Exempt Property – Matt Garcia

EXEMPT PROPERTY ISSUES

Presenter:

KATHLEEN A. HURREN, San Antonio

Law Office of Kathleen A. Hurren

Author:

MATIAS EDUARDO GARCIA 3821 Juniper Trace, Suite 108

Austin, TX 78738

State Bar of Texas

13th

ANNUAL COLLECTIONS &

CREDITORS’ RIGHTS

May 14-15, 2015

Dallas

CHAPTER 6

Matias Eduardo Garcia

LICENSES

Admitted to practice, State Bar of Texas, November 1999, License Number: 24012675

Admitted to practice in the Western District of Texas, August, 2004

Received Mediation Certificate in December 1997

LEGAL EXPERIENCE

Barnett & Garcia, PLLC Austin, Texas

Shareholder (07/03 – present)

Represent and defend individual, corporate and financial creditors in litigation, appeals, and

alternative dispute forums involving actions for debt, breach of contract, sworn account,

DTPA, FDCPA, foreclosure, and fraud.

Represent and defend commercial, life, bond and workers’ compensation insurance carriers

in civil litigation, appeals, and alternative dispute forums involving the collection of

deductibles, commissions, additional premiums, deceptive insurance practices under Article

28.28 of the Texas Insurance Code and subrogation claims.

Counsel to Special Deputy Receiver, Prime Tempus, Inc., for Vesta and Highlands Insurance

in Receivership; Previously Counsel to Special Deputy Receiver, Prime Tempus, Inc., for

Colonial Insurance in Receivership.

Counsel to Special Deputy Receiver, Resolution Oversight Corporation, for Gramercy in

Receivership; Previously Counsel to Special Deputy Receiver, Resolution Oversight

Corporation, for Financial Insurance Company of America.

Counsel to Special Deputy Receiver, Milford Consulting, LLC, for San Antonio Indemnity

Company in Receivership

Previously Counsel to Special Deputy Receiver, H. Koehler, Inc., for Universal Insurance

Exchange and Special Deputy Receiver, JoAnn Howard & Associates, for Metro West

Health Plan, Inc.

The Reyes Law Firm Austin, Texas

Associate (05/00 – 07/03)

Successfully litigated various cases involving breach of contract, sworn account, DTPA,

fraud, foreclosures, and product liability on behalf of individual, corporate and financial

creditors.

Represented commercial, life, bond and workers’ compensation insurance companies in the

collection of additional premiums, deductibles, commissions and subrogation claims.

Managed the litigation and pre-litigation collection of over 10,000 delinquent retail and

commercial accounts in the state of Texas on behalf of various individual, corporate and

financial creditors.

Drafted and advised corporate clients on governance issues, business and financial strategy,

and “B2B” contracts.

EDUCATION The University of Texas School of Law J. D. - May 1999

The University of Texas at Austin BBA - Dec. 1995

MEMBERSHIPS American Inn of Court CXVIII

Commercial Law League of America

International Association of Commercial Collectors

Commercial Collection Agencies of America

Austin Bar Association

Hispanic Bar Association of Austin

PRESENTATIONS

Presenter: CLE: Exempt Property (05/01/14)

Co-Presenter: CLE: 50 Ways to Lose your Law License (03/04/14)

Presenter: CLE: Summary Judgment Proof: Toolkit and Forms (05/01/13)

Co-Presenter: CLE: Turning Judgments into Cash (03/26/13)

Co-Presenter: CLE: Passing the Paddle: Shifting School Discipline to the Courts

(01/08/13)

Presenter: CLE: Legislative Update (05/02/12 and 10/11/12)

Co-Presenter: CLE: Driven to Distraction (04/10/12)

Presenter: CLE: Post Judgment Remedies (04/14/11)

Co-Presenter: CLE: Collateral Consequences in Criminal Prosecutions (02/08/11)

Presenter: CLE: Exemptions under State Law (09/02/10)

Co-Presenter: CLE: Biller - The Ethics of Billing and Collecting Legal Fees

(10/12/09)

Presenter: CLE: Exempt Property (07/09/09 and 07/16/09)

Co-Presenter: CLE: DWI

Presenter: CLE: Exempt Property – Characterization, Conversion, What’s

Protected and Isn’t Protected (09/11/08, 09/18, 2008 and 10/30/08)

Co-Presenter: CLE: The Reporters’ Privilege (02/13/07)

Presenter: CLE: The Care and Feeding of Clients: How to Organize Your Office

to Service Your Client Best (08/18/06, 08/25/06 and 09/15/06)

Co–Presenter: CLE: Pitfalls of Multi-Party Representations: Ethical Dilemmas in

Aggregate Settlements (02/08/05)

Co-Presenter: Texas Bail Bond Course: Collecting on Bail Bond Debts: Pre and Post

Judgment Remedies (11/12/04)

Co-Presenter: CLE: The Trials and Tribulations of Pro Bono (04/25/04)

Co-Presenter: CLE: American Civil Liberties and the War on Terrorism (02/18/03)

PUBLICATIONS Contributor to Chapter 14 of the Texas Collections Manual Supplement

published by the State Bar of Texas expanding the explanation and use of

receiverships in collections, including summarizing recent case law

developments

COMMUNITY Travis County Children’s Protective Services Board, Board Member and

Treasurer

Children’s Protective Assistance, Inc., Board Member and Treasurer

Texas Bar Foundation Fellow

Center for Child Protection, Past Board Member

Attorney Volunteer for Adoption Day sponsored by the Austin Bar

Association, Past

Acknowledgment

I wish to express my sincere thanks to Roland Rivera, a law student with the

University of Texas School of Law, who helped me expand several sections in this paper.

