Bankruptcy exemptions protect the equity in your property from creditors and the bankruptcy court—preventing the equity from being used to pay your creditors. Equity is the value of property after you subtract the amount of any liens against the property from its fair market value.
The equity in your home is one such asset in bankruptcy. And bankruptcy exemptions—including the homestead exemption—allow you to protect the property you will need to maintain a home and employment after bankruptcy.
Bankruptcy exemption amounts vary by state, so the amount you will be able to protect will depend on where you live and the type of bankruptcy you file (Chapter 7 or Chapter 13).
In Texas, bankruptcy exemptions are quite generous, especially regarding the equity in your home. The Texas homestead exemption allows you to protect an unlimited amount of equity in your primary residence, provided the property does not exceed 10 acres in a city, town, or village, or 100 acres (200 acres for a family) in the country. This means that in a bankruptcy case, you can keep your home regardless of its value, as long as the property size is within these limits. Texas also allows you to choose between state and federal bankruptcy exemptions, but you cannot mix and match between the two systems. The choice between state and federal exemptions can significantly impact the protection of other assets, such as personal property, retirement accounts, and vehicles. The type of bankruptcy filed, Chapter 7 or Chapter 13, also affects how exemptions are applied. In Chapter 7, exemptions protect your assets from being sold by the bankruptcy trustee to pay creditors, while in Chapter 13, exemptions can influence the amount you must repay unsecured creditors through your repayment plan.
