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Updated: 2020-07-27 by
Every state has laws that designate certain types of property (some or all of the equity in your home, some personal possessions, tools that you need for your work) that are off-limits to unsecured creditors—that is, creditors that don't have a lien on your property. Credit card debt and medical bills are the two most common types of unsecured debt.
Unsecured creditors cannot force you to sell your exempt property to pay off your debt. Even if the creditor goes to court, wins a court judgment against you, and takes steps to attach a lien to your property, you are still entitled to your exemption amount before the creditor gets any proceeds form a sale.
If you sell your exempt property voluntarily, the creditor has a right to have its lien paid from the sale proceeds before you receive anything. As a practical matter, most of the property of people who file for Chapter 7 bankruptcy is exempt, so they don't want to sell what they have. If all of your property is protected by exemption laws, you are said to be "judgment proof"—meaning that creditors can't collect anything from you, whether or not you file for bankruptcy.
One important thing to remember is that an exemption protects only the "equity" in your property. That's the difference between the value of the property and what you owe to creditors—like your mortgage lender—who have a secured interest in it.
If you owe $18,000 on a $20,000 car, you have only $2,000 in equity. If your state has at least a $2,000 exemption for motor vehicles, that will be enough to protect the car in bankruptcy—but you must continue to make the payments to the secured creditor.
On the other hand, if you own the vehicle free and clear, then your equity is the full value of the vehicle, and a $2,000 exemption would not be enough to protect it. The trustee would force the sale of the car, you would get your exemption amount, and the trustee would get the rest of the proceeds to distribute to the unsecured creditors.
To learn what property is exempt in your state, see the Exemptions section of this website.
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A quick summary of the main exemptions under Texas law.