13 Creditor Protected Assets in Texas

Texas is known as being a haven for debtors, going back to before it was even a US state. Protections for debtors against creditors run through Texas history and inform the state constitution. In an interview with Dallas Morning News, one advisor for JPMorgan called Texas one of the most debtor-friendly states, and said that “The Texas Constitution is the foundation for the protection of debtors from creditor actions in certain particular ways.”

Out of foundational protections for debtors, the Texas legislature has taken that legacy even further and provided several individual types of property and assets that receive legal protection from creditors. That is, creditors are barred, by law, from taking those statutorily protected items as a means of fulfilling debt obligations.

Article XVI, section 49 of the Texas constitution lays out the duty of the legislature in this regard, by simply stating: “The Legislature shall have power, and it shall be its duty, to protect by law from forced sale a certain portion of the personal property of all heads of families, and also of unmarried adults, male and female.”

In a 2003 case in the Texas appellate courts, the court noted both legal history and commentary of the Texas constitution pointed towards one overarching goal: protecting debtors.

The interpretive commentary states article XVI, section 49 of the constitution was created: For the purpose of protecting debtors from destitution, or their families from deprivation of support, or the public from the danger of their becoming charges, the constitution provides that the legislature shall have the duty of enacting statutes which stipulate that certain personal property of debtors shall not be liable to seizure and sale under legal process for the payment of their debts. The freedom so conferred is termed an exemption…. Exemption laws are founded on public policy. The purpose underlying legislation is securing to the unfortunate debtor the means to support himself and his family, the protection of the family being the main consideration. Dryden v. Dryden, 97 S.W.3d 863 (Tex. App. 2003).

Section 49 is immediately followed by Section 50-52, which lays out the constitutional protection for the most prized of Texas’s exemptions for debtors: the homestead exemption, which prevents creditors from seizing a debtor’s house. When you put all that together, you get why some bankers refer to Texas a “nightmare” for creditors, and say, “Texas is a very hard state to effectively sue and collect money in. And if the consumer hires an attorney, it gets very difficult indeed to force payment.”

What Is Texas Homestead Exemption?

The Texas homestead exemption is one of the most powerful tools in asset protection. The homestead exemption provides a shield against creditors from seizing a person’s home to fulfill debt and provides a wealth of tax benefits under Texas law. Once you’ve established a homestead under Texas law, it’s very easy to build out from there and shield personal property associated with the homestead.

The heart of the Texas homestead is an exemption that prevents creditors from seizing the family home to fulfill debts. After that basic protection, Texas also provides perks like tax breaks for school and county taxes, among others. Texas law encourages residents to take advantage of the laws and benefit from them. This piece will walk through the history of the homestead, to show why it has such permanence in Texas law, and why every Texas should use the law to their advantage — even if creditors are not an issue. If you are a Texas putting together an asset protection plan in Texas, whether basic or advanced, this is likely the first step you should take.

Different types of debtors and creditors

Before we jump into the different types of assets getting protection, it’s important to note who can get such protection. Because while Texas is a friendly state for debtors or anyone seeking to protect their assets  — there are critical caveats.

For instance, some forms of debt don’t get the same level of deference as your typical commercial debt. The two prominent types of debt that don’t get the same level of deference are child support and spousal maintenance. And the reason these two things don’t get similarly treated as commercial debt, like credit cards or loans, is that they are not considered debt at all.

In the 2018 Texas state supreme court case, Dalton v. Dalton, one of the judges discussed the differences here:

Although retirement benefits are generally exempt from attachment for the satisfaction of debts, TEX. PROP. CODE § 42.0021, Texas treats both child support and spousal maintenance obligations as materially different from traditional debts. For example, the Texas Constitution broadly prohibits imprisonment for debts, TEX. CONST. art. I, § 18, but this prohibition does not apply to child support obligations or to court-ordered spousal maintenance obligations under chapter 8. In re Green , 221 S.W.3d at 647. Similarly, Texas law generally exempts wages from seizure or attachment. TEX. CONST. art. XVI, § 28 ; TEX. PROP. CODE § 42.001(b)(1). But income withholding is expressly available as a mechanism to enforce child support and spousal maintenance obligations. Dalton v. Dalton, 551 S.W.3d 126 (Tex. 2018)

If you face the prospect of paying something due from child support or spousal maintenance, those aren’t considered debt. If you encounter that prospect, it is vital to have a local family law attorney in Texas walk you through managing your legal obligations if you owe money due to child support or some spousal maintenance like alimony.

