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Bankruptcy Exemptions

Texas Business Homestead: Is it Dead?

Property designated as homestead in Texas, provides certain protections, including exemption from forced sale for the payment of most debts. Exceptions exist for valid purchase money liens, liens for taxes, improvements, home equity and reverse mortgage liens. Such exemption is also generally available to those who file for bankruptcy in Texas.

Prior to the changes in Art. XVI, Section 51 of the Texas Constitution and Section 41 of the Texas Property Code, a property owner could designate and claim a business homestead if the property was used “as a place to exercise the calling or business.” In 1999, both the Texas Constitution and Property Code were amended to increase the size of an urban homestead from one acre to ten acres. Facially, these amendments appear to be beneficial to business owners by greatly increasing the size of their exempt property. Nevertheless, the other changes actually severely restricted the Texas business homestead and made the same unavailable to most Texas business owners.

These new amendments provide: “If used for the purposes of an urban home or both an urban home and a place to exercise a calling or business, 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 which may be in one or more contiguous lots, together with any improvements thereon.” Tex. Prop. Code §41.002.

Prior to the amendments an individual could have both a business and residential homestead in the same urban area. This has now changed. One must now actually live in the business homestead in order to claim it as exempt. The language “ used for the purposes of an urban home or both an urban home and a place to exercise a calling or business,” makes this change — now fatal to most Texas business homesteads. Since the days of the shopkeeper living above his store are long gone, most business owners do not live in their business location.

The Court of Appeals for the 5th Circuit mentioned the effect of this change in the law of Texas business homestead in denying the claim of business homestead to a Chapter 13 debtor who did not reside in the property which he claimed as his business homestead. Nesco Acceptance Corp. v. Jay, 432 F.3d 323 (5th Cir. 2005). Following the ruling in Nesco, Bankruptcy Judge Leif M. Clark of San Antonio, recently ruled that the owner of a large car lot located on the south side of San Antonio could not claim the lot where he operated his used car business as exempt because he did not live there even though he had no residential homestead.

For those not living in their place of business, the Texas Business homestead exemption is no longer available.

Exemption Planning: Bankruptcy and the Non-Exempt Inheritance

When a Bankruptcy is filed, a bankruptcy estate is created. The estate is comprised of all the debtor’s rights and property (with certain exceptions). The bankruptcy estate also includes inheritances from those who pass away within six months of the date of the debtor’s bankruptcy filing. From the bankruptcy estate is carved out the debtor’s exempt property, which is not part of the estate. The remainder of the estate is subject to administration by the Chapter 7 Trustee. It is his job to liquidate the bankruptcy estate’s non-exempt assets so that payment can be made to the unsecured creditors who timely file proofs of claim.

Many times bankruptcy must be filed on an emergency basis such as: to stop a foreclosure, an IRS levy, the filing of a tax lien, a Sheriff’s sale or, a judgment about to be rendered. The need to file immediately must be weighed against the potential loss of non-exempt assets. Many potential debtors have elderly parents with sizeable estates who are not in good health. Interests in an inheritance or in a decent’s estate is not exempt under the Texas Exemptions and limited in amount under the Federal Bankruptcy Exemptions. Therefore, it is very important to consider the impact of a loved one passing within six months of a bankruptcy filing and the inclusion of an inheritance in the debtor’s bankruptcy estate.

There are several solutions to this problem. Where a loved one has passed and bankruptcy must be filed, the debtor heir may disclaim (give up) his interest in the decedent’s estate under section 122 of the Texas Estates Code. This may be done anytime before the bankruptcy filing but not afterwards. In the case of In the Matter of Simpson, 36 Fd. 3d 450 (5th Cir.1994 ), the Court of Appeals upheld a debtor’s right to disclaim an inheritance the day before his bankruptcy filing. The disclaimer must be complete to be effective. The heir cannot accept some assets of the probate estate and disclaim others.

Another solution is where the relative is still alive, he can execute a codicil to his will to leave the property which would have passed outright to the bankruptcy debtor (to be), to a spendthrift trust with the debtor as beneficiary. Since this is the choice of the relative and not the debtor, who does not yet have any property rights in the inheritance, such planning is permissible, and has withstood judicial challenge.

For example, a wealthy elderly veteran lay dying in Methodist hospital in San Antonio, Texas. He had several children from his first wife who had passed away. He remarried a woman who was not much older than his children. One of his daughters was recently divorced and burdened with sizeable debt from her ex-husband’s business. She needed to file for bankruptcy at once. A codicil to her father’s will was prepared leaving her share of her dad’s estate to a spendthrift trust on her behalf. Her father signed the codicil in his hospital bed shortly before he died. His daughter filed for bankruptcy just before his death. Her inheritance was protected. Hundreds of thousands of dollars worth of land which would have gone to her bankruptcy trustee was shielded by the use of the codicil which effectively removed the inheritance from her bankruptcy estate.

Since most debtors are distraught about their own financial problems they sometimes overlook the ill-health and potential near-future inheritance from relatives. This type of potential bankruptcy asset must not be overlooked and accounted for in bankruptcy planning. A simple revision to a will or codicil can be used to remedy the problem where the relative is still alive and a disclaimer can be used where the relative has passed away prior to the bankruptcy filing. Both are effective bankruptcy planning tools for the non-exempt inheritance.

