The Complete Guide to Filing Bankruptcy in Texas
Filing for bankruptcy is one of the most important financial decisions you can make. For Texas residents overwhelmed by debt, bankruptcy offers a legal path to eliminate or reorganize obligations and start fresh. This comprehensive guide covers everything you need to know about filing bankruptcy in Texas, from understanding which chapter is right for you to protecting your assets through the generous Texas exemption system.
At Machi Wright & Associates in Arlington, Texas, we have helped thousands of individuals and families navigate the bankruptcy process. With over 30 years of experience, our attorneys understand the unique aspects of Texas bankruptcy law and can guide you through every step.
Understanding Bankruptcy: Chapter 7 vs. Chapter 13
Texas residents have two primary bankruptcy options available: Chapter 7 liquidation bankruptcy and Chapter 13 reorganization bankruptcy. Both offer debt relief, but they work in fundamentally different ways and serve different financial situations.
Chapter 7 Bankruptcy in Texas
Chapter 7 bankruptcy, commonly called liquidation or straight bankruptcy, eliminates most unsecured debts within approximately 3 to 4 months. When you file Chapter 7, a court-appointed trustee reviews your assets and may sell non-exempt property to pay creditors. However, Texas has exceptionally generous exemptions, and the vast majority of Chapter 7 filers in Texas keep all of their property. Debts typically eliminated in Chapter 7 include credit card balances, medical bills, personal loans, utility arrearages, and certain older tax debts.
To qualify for Chapter 7 in Texas, you must pass the means test. This test compares your household income over the past six months to the Texas median income for your family size. If your income falls below the median, you automatically qualify. If your income exceeds the median, a secondary calculation examines your disposable income after deducting allowed expenses. Many people with above-median income still qualify for Chapter 7 after deductions.
Chapter 13 Bankruptcy in Texas
Chapter 13 bankruptcy reorganizes your debts into a structured repayment plan lasting 3 to 5 years. You make a single monthly payment to a Chapter 13 trustee, who distributes funds to creditors according to the court-approved plan. At the end of the plan period, remaining qualifying unsecured debts are discharged. Chapter 13 is often the better choice when you have regular income but need time to catch up on mortgage arrears, car payments, or tax obligations. It also protects assets that might not be fully exempt in Chapter 7.
Chapter 13 has debt limits that are periodically adjusted. You must have regular income, and your total secured and unsecured debts must fall within the statutory limits. Your repayment plan amount is based on your disposable income — the difference between your income and necessary living expenses as defined by the bankruptcy code.
The Texas Bankruptcy Exemption System
One of the most significant advantages of filing bankruptcy in Texas is the state’s generous exemption system. Exemptions determine which assets you can keep during bankruptcy. Texas allows filers to choose between state and federal exemptions, and most choose the state exemptions because they offer substantially more protection.
Texas Homestead Exemption
The Texas homestead exemption is among the most protective in the nation. There is no cap on the value of your home — whether your house is worth $100,000 or $1,000,000, it can be fully exempt. The only limitation is on property size: up to 10 acres in an urban area or up to 100 acres (200 for families) in a rural area. This means most Texas homeowners can file bankruptcy without any risk to their primary residence. However, you must have owned the property for at least 1,215 days (about 40 months) before filing to claim the full unlimited exemption under federal rules.
Personal Property Exemptions
Texas protects a broad range of personal property in bankruptcy. The exemptions cover home furnishings, food, farming or ranching equipment, clothing, jewelry (up to 25 percent of the aggregate personal property limit), two firearms, athletic and sporting equipment, one motor vehicle per licensed household member, and pets. The aggregate limit for personal property is $50,000 for an individual or $100,000 for a family.
Retirement Account Exemptions
Retirement accounts enjoy strong protection in Texas bankruptcy. 401(k) plans, 403(b) plans, IRAs (traditional and Roth, with a cap of approximately $1.5 million for IRAs), pension plans, and other qualified retirement accounts are generally fully exempt. This means you can file bankruptcy to eliminate debt while keeping your entire retirement savings intact.
Wages and Insurance Exemptions
Current wages for personal services are exempt, as are most insurance proceeds and benefits. Life insurance cash values and proceeds, health insurance benefits, and annuity benefits are protected under Texas law. Additionally, certain government benefits including Social Security, veterans’ benefits, unemployment compensation, and workers’ compensation are exempt from bankruptcy proceedings.