The reason for this caveat and differentiation is because child support, in particular, isn’t seen as a debt. The Texas supreme court explained this in the case Ex Parte Hall in 1993, saying: “it has long been held that the obligation to support one’s child is not a debt, but a natural and legal duty.” Ex Parte Hall, 854 S.W.2d 656, 658 (Tex. 1993).

Caveats to property exemptions  

There are two more important notes to consider before going through the list of exempt property. The first point is that it is up to the person claiming an exemption to claim the legal right. As a 2012 appellate case made clear, “The debtor bears the burden of proving that property is exempt from attachment.” Congleton v. Shoemaker (Tex. App. 2012).

The second point here is that if you are going to claim a property right — you must have an actual legal entitlement to make that claim. In a 2004 case, the Texas courts held:

Because “[a]n exemption is a right given by law to a debtor to retain a portion of his [or her] property free from the claims of creditors,” we hold that Appellant cannot claim as exempt the portion of benefits to which she has no legal right. Pickens v. Pickens, 125 Tex. 410, 83 S.W.2d 951, 954 (1935); see also In re Swift, 124 B.R. 475, 481 (Bankr.W.D.Tex. 1991) (finding computer system that was not the property of the debtor could not be included in the debtor’s exemptions); Day, 112 F.Supp.2d at 837-39 (holding plaintiff had no legal right to benefits erroneously distributed pursuant to a void QDRO). Jones v. American Airlines, Inc., 131 S.W.3d 261 (Tex. App. 2004).

In that case, one of the parties claimed that the courts wrongly seized part of payout in a retirement fund and that she had a right to it. But when the courts looked at it — the payouts from the retirement funds had been wrongly made, and there was no legal right that exempted her.

To put it more simply, one of the property interests a person has is that creditors cannot take housepets as a form of payment. But you couldn’t make that same claim on a housepet if it wasn’t your housepet. You must have a legal right to claim on that housepet for the legal rights to attach to your claim. Therefore, it’s worth thinking of means to establish your legal right to various forms of property as we work through the exempted asset classes Texas offers to its citizens.

The Texas Homestead Exemption 

The first, and perhaps most sacred, type of property that gets protection in Texas is the homestead. The first line of section 50 of Article XVI of the Texas Constitution lays out the basic principle, “The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for…” The basic principle is that the home and the land it sits on is sacred in Texas unless you meet fit under one of the specific exceptions the constitution lists.

Texas delineates between two types of homestead: urban and rural. The test of whether or not a homestead is urban or rural is listed in the Texas property code. The basic test is whether or not the homestead fits the factual factors listed for an urban homestead, and if it fails that, the homestead reverts to a rural homestead. The test for an urban homestead is in Section 41.002; subsections (a) and (c) of the Texas Property Code, and it states:

(a) If used for the purposes of an urban home or as both an urban home and a place to exercise a calling or business, the homestead of a family or a single, adult person, not otherwise entitled to a homestead, shall consist of not more than 10 acres of land which may be in one or more contiguous lots, together with any improvements thereon.

(c) A homestead is considered to be urban if, at the time the designation is made, the property is:

(1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and

(2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:

(A) electric;

(B) natural gas;

(C) sewer;

(D) storm sewer; and

(E) water.

The main factors are in subsection (c), and if the homestead is urban, the lot gets protected for up to ten continuous acres. If the urban lot sits across split up acreage, only the lot with the physical homestead gets counted — this is not true for a rural homestead.