Texas Exemptions:

A single individual is entitled to exempt $50,000.00 in net equity of the following types of property from claims of creditors and/or a bankruptcy trustee. In the case of a couple or head of household [individual with dependent(s)] the amount of net equity in such types of property is $100,000.00. (1) Home furnishings; (2) Provisions for consumption; (3) Farming or ranching vehicles and implements: (4) Tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession; (5) Wearing apparel; (6) Jewelry not to exceed 25% of the applicable $50,000 or $100,000.00 maximum exemption; (7) Two Firearms; (8) Athletic and sporting equipment, including bicycles; (9) A vehicle for each family member with a driver’s license; (10) Two horses, mules, donkeys and a saddle, blanket and bridle for each; (11) 12 head of cattle; (12) 60 head of other types of livestock; (13) 120 fowl; and (14) household pets. In addition, and not subject to the monetary limits set forth above the following types of property is also exempt: (1) If used for the place of residence or a business and a home, 10 acres of continguous real property in an urban area or, 100 acres if used as a place of residence or a place of business and residence for a single individual in a rural area or, 200 acres in the case of a couple or head of a household; (2) The cash proceeds from the sale of a Texas homestead are exempt for a period of six months from the date of sale; (3) a burial lot; (4) a tax qualified IRA and/or pension plan; (5) Alimony or support payments; (6) Social Security and pension benefits; (7) Unemployment benefits; (8) The cash value of a life insurance policy; (9) Life insurance proceeds;

Federal Exemptions:

The following bankruptcy property exemptions may be claimed by Texas bankruptcy debtors as an alternative to the Texas Exemptions:

1. A single individual is entitled to claim upon to $27,900.00 in equity in real or personal property which the debtor or a dependent of the debtor uses as a residence, or in a burial plot. This amount is doubled in a joint case (husband and wife). 2. $4,450.00 in equity (per debtor) in a motor vehicle. 3. $14,875 in aggregate value (per debtor) (not to exceed $700.00 per item) in household furnishings, household goods, wearing apparel, appliances, books animals, crops, or musical instruments that are held primarily for personal, family, or household use. 4. $1,875.00 in equity (per debtor) in family jewelry 5. $1,075.00 plus up to $13,950.00 (per debtor) of any unused amount of the homestead exemption in (1) above. (This is known as the wild-card exemption) 6. $2,800.00 (per debtor) in implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor. 7. Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract. 8. $14,875.00 in accrued dividends or interest or loan value of any unmatured life insurance contract owned by the debtor. 9. Professionally prescribed health aids for the debtor or a dependent of the debtor. 10. The debtor’s right to receive: social security benefits; unemployment compensation; or local assistance benefits; veteran’s benefits, disability, illness or unemployment benefits; alimony, support or separate maintenance, payment under a stock bonus, pension, profit sharing, annuity or similar plan. 11. An award under a crime victim’s reparation law; a payment on account of the wrongful death or life insurance proceeds arising from the death of person of whom the debtor was a dependent to the extent reasonably necessary for the support of the debtor and his dependents; $27,900.00 (per debtor) on account of personal bodily injury, not including pain and suffering or compensation for actual pecuniary loss, of the debtor or person whom the debtor is a dependent; 12. Exempt retirement funds.

Texas Versus Federal Exemptions: Which Is Best?

Texas Bankruptcy Debtors may choose between the Texas and Federal Exemptions. The election must be complete – one or the other. One may not “mix and match” between the Texas and Federal Exemptions.
The Texas exemptions should be considered when net equity in a home exceeds $28,000.00 for an individual or $56,000.00 for a couple. This is so because these are the maximum amounts of value which may be claimed under the Federal Exemptions, while the Texas homestead exemptions have no dollar limitations, only acreage limitations (10 acres in the city and 100 rural acres for a single adult or 200 rural acres for a head of household or couple).
The Texas exemptions allow exemption of $50,000.00 in net equity in eligible personal property for a single adult or $100,000.00 in net equity in eligible personal property for the head of a household or a joint debtor (husband and wife) case.
The following items are NOT EXEMPT under the Texas Exemptions but are, subject to certain dollar limitations, under the Federal Exemptions:

1. Cash 2. Bank Accounts 3. Brokerage Accounts 4. Utility and rental Deposits 5. Stocks and bonds 6. Mutual Funds 7. Income Tax Refunds 8. Claims and causes of action 9. Inheritances 10. Interests in businesses, corporations, partnerships, joint ventures 11. Non-homestead real estate including leases or real and personal property 12. Oil and gas interests 13. Patents, copyrights, trademarks and tradenames 14. Additional vehicles (beyond one per licensed family driver) 15. Additional firearms (beyond the two permitted) 16. Aircraft 17. Boats 18. Inventory 19. Customer Lists 20. Goodwill 21. Websites 22. Franchise agreements 23. Leases on non-homestead property 24. Telephone numbers 25. Contract rights 26. Personal injury and wrongful death claims 27. Office equipment and supplies 28. Insurance renewal commissions 39. Real estate broker/agent commissions 40. Intellectual property rights 41. Book, music, art and photographic publishing and royalty rights 42. Sporting event, theatrical and other tickets and subscription rights (ie. San Antonio Spurs season tickets, San Antonio Symphony and Majestic Theater season tickets, cruise line and airline tickets, bonus miles, frequent flyer miles) 43. Country Club Memberships 44. Timeshare Interests 45. Refunds and overpayment rights

Multi-State Residents: Which Exemptions Apply?

The debtor’s domicile for the two year period prior to bankruptcy filing determines which state’s exemptions apply. For example, a long-time Florida resident moves to Texas and files for bankruptcy four months later. Because the debtor lived in Florida for the two year period before filing for bankruptcy, the Florida exemptions must be taken rather than the more liberal Texas exemptions.

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