The Texas Means Test Explained
The means test is the gateway to Chapter 7 bankruptcy. It was created by the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act to ensure that filers with the ability to repay some debts use Chapter 13 instead of Chapter 7. Here is how it works in Texas.
First, your current monthly income (CMI) is calculated by averaging your gross income from all sources over the six months before filing. This includes wages, self-employment income, rental income, pension payments, and regular contributions from others. Social Security income is excluded. Your CMI is then annualized and compared to the Texas median income for your household size. As of recent figures, the Texas median annual income is approximately $59,800 for a single earner, $76,100 for a two-person household, $86,500 for three persons, and $102,700 for a four-person household.
If your income is below the median, you pass the means test and can proceed with Chapter 7. If above the median, the second part of the test subtracts allowed expenses (using IRS standards for food, clothing, transportation, and other categories, plus actual secured debt payments) from your CMI. If the resulting disposable income is below the threshold, you still qualify for Chapter 7. Many people with above-median income qualify once mortgage payments, car loans, taxes, and other allowed deductions are factored in.
Step-by-Step: The Texas Bankruptcy Filing Process
Step 1: Credit Counseling
Federal law requires you to complete a credit counseling course from an approved agency within 180 days before filing your bankruptcy petition. This session, which can typically be completed online or by phone in about an hour, reviews your financial situation and explores alternatives to bankruptcy. You will receive a certificate of completion that must be filed with your petition.
Step 2: Gathering Financial Documents
You will need to compile comprehensive financial documentation including pay stubs for the past six months, tax returns for the past two years, bank statements, a list of all debts with creditor names and amounts, a list of all assets with estimated values, mortgage statements, vehicle loan information, and records of any property transfers or large payments made in the past two years.
Step 3: Filing the Petition
Your bankruptcy petition is filed with the U.S. Bankruptcy Court for the Northern District of Texas (for the DFW area) or the appropriate district court. The petition includes detailed schedules listing all assets, debts, income, expenses, and recent financial transactions. Filing triggers the automatic stay, which immediately stops most collection actions, lawsuits, wage garnishments, foreclosure proceedings, and harassing creditor calls.
Step 4: The 341 Meeting of Creditors
Approximately 20 to 40 days after filing, you attend a Meeting of Creditors (also called the 341 meeting) where the bankruptcy trustee and any creditors can ask questions about your financial situation and the information in your petition. Despite its name, creditors rarely attend. The meeting typically lasts 5 to 10 minutes and is conducted by the trustee, not a judge. Your attorney will prepare you for this meeting and attend with you.
Step 5: Debtor Education Course
After filing but before receiving your discharge, you must complete a second educational course called the debtor education or financial management course. Like the pre-filing counseling, this can be done online and typically takes about two hours. It covers budgeting, money management, and using credit wisely after bankruptcy.
Step 6: Discharge
In Chapter 7, your discharge typically arrives about 60 to 90 days after the 341 meeting, for a total timeline of approximately 3 to 4 months from filing. In Chapter 13, the discharge comes after you successfully complete your 3-to-5-year repayment plan. The discharge order permanently eliminates your personal liability for the discharged debts.
Debts That Can and Cannot Be Discharged
Debts Typically Discharged in Texas Bankruptcy
Most unsecured debts can be eliminated through bankruptcy. These include credit card debt, medical bills, personal loans and payday loans, utility bills, past-due rent, certain older income tax debts (generally taxes due more than three years ago, filed more than two years ago, and assessed more than 240 days ago), deficiency balances after repossession or foreclosure, lawsuit judgments for debt collection, and business debts from sole proprietorships.
Debts That Survive Bankruptcy
Certain obligations cannot be discharged in bankruptcy under any circumstances. These include most student loans (unless you can prove undue hardship, which is a very high standard), child support and alimony, most recent tax debts, criminal fines and restitution, debts from DUI injuries, and debts incurred through fraud. Additionally, creditors can challenge the discharge of specific debts if they can prove fraud, misrepresentation, or that the debt was incurred knowing it could not be repaid.
