Chapter 7 bankruptcy is sometimes referred to as a “liquidation” bankruptcy case. However, in practice there is very little liquidation of property. Most Texas bankruptcy debtors find that they don’t lose any of their property in Chapter 7 bankruptcy.
When a person files bankruptcy they have to list all of their property and what they think it is worth. This is a very imprecise process for most personal property, which is everything you own except land. As a general rule, we try to estimate what the property would sell for at a garage sale or if you sold it on Craig’s List. Some property does not retain its value over time. For example, we usually estimate that clothing will sell for about 10% of what you paid for it. For automobiles we use the clean retail value as calculated by NADA. For homes we generally use the tax appraisal value. Keep in mind that the NADA and the tax appraisal value are simply starting points. You must consider damage to the property that lowers its value or upgrades to property that have increased its value, as well as any other factors that affect the property’s value.
Once we establish the value of the property we apply exemptions. Exemptions are laws that allow you to protect specific types of property from liquidation by creditors or in bankruptcy. Exemptions have their limitations though. For example, you may be able to exempt a Toyota Corolla but you probably would not be able to exempt a Ferrari. Every state has its own set of exemptions and many states also allow you to use Federal exemptions as well. Texas is one of the states that allows Federal exemptions. In fact, the combination of Texas and Federal exemptions provides a lot of flexibility in protecting property. Texas is a very good state in which to file bankruptcy.
The bottom line is that if you qualify for Texas exemptions, meaning that you have lived in Texas for at least two years, then it is unlikely that you will have any property liquidated in Chapter 7 bankruptcy. Of course, before filing Chapter 7 you should discuss how your assets will be affected with an experienced bankruptcy attorney.
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