The factor test listed in the statute is fact-dependent and done on a case-by-case basis. If not enough of the factors are present to establish an urban homestead, it reverts to a rural homestead where the rules are different. Texas Code defines the rural homestead in Section 41.002; subsection (b).

(b) If used for the purposes of a rural home, the homestead shall consist of:

(1) for a family, not more than 200 acres, which may be in one or more parcels, with the improvements thereon; or

(2) for a single, adult person, not otherwise entitled to a homestead, not more than 100 acres, which may be in one or more parcels, with the improvements thereon.

The most significant difference is that the rural homestead gets protection for up to 200 acres for a family, 100 acres for an individual. And there is no requirement for the acreage to be one large, continuous plot of land. The rural homestead exemption covers all of that land across multiple parcels. The spirit behind this idea was to protect farmers or others with one parcel with the farmhouse and other plots of land for agricultural purposes.

There is not a list of requirements that a rural homestead must meet. Once a rural homestead gets established, “it remains a rural homestead, even if the surrounding area becomes urban.”

The homestead protection has less force in federal court, but it is not totally without protection for Texas citizens. In a recent case, a federal court pointed to a Fifth Circuit case, which said, “[H]omesteads are favorites of the law, [and] we must give a liberal construction to the constitutional and statutory provisions that protect homestead exemptions.” Bradley v. Pac. Sw. Bank, FSB (In re Bradley), 960 F.2d 502, 507 (5th Cir. 1992). The 2019 case, commenting this one, said:

“Indeed, we must uphold and enforce the Texas homestead laws even though in so doing we might unwittingly assist a dishonest debtor in wrongfully defeating his creditor.’…” In re Cyr, 602 B.R. 315 (Bankr. W.D. Tex. 2019)

A more critical principle is protecting the Texas homestead rather than worrying about being overbroad.

The Texas Snap-shot Rule

Finally, Texas has what is called the “Snap-shot rule.” That means whatever the date a bankruptcy petition gets filed is the date that the homestead is determined. The courts have ruled, “the Petition Date is the operative date in determining whether a homestead is exempt, and a homestead owned on the date of bankruptcy filing is “subject to an unconditional exemption under Texas law.” In re DeBerry, 884 F.3d at 529, 530 (5th Cir. 2018). The court also gave an example of how that rule works:

If a debtor sells her homestead a month before declaring bankruptcy and then uses that money to buy a new residence three months later — perhaps because like many she needs the equity from her old house to be able to afford the new house — then her creditors cannot reach the new homestead. But if that debtor who sold the house pre-petition does not use the proceeds to obtain a new homestead within six months, the funds become part of the estate.

The snap-shot rule ensures that the basic principle we started with outlining, the protection of the Texas homestead in the state constitution, remains covered in situations where the homestead may change depending on circumstances.

While there are a variety of ways of establishing the Texas homestead, one quick way is to file an Application for Residential Homestead Exemption with your appraisal district for the $25,000 homestead exemption.

Exempted property with no aggregate limitations 

Texas Property Code sections 42.001 and 42.002 list out types of property and assets that receive an exemption from creditors. There are two types of property exempted, those subject to aggregate limitations. That is, personal property is exempt unless it goes over a monetary value listed in the statute. We’re going to start with those property items that have no aggregate limitations — that is, they can have any value. They’re always exempt from creditors liquidating them to fulfill a debt obligation.

Texas Property Code 42.001(b)(1)-(4) lists out the property with no aggregate limits:

(b) The following personal property is exempt from seizure and is not included in the aggregate limitations prescribed by Subsection (a):

(1) current wages for personal services, except for the enforcement of court-ordered child support payments;

(2) professionally prescribed health aids of a debtor or a dependent of a debtor;

(3) alimony, support, or separate maintenance received or to be received by the debtor for the support of the debtor or a dependent of the debtor; and

(4) a religious bible or other book containing sacred writings of a religion that is seized by a creditor other than a lessor of real property who is exercising the lessor’s contractual or statutory right to seize personal property after a tenant breaches a lease agreement for or abandons the real property.