How Bankruptcy Affects Your Credit
A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date, and a Chapter 13 for 7 years. While this sounds severe, the practical impact is often less dramatic than people fear. If you are considering bankruptcy, your credit is likely already damaged by missed payments, collection accounts, charge-offs, and high credit utilization. Bankruptcy replaces these ongoing negative marks with a single event and stops further damage from accumulating.
Many clients see their credit scores begin recovering within 12 to 18 months after filing. The elimination of debt immediately improves your debt-to-income ratio, and with disciplined use of a secured credit card and timely bill payments, it is possible to achieve a fair-to-good credit score within two to three years. Some of our clients have qualified for mortgage loans within two years of their Chapter 7 discharge.
Special Situations in Texas Bankruptcy
Bankruptcy and Your Home
If you are behind on mortgage payments, Chapter 13 allows you to cure the arrears over the life of your repayment plan while continuing to make regular mortgage payments. This can save your home from foreclosure. In Chapter 7, you can typically keep your home if it is protected by the Texas homestead exemption and you continue making mortgage payments. If you wish to surrender the home, Chapter 7 can eliminate the mortgage debt and any deficiency balance.
Bankruptcy and Your Vehicle
Texas exempts one motor vehicle per licensed household member. If your vehicle equity falls within the exemption limits, you can keep the car in Chapter 7 as long as you continue making payments and stay current. Chapter 13 may allow you to reduce the amount owed on a car loan to the vehicle’s current value (called a cramdown) if the loan is more than 910 days old. This can result in significant savings on underwater car loans.
Bankruptcy and Wage Garnishment
If your wages are being garnished, filing bankruptcy triggers the automatic stay, which stops the garnishment immediately. In some cases, you may be able to recover garnished wages taken within 90 days before filing. This immediate relief is one of the most tangible benefits of filing for bankruptcy when you are facing active collections.
Small Business and SBA Loan Defaults
Small business owners in Texas often face personal liability for business debts, especially SBA loans that require personal guarantees. Both Chapter 7 and Chapter 13 can address these obligations. Chapter 7 can discharge the personal guarantee on SBA loans and other business debts. Chapter 13 can reorganize business debts into a manageable payment plan if the business is still operating and generating income.
Frequently Asked Questions About Texas Bankruptcy
How much does it cost to file bankruptcy in Texas?
The court filing fee for Chapter 7 is $338 and for Chapter 13 is $313. Attorney fees vary but typically range from $1,000 to $2,000 for a straightforward Chapter 7 case. Chapter 13 attorney fees, which are set by local rules, are usually between $3,500 and $5,000 and can be paid through the repayment plan. Credit counseling and debtor education courses cost approximately $25 to $50 each.
Will I lose everything if I file bankruptcy?
No. The vast majority of Chapter 7 filers in Texas keep all of their assets. The Texas exemption system is among the most generous in the country, with an unlimited homestead exemption, broad personal property protections, and full retirement account exemptions. Most cases are what attorneys call no-asset cases, meaning the trustee finds no non-exempt property to liquidate.
Can I file bankruptcy more than once?
Yes, but there are waiting periods between discharges. You must wait 8 years between Chapter 7 discharges, 6 years between Chapter 13 discharges (unless you paid at least 70 percent of unsecured claims), 4 years from a Chapter 7 discharge to receive a Chapter 13 discharge, and 2 years from a Chapter 13 discharge to receive a Chapter 7 discharge.
Can married couples file jointly?
Yes. Married couples can file a joint bankruptcy petition, which combines both spouses’ debts and assets into a single case. This is often more cost-effective than filing separately. However, filing jointly is not always the best strategy — if only one spouse has significant debt, an individual filing may protect the non-filing spouse’s credit while still eliminating the debts.
Talk to an Arlington Bankruptcy Attorney Today
If you are considering bankruptcy in Texas, you do not have to navigate this process alone. At Machi Wright & Associates, we offer free consultations to evaluate your financial situation and recommend the most effective debt relief strategy. Our Arlington office serves clients throughout the DFW metroplex, including Fort Worth, Grand Prairie, Mansfield, and surrounding communities in Tarrant and Dallas Counties.
Call us today at 817-335-8880 or contact us online to schedule your free bankruptcy consultation. We will review your debts, income, and assets to determine whether Chapter 7 or Chapter 13 is the right path for your fresh financial start.