcy code or the the exemptions provided by Texas statute. Texas is considered one of the better states for debtors to claim exemptions.

For example, the current federal homestead exemption maxes out at $21,165. But Texas statute protects homesteads up to 10 acres in an urban setting (village, town or city) and up to 100 acres (200 acres married/family) in a rural setting. Further, proceeds from the sale of a homestead are protected for six months (in other words, you have to buy a new place, or the creditors can come after the cash).

Texas law protects personal property up to $30,000 ($60,000 married/head of family).  This includes household furnishings, some art, some jewelry (specific limits), farm and ranch implements, boating equipment used for work, and other tools of the trade.

Texas, being Texas, allows retention of two firearms, household pets, and two horses, mules, or donkeys and a saddle, blanket, and bridle for each; 12 head of cattle; 60 head of other types of livestock; and 120 fowl.

Important financial instruments are also protected, including certain insurance policies and retirement instruments.

Figuring out proper exemptions can be difficult

Note to potential pro se filers (that is, those who without benefit of attorney): This section is a profound example of why you hire a trained, experienced bankruptcy attorney. Sure, you can read the state code, but you have to know which sections to look in--the exemptions are not, as one might assume, gathered neatly together under a "State Bankruptcy Exemptions" heading. The homestead exemption is in the Property Code section at Section 41.001.  The Personal Property exemption also is described in the Property code, at Section 42.001.

Exemptions not neatly collected

But other important exemptions are scattered throughout the statutes. And, unfortunately, an Internet search might not result in finding an alternate, accurate, up-to-date list that is truly authoritative. For example, a common mistake on many law/bankruptcy sites is that Texas urban homesteads are restricted to only one acre (instead of 10, as clearly worded in the statute as ". . .the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land. . . .").

Laws change and get updated

Furthermore, nothing in law is static, as shown by the passage of BAPCPA and continual updates to local rules in bankruptcy courts. Even the Texas State Law Library has the following notice atop this page:
The statutes available on this website are current through the 81st Legislature. The Texas Constitution is current through the amendments approved by the voters in November 2009. This website will not reflect changes in law made during the 82nd Legislature until 2012. See FAQ Question 2 for more information.

Continued in Bankruptcy in Texas, Part 3.

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