Non-aggregate exempted property: Wages

The first non-exempt item is the most important: wages. A personal salary, made for personal services, is entirely exempt from consumer collection debt. The only exceptions to this rule are child support, back taxes, and defaulted student loans. Child support, as mentioned previously, is considered a duty, not a debt. Other than those specific examples, a creditor cannot garnish a paycheck in any means.

When you combine the one-hundred percent protection for wages and the unlimited security for the homestead, you can see how Texas law provides an expansive and power shield for potential debtors against creditors. One important caveat to the wages protection, however, is that even though a paycheck gets exempted — cash savings do get the same protection. Some attorneys in this area call it the cash problem. The workaround for this is to shift cash assets, which get effectively no protection, into exempted forms of property.

Texas Property Code statute section 42.004(a)-(b) describes the situation where a person is turning non-exempted property — like a savings account full of cash — into exempted property:

(a) If a person uses the property not exempt under this chapter to acquire, obtain an interest in, make improvement to, or pay an indebtedness on personal property which would be exempt under this chapter with the intent to defraud, delay, or hinder an interested person from obtaining that to which the interested person is or may be entitled, the property, interest, or improvement acquired is not exempt from seizure for the satisfaction of liabilities. If the property, interest, or improvement is acquired by discharging an encumbrance held by a third person, a person defrauded, delayed, or hindered is subrogated to the rights of the third person.

(b) A creditor may not assert a claim under this section more than two years after the transaction from which the claim arises. A person with a claim that is unliquidated or contingent at the time of the transaction may not assert a claim under this section more than one year after the claim is reduced to judgment.

The key to getting around this and not raising problematic red flags is to follow 42.004(c), which provides, “It is a defense to a claim under this section that the transfer was made in the ordinary course of business by the person making the transfer.” As one attorney puts it, “conversion of cash into exempt assets should be accomplished in the orderly course of business or personal life for purposes that can be reasonably justified independent of any threatened or pending litigation.”

This “cash problem” point is valid of any property listed here — but it is especially important to note it around wages, which are exempt from garnishment. Garnishment is only one tool of creditors, and a good asset protection plan accounts for the “cash problem.”

Social security and VA benefits are protected under federal law from garnishment:

The federal law exempts most federally funded retirement or disability benefits including SSI, Social Security, VA benefits, civil service retirement, Foreign Service retirement, and longshoremen and harbor worker’s compensation. If government benefits are directly deposited into a bank account and no other money goes into the account, the money in the account cannot be taken to pay a judgment. If this applies to you, notify your bank by sending an anti-garnishment letter.

On one final note, wages can also include future wages. 42.001(d) applies to future commissions and says: “Unpaid commissions for personal services not to exceed 25 percent of the aggregate limitations prescribed by Subsection (a) are exempt from seizure and are included in the aggregate.”

Non-aggregate exempted property: Professionally prescribed health aids

A professionally prescribed health aid is anything that you receive from a doctor or other professional that helps your health. These items include things like walkers, scooters, and other health devices. Anything that aids you in your health, the state of Texas understands that these are expensive, and a creditor should not be allowed to liquidate these items to fulfill a debt. The exemption applies not only to you — but to any dependents, you may have in your care.

Non-aggregate exempted property: Alimony, Child support, and more

Alimony, child support, and other dependent or spousal maintenance payments owed after a divorce, child support, or separate court hearing gets treated as wages. It all gets complete protection, and a creditor cannot garnish or otherwise take these payments to fulfill a debt. 42.001(b)(3) says, “alimony, support, or separate maintenance received or to be received by the debtor for the support of the debtor or a dependent of the debtor.”

The same caveats that apply to wages apply here as well.

Non-aggregate exempted property: Religious books

Two provisions cover Bibles and other religious texts. 42.001(b)(4) and 42.002(e) are the applicable provisions.

