Protection From Creditors in Texas

Posted by Sean Green on in Asset Protection
  • Hits: 105_BAM1094Despite what you may have heard, there is no way to completely bullet-proof your assets from judgment creditors. Stories abound of people and businesses implementing very creative methods in an attempt to protect personal assets and business assets from judgments and seeking ways to avoid having to pay those judgments. Utilizing an asset protection plan is a way to deter potential plaintiffs from suing you; but again, NO PLAN IS FAILPROOF. Prudent planning calls for creating asset protection strategies long before adverse events occur.

This article is designed to discuss the basic protections provided to all residents of Texas by the Texas Constitution and the Texas Property Code. Some individuals require more than just the basic protections. For these folks, various structures can be implemented in order to gain increased protection from judgment creditors. Future articles will discuss what methods can be applied to people who need additional protection.

Homestead

The biggest asset that most individuals have is their personal residence. It only makes sense that your home should be protected from creditors. Fortunately, Texas provides homestead protection that is unrivaled in most other states. For example, some states allow execution on a judgment that can strip you of all of your possessions and put you out on the street. This is usually not true in Texas.

The Texas Constitution protects a homeowner from forced sale for purposes of paying debts and judgments. As with most things in the law, there are a few exceptions including purchase money contracts (think mortgage), taxes (both ad valorem and federal tax liens against both spouses), owelty of partition (divorce), home improvement loans, home equity loans, reverse mortgages, liens pre-dating the establishment of homestead, refinance loans, or the conversion or refinance of a lien on a mobile home that is attached to the homestead. Notice that most of these exceptions deal with loans provided by a bank or other lending institution. These loans require that your home be used as collateral so it follows that failure to pay that loan can and will result in foreclosure.

It is important to note what is not included as exceptions to the Texas “homestead” rule. The vast majority of liens are void. Despite the value of the home, an ordinary judgment creditor cannot force its sale absent some sort of fraud. Texas courts liberally construe homestead laws. London v. London, 342 S.W.3d 768, 776 (Tex. App. – Houston [14th Dist.] 2011, no pet.). Moreover, creditors attempts to place or enforce a lien against the homestead can be defeated using the procedure in Texas Property Code § 53.160.

Homestead equity can also be rolled over from home to home. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex. App. – San Antonio 1989, no writ). Texas Property Code section 41.001(5)(c) states: “The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.” Some title companies will attempt to pay or release all judgment on Schedule C of the title commitment. If this happens, and if the property is homestead, then the seller should aggressively assert section 41.001(5)(c). If the title company refuses to follow the law, then it may be time for the seller to change title companies.

The bottom line is that your personal residence is protected from most creditors. Since your homestead is likely your biggest asset, you can rest comfortable knowing that your home is, for the most part, an asset that cannot be touched. Again, creditors that have used your home as collateral and federal, state, and local taxing authorities can force you to sell your residence.

Wages

The Texas Constitution also prohibits the garnishment of wages, thus protecting the income of a person who receives a salary or wages. Creditors may not touch either one, at least until they are on their way to the debtor.

Personal Property

Texas Property Code §42.001 et seq. specifically list the amount and types of exempt personal property. These exemptions include:

  • Home furnishings;
  • Provisions for consumption;
  • Farming or ranching vehicles and implements;
  • Tools, equipment, books, or apparatus, including boats and motor vehicles used in a trade or profession;
  • Wearing apparel;
  • Jewelry (up to a certain point);
  • Two firearms;
  • Athletic and sporting equipment, including bicycles;
  • a vehicle for each licensed driver in the household;
  • Animals and forage on hand for their consumption
  • Certain savings plans “to the extent that the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income tax on the person’s interest is deferred until actual payment of benefits to the person” under the Internal Revenue Code;
  • College tuition funds (including IRS section 529 funds); and
  • Cash value of annuities and life insurance policies exempted under section 1108.001 of the Texas Insurance Code

Cash

The most vulnerable of all assets is cash. If a creditor is pursuing a debtor the debtor has several options to convert the cash to exempt property. This must be done carefully and with diligence. The options are to convert the cash to homestead-exempt assets such as home improvements or vehicles; use it for reasonable expenses (i.e., retaining an attorney, paying the IRS, paying a child’s tuition, etc.), and slowly but systematically withdrawing the cash from the bank over time.

If a lawsuit is threatened or pending then one must be especially careful converting his or her cash. Transfers or conversions to avoid threatened or pending litigation are void and thus not effective. If you are in that scenario, you must be able to credibly argue that the cash was used in the “ordinary course of business”. Said another way, conversions of cash must be accomplished in the orderly course of business or personal life for purposes that can be justified independent of threatened or pending litigation.

Homestead Exemptions and Registered Entitites

Business entities DO NOT enjoy the homestead protections afforded by the Texas Constitution or Texas Property Code. Only individuals may take advantage of these protections. For this reason, it is generally advisable for clients to keep his or her homestead in his or her individual name.

Stock in corporations is considered to be nonexempt personal property subject to levies, garnishments, and turnovers. Interestingly, partnership and LLC interests are subject only to charging orders, which means that if distributions occur, and only if they occur, then the creditor may attach them.

Conclusion

Texas is a debtor-friendly state and the vast majority of people are “judgment proof”. Strategies can be utilized by every Texas resident to protect most of their personal belongings. On the other hand, there are a large number of people that need additional protection beyond that afforded by statute. If you own your home debt-free or have other investment property or cash balances, the homestead and personal property protections afforded by Texas law are not sufficient. For these individuals, a more sophisticated asset protection plan must be put into place.

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