As we’ve written in the last two blogs, Texas has a generous set of exemptions. As a result, all of the assets belonging to most people filing a straight Chapter 7 bankruptcy are exempt, protected from the reach of the bankruptcy trustee and, thus, from their creditors.
IF YOU HAVE ANY ASSETS THAT ARE NOT EXEMPT
In the unusual event that you do own something that is NOT exempt, the Chapter 7 trustee would have a right to take it away from you, sell it and then pay the proceeds from that sale to your creditors. If this asset is something you no longer care about – the last remaining equipment and inventory of a closed business, for example – you may be fine with just letting the trustee liquidate it and paying your creditors from the proceeds in an orderly way. However, if the nonexempt asset is something you want to keep, you would likely be able to do so by filing a Chapter 13 payment plan instead.
ESPECIALLY LIKELY IF YOU’VE RECENTLY MOVED TO TEXAS
Because the state exemptions in Texas are comparatively generous, those who qualify for them usually don’t have any assets that are at risk when filing for a Chapter 7 bankruptcy. So this strategy of filing a Chapter 13 case to preserve any at-risk assets would more likely be useful for folks who have recently moved to Texas and don’t yet qualify for the Texas exemptions. According to Section 522(b)(3)(A) of the Bankruptcy Code, you must live in Texas for two full years before filing your bankruptcy case in order to take advantage of Texas’s exemptions. Otherwise you would have to use the exemptions available to residents of the state from which you moved, which might not be as favorable.
AN EXAMPLE OF HOW CHAPTER 13 HELPS A NEW TEXAS RESIDENT
The best way to show how this would work is with an example.
If you had lived in Alabama and moved to Texas a year ago, you would be required to use Alabama’s exemptions if you filed a bankruptcy now in Texas. Let’s say you own a vehicle worth $6,500 free and clear. Alabama does not provide an exemption specifically for a vehicle, but gives you a “wild card” exemption that can be used for your vehicle, totaling only $3,000. Since your vehicle is worth $6,500, if you filed a Chapter 7 case the trustee would be able to take your vehicle from you, sell it, pay you the $3,000 exemption and then use the remaining proceeds to pay your creditors.
Chapter 13 would prevent that and let you to keep your vehicle. It does that by, in effect, giving you time to earn the right to keep the vehicle instead of losing the vehicle in a Chapter 7 case. One of the main requirements of a Chapter 13 plan is that during the course of your three-to-five-year case you must pay your ordinary unsecured creditors as a group at least as much as they would have been paid if you had filed a Chapter 7 case instead, from the proceeds of the sale of any nonexempt assets. To meet this requirement in the above example, during the course of your case you would have to pay about $3,500 to your ordinary unsecured creditors. That’s the portion of the value of your $6,500 vehicle that is not protected by the $3,000 exemption. (To keep things simpler here, we’re not counting the trustee’s likely costs related to selling the vehicle or the trustee’s own fees, which would reduce the amount going to the creditors in a Chapter 7 case and, therefore, would reduce the amount required to be paid into the Chapter 13 plan.)
ADD ONE PRACTICAL TWIST TO MAKE CHAPTER 13 MUCH MORE ATTRACTIVE
If we add just one detail to this example, Chapter 13 would make much more sense as an option. If you happened to owe $3,500 in recent income taxes to the IRS, that alone could be a sensible reason to think seriously about filing a Chapter 13 case to pay that tax while under bankruptcy protection. Because this would be a priority debt paid ahead of ordinary debts, in a Chapter 7 case the trustee would use the entire $3,500 from the vehicle sale to pay off the tax, leaving no money for the ordinary unsecured debts. Because nothing would go to those creditors in a Chapter 7 case, if instead you filed a Chapter 13 case in this scenario, you would not be required to pay anything to them either. Your plan would earmark $3,500 to pay off the income tax debt without being required to pay anything toward your other debts. You’d be saving your vehicle, paying off your taxes and paying nothing more to your creditors than if you had filed a Chapter 7 case.
Especially if you’ve moved to Texas within the last two years, protecting your assets gets more complicated. So you should consult with an experienced bankruptcy attorney. If you are in the Dallas-Fort Worth area, please contact us at The Law Offices of Roger Fuller to schedule a free, no-obligation, confidential consultation by calling us at 214-516-6187 or by reaching us here. Thank you.