42.001(b)(4) a religious bible or other book containing sacred writings of a religion that is seized by a creditor other than a lessor of real property who is exercising the lessor’s contractual or statutory right to seize personal property after a tenant breaches a lease agreement for or abandons the real property.

42.002(e) A religious bible or other book described by Subsection (b)(4) that is seized by a lessor of real property in the exercise of the lessor’s contractual or statutory right to seize personal property after a tenant breaches a lease agreement for the real property or abandons the real property may not be included in the aggregate limitations prescribed by Subsection (a).

The short version is that Bibles and other religious books containing sacred writings are not subject to the aggregate limitation and are exempt from seizure.

Aggregate limitations rules for personal property

The second type of personal property that Texas grants exemption from creditors has one main caveat: Texas places aggregate limitations on it. That means the overall value of that specific form of personal property has a limit. Every piece of property listed in Texas Property Code 42.002 is exempt but falls under aggregate limitations. The limitations get listed in 42.001(a):

(a) Personal property, as described in Section 42.002, is exempt from garnishment, attachment, execution, or other seizure if:

(1) the property is provided for a family and has an aggregate fair market value of not more than $100,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property; or

(2) the property is owned by a single adult, who is not a member of a family, and has an aggregate fair market value of not more than $50,000, exclusive of the amount of any liens, security interests, or other charges encumbering the property.

The short version is that for a family, the aggregate limitation on personal property in 42.002 has a cap on the value of $100,000, and for individuals, the aggregate restriction is $50,000. If the aggregate value goes above that amount, a creditor can reach through and use the personal property for the fulfillment of a debt.

Aggregately limited personal property

Each one of these types of personal property must get designated by the debtor. Once he does that, the property receives full exemption under the law, pending any aggregate limits. Texas Property Code 42.002(a) lists the following kinds of property:

(a) The following personal property is exempt under Section 42.001(a):

(1) home furnishings, including family heirlooms;

(2) provisions for consumption;

(3) farming or ranching vehicles and implements;

(4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;

(5) wearing apparel;

(6) jewelry not to exceed 25 percent of the aggregate limitations prescribed by Section 42.001(a);

(7) two firearms;

(8) athletic and sporting equipment, including bicycles;

(9) a two-wheeled, three-wheeled, or four-wheeled motor vehicle for each member of a family or single adult who holds a driver’s license or who does not hold a driver’s license but who relies on another person to operate the vehicle for the benefit of the nonlicensed person;

(10) the following animals and forage on hand for their consumption:

(A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;

(B) 12 head of cattle;

(C) 60 head of other types of livestock; and

(D) 120 fowl; and

(11) household pets.

The one form of personal property subject to most litigation is 42.002(a)(4) “tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession.” The questions of whether or not something is or is not a thing used in a “trade or profession” is a very fact-dependent question that gets decided on a case-by-case situation.

For instance, there’s one case where a man claimed that a sailboat he owned was exempt because he used it as part of the tools of his trade as a sailing instructor and electrical engineer. But the court found that he had only used the sailboat to teach someone how to sail one time and that one time was taking a friend out for a leisurely outing. There was no evidence he was an instructor or using it as part of his business as an instructor, not was there any evidence that an electrical engineer used a sailboat as part of his or her profession. The court said:

“In order for the sailboat to fall within this section, there must be evidence that it fairly belonged to or was usable in the debtor’s trade and that it was used with sufficient regularity to indicate actual use by the debtor.” Leibman v. Grand, 981 S.W.2d 426 (Tex. App. 1998).

And in a recent 2017 case, a Texas court ruled that a domain name, the URL for a website, was not a form of personal property that would be considered a “tool or profession or trade” that gets included in the statutory definition. Restrepo v. Alliance Riggers & Constructors, Ltd., 538 S.W.3d 755 (Tex. App. 2017). The court said, “A domain name is not a tool, nor is it a piece of equipment, a book, or apparatus. Appellants have not cited, and we are unable to find any authority holding that a domain name is exempt personal property under any other portion of Section 42.002.”

