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Is your home equity at risk in a Chapter 7 bankruptcy?

When you fall behind in one area financially, it can have a ripple effect on many other parts of your life. For example, a hospital with a big unpaid medical debt could file a claim for a lien against your home. A credit card company could garnish your wages, leaving you unable to pay your mortgage.

For many people considering bankruptcy, protecting their home and a few other crucial assets will be the biggest focus. In a Chapter 7 bankruptcy, the liquidation of property to repay creditors is a necessary step. You have to tell the courts about everything of value you own. Even some of your home equity may be at risk.

Thankfully, there are property exemptions that allow those who file for Chapter 7 bankruptcy in Texas to discharge their unsecured debts without losing their homes. 

How much home equity can you protect?

Exemptions allow you to earmark certain property as protected from sale or refinancing in your bankruptcy. You can choose between the federal exemptions and the Texas exemptions, but you have to use the same exemptions for all categories of property. The federal homestead exemption is $25,150, which works for those with only a little accrued equity in their home.

The Texas exemption doesn’t depend on the financial value of your home equity but rather the acreage and location of the property. Those living in a city or village can protect up to 10 acres of property. Someone living in a rural area, however, can protect up to 100 acres. Married couples filing jointly can potentially protect up to 200 acres from creditor claims in a Texas Chapter 7 bankruptcy.

If you have more acreage than that, you may have to refinance some of the acreage or even sell it to help repay your debts before your discharge.

Understanding exemptions helps you protect your assets

The more valuable property you have, the more important it is to choose carefully between the federal and Texas state bankruptcy exemptions. A close review of your finances and the current available exemptions can help you protect as much property as possible if you qualify for a Chapter 7 filing.

Learning more about the rules for Chapter 7 bankruptcies can lead to a brighter financial future after you discharge your debts.