Most states have homestead exemptions that protect private residences or the land on which they're constructed from seizure in bankruptcy. Texas homestead exemptions are covered in Chapter 41 of the Texas Property Code.
The protections afforded homeowners in Texas are particularly strong. In many states with homestead acts -- California is one example -- the homeowner must first file a homestead declaration form before his property can become exempt from seizure. Even then, only a certain amount of the value of the home may be exempt.
In Texas, however, every homeowner is automatically protected. Further, while there are constraints, the value of the home is not one of them. In most circumstances, if the property conforms to the acreage and ownership requirements, it doesn't matter how much the home is worth; it's always fully protected.
In theory, a homeowner could own a house worth $10 million, go through bankruptcy with the house fully protected, then sell the house for its full value without having to pay creditors a cent.
Constraints on the Texas Homestead Exemption
There are some constraints on the exemption:
• Acreage. If the property is situated in an urban environment, which includes cities, towns and villages, only 10 acres are protected. If the property is rural, 100 acres are protected if the owner is an individual, 200 if the property is owned by a family.
• Length of Ownership. To receive protection under Texas law, the property must have been owned for at least 1,215 days prior to the declaration of bankruptcy. If the property has been owned for less time, some protections may still be available under Federal law, but the exemption is capped at a relatively low $155,675.
When a Declaration May Be Required
Although most Texas homesteads are covered under statute without the necessity of a declaration of homestead, a declaration may be required if the total acreage exceeds the acreage limits of the homestead exemption.
Under Texas Property Code Ann. §41.005, when the property exceeds the acreage limits -- for instance, an urban property of 30 acres -- the homeowner must file a homestead declaration prior to the declaration of bankruptcy. That declaration must specify which 10 acres are protected. The other 20 acres then may be seized in bankruptcy and sold at auction to satisfy the claims of the creditors.
Disadvantage of Texas Homestead Exemption Statutes
The very strength of homestead protections in Texas can also disadvantage homeowners. With a few exceptions -- home improvement loans, since 1998 -- Texas lenders have fewer rights than lenders in other states. This has sometimes made it difficult for Texans to obtain home mortgages.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.