In bankruptcy proceedings, the homestead exemption protects your home equity from creditors in a Chapter 7 bankruptcy and helps reduce your payments in a Chapter 13 bankruptcy. If you have equity in your home, the homestead exemption may allow you to keep it if you file for Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, the homestead exemption also comes into play because it determines how much you must pay to your unsecured creditors.
For Texas Residents, the Article 16 of the Texas Constitution provides for a Homestead Exemption. When this exemption applies under the bankruptcy rules, the Texas resident must have resided in Texas for the two years. The homestead exemption only applies to your residence -- you cannot use it for other real properties that you own unless it's contiguous with your homestead.
For the homestead exemption in Texas, the homestead does not pass to the trustee in bankruptcy, and the homestead cannot be seized by creditors. In order to protect the homestead, you must continue to pay the creditor with a legitimate lien on the homestead. If you fail to make the payments, the creditor can foreclose on the homestead.
Limits on Equity in the Homestead in Texas
Changes to bankruptcy law enacted in 2005 place limits on how much equity from the homestead can be claimed in a bankruptcy if the homestead was acquired within the last three years and four months or
The federal restrictions on the homestead exemptions were put in place in 2005 in order to discourage people from moving to and buying a house in a state with a homestead exemption in order to shield their assets from bankruptcy. To take advantage of the homestead exemption in Texas, you must have bought and owned your home in Texas for at least 40 months prior to the bankruptcy. If you sold your home and bought a new one in Texas with the sale proceeds, then the time you owned your first home still counts toward the 40-month requirement.
If you cannot satisfy this requirement, then federal law caps your homestead exemption in Texas at $160,375 regardless of your state exemption amount. Your homestead exemption in Texas is also capped at $160,375 under federal law if your homestead was acquired by transferring non-exempt property into a home with an intent to commit bankruptcy fraud within the last ten (10) years or to defraud, delay or hinder creditors.
Difference Between the City or Rural Homestead in Texas
Generally, a Texas residence may have a city or rural homestead, but not both. A city homestead is permitted to include up to 10 acres of land and the home on it. A rural homestead encompasses is permitted to include up to 100 acres of land for an individual and up to 200 acres of land for an individual with dependents or a couple (including the structures on the land).
If you sell the homestead, the proceeds from the sale are protected from your creditors for a six month period. Any new homestead you acquire during that six month period is also exempt. Any proceeds from the sale of the first homestead not used for the purchase of the second homestead, however, are not exempt.
Valid liens against a homestead in Texas can include:
- Federal tax liens;
- Real property tax liens;
- Homeowners' Association liens;
- Home Improvement liens; or
- Purchase Money Loan liens (mortgage).
This article was last updated on Friday, February 16, 2018.