I also want to acknowledge Kathleen Hurren, who contributed to the sections on

Allowed Liens, Homestead in Qualifying Trust and Tax Foreclosure Proceeds.

Exempt Property Issues Chapter 6

i

TABLE OF CONTENTS

I. INTRODUCTION ................................................................................................................................................... 1

II. PROPERTY SUBJECT TO EXECUTION ............................................................................................................ 1

III. REAL PROPERTY EXEMPTIONS ....................................................................................................................... 1 A. Texas Property Code and Texas Constitution. ................................................................................................ 1 B. Burial Plots. ..................................................................................................................................................... 1 C. The Homestead. ............................................................................................................................................... 1

1. Generally. ................................................................................................................................................ 1 2. Urban Homestead. ................................................................................................................................... 1 3. Business Homestead. ............................................................................................................................... 1 4. Rural Homestead. .................................................................................................................................... 2 5. Designation of a Homestead. ................................................................................................................... 2 6. Sale of a Judgment Debtor’s Homestead. ................................................................................................ 3 7. Destroying the Homestead Exemption. ................................................................................................... 3 8. Allowed Liens.......................................................................................................................................... 5 9. Homesteads in Qualifying Trust. ............................................................................................................. 5

IV. PERSONAL PROPERTY EXEMPTIONS ............................................................................................................. 5 A. Texas Property Code. ...................................................................................................................................... 5 B. Personal Property Exemption. ......................................................................................................................... 5

1. Family. ..................................................................................................................................................... 6 2. Valuation. ................................................................................................................................................ 6 3. Property. .................................................................................................................................................. 6

C. Wages. ........................................................................................................................................................... 10 D. Commissions. ................................................................................................................................................ 10 E. Religious Books and Sacred Texts. ............................................................................................................... 10

V. RETIREMENT ACCOUNTS, HEALTH SAVINGS PLANS, AND COLLEGE SAVINGS PLANS................ 10 A. Retirement Accounts. .................................................................................................................................... 10

1. Exemption. ............................................................................................................................................. 10 2. Requirements. ........................................................................................................................................ 11

B. Health Savings Accounts. .............................................................................................................................. 11 C. College Savings Plans. .................................................................................................................................. 11

VI. COMMUNITY PROPERTY ................................................................................................................................ 11 A. Texas Family Code. ....................................................................................................................................... 11 B. Generally. ...................................................................................................................................................... 11 C. Community Property Presumption. ............................................................................................................... 11 D. Community Property Types. ......................................................................................................................... 12 E. Separate Property. ......................................................................................................................................... 13

VII. CONCLUSION ..................................................................................................................................................... 13


1

EXEMPT PROPERTY ISSUES I. INTRODUCTION

From its inception, Texas has always been a

debtor-friendly state. Exemptions for essential

personal property had been part of Spanish and

Mexican law in Texas during its infancy. See John

Cornyn, The Roots of the Texas Constitution:

Settlement to Statehood, 26 TEX. TECH L. REV. 1089,

1187 (1995). By 1786, early Spanish law exempting

homes and personal items such as clothing, bedding,

arms, working stock and farm implements had become

universal. See id. at 1185–86. The legislature of

Coahulia y Texas in 1829 protected land grants from

enforcement of any prior debt for twelve years and

prevented suits for recovery of those debts. See id. at

1186. It also exempted lands, farming implements and

tools or machinery of one’s trade. With its first

homestead exemption in 1839 and the first state to

include the homestead exemption in its constitution in

1845, Texas was well on its way to securing its legacy

as a debtor’s haven. See id.

Although exemptions can be found in various

statutes such as the Texas Insurance Code and Texas

Labor Code, this article is intended to provide a brief

overview to the general judgment creditor’s attorney of

the exemptions found in the Texas Property Code and

constitution. The practitioner should take careful note

to review all statutes, federal and state, for a full

comprehensive understanding of a debtor’s

exemptions.

II. PROPERTY SUBJECT TO EXECUTION

A judgment debtor’s property is subject to levy

and execution so long as the property is not exempt by

constitution, statute or other rule of law. TEX. CONST.

art. XVI, §§ 49-51; TEX. PROP. CODE §§ 41.001-.006;

TEX. R. CIV. P. 637.

III. REAL PROPERTY EXEMPTIONS

A. Texas Property Code and Texas Constitution.