So while the description for that section is broad, it would be best to stick to a literal definition of “tools, equipment, books, and apparatus” and not digital things. And also, follow the court’s admonition over the sailboat that any “tools, equipment, books, and apparatus” get used with “sufficient regularity to indicate actual use.”

Retirement plans and life insurance exempt 

Finally, our last category of exempt personal property broadly covers various kinds of retirement plans and benefits from life, health, or accident insurance. Generally speaking, “money held in a retirement plan is exempt. Nontaxable rollover distributions are also exempt. However, taxable distributions are not exempt as soon as they leave the plan administrator.” And, “Benefits from life, health, or accident insurance are usually exempt unless the insured person pledged the policy proceeds to secure a debt.”

Texas lists these exemptions under Texas Property Code 42.0021(a).

(a) In this section, “qualified savings plan” means any stock bonus, pension, annuity, deferred compensation, profit-sharing, health, education, or similar plan or account, to the extent the plan or account is exempt from federal income tax or to the extent federal income tax on a person’s interest in the plan or account is deferred until actual payment of benefits to the person. A plan or account that is subject to federal income tax is considered to be exempt from federal income tax for purposes of this section if the plan or account is subject to the tax solely under Sections 511 through 514, Internal Revenue Code of 1986. The term includes:

(1) a retirement plan sponsored by a private employer, government, or church;

(2) a retirement plan for self-employed individuals;

(3) a simplified employee pension plan;

(4) an individual retirement account or annuity, including an inherited individual retirement account or annuity;

(5) a Roth IRA, including an inherited Roth IRA;

(6) a health savings account;

(7) a Coverdell education savings account;

(8) a plan or account established under Subchapter F, Chapter 54, Education Code, including a prepaid tuition contract;

(9) a plan or account established under Subchapter G, Chapter 54, Education Code, including a savings trust account;

(10) a qualified tuition program of any state that meets the requirements of Section 529, Internal Revenue Code of 1986;

(11) a qualified ABLE program of any state that meets the requirements of Section 529A, Internal Revenue Code of 1986; and

(12) an annuity or similar contract purchased with assets distributed from a plan or account described by this subsection.

The key to the exemption is that it is exempt while it is in the retirement or savings plan, but not when a payout comes. Taking a lump sum out of a retirement plan would bring about the same “cash problem” discussed for wages.

Debt collection scams 

Texas has broad and robust rights and protections for consumers under the Texas Debt Collection Act and the Texas Deceptive Trade Practices/Consumer Protection Act. The Texas Attorney General’s office has this notice for consumers:

If a debt collector threatens to take your home or garnish your wages, you may be the victim of a debt collection scam. File a complaint with us immediately.

They have a list of things that any commercial debt collector cannot take or say. If a debt collector violates these laws — the Texas Attorney General’s office asks consumers to file a complaint with them for further investigation. Complaints can get submitted through their office at this link.

LEGAL DISCLAIMER: Information in this article is provided free of charge and purely for informational and educational purposes only and is not offered as legal advice. No attorney-client relationship is created by the offering of this article. [WEBSITE NAME] is not a law firm, does not represent clients, and is not representing you or anyone else. Although every effort is made to keep information up-to-date, laws may change. Retaining legal counsel for your individual case and circumstance is advisable before taking any action that has legal consequences. Consult a tax advisor or financial consultant as well, as this is not offered for any tax or financial service or advice.  

Daniel C. Vaughan is an experienced attorney who has worked on or consulted in numerous lawsuits for Fortune 500 companies and the top law firms in the country. He’s worked on multi-state class action lawsuits, government investigations, and more. He leads teams of attorneys to bring new technology to bear on legal problems to reduce legal spend and find innovative solutions. He received a law degree from Regent University School of Law and a Bachelor of Science from Middle Tennessee State University where he graduated from the University Honors College.