When a debtor files bankruptcy, an estate is created. The estate includes all of the person’s legal and equitable interests in property at the commencement of the case, and may also include any property the debtor becomes entitled to during the 180 day period following the filing of the bankruptcy case. However, debtors can exempt property from being included in the bankruptcy estate. Each state has its own set of exemption. Federal statutes provide another set of exemptions that can be used in some states. Debtors in Texas are allowed to use both the Federal and Texas exemptions when filing bankruptcy.
Property that has not been exempted using these statutes is referred to as being “nonexempt” property. The existence of nonexempt property affects bankruptcy cases in different ways, depending on which chapter of bankruptcy is filed and in which jurisdiction. In Chapter 7 bankruptcy cases, nonexempt property is liquidated and the proceeds paid to the creditors. Debtors are allowed to keep any property that is protected by an exemption. In Chapter 13 bankruptcy cases, debtors have to pay the value of their nonexempt property to a trustee to be disbursed to unsecured creditors, but the trustee does not liquidate this property. The property remains a part of the bankruptcy estate until the debtor’s Chapter 13 plan is confirmed, at which point the property vests back in the debtor unless otherwise stated in the plan or the confirmation order. In some jurisdictions, the property stays a part of the bankruptcy estate even after confirmation of the plan. In these jurisdictions, debtors are required to seek an order of the court whenever they intend to sell, transfer, or otherwise dispose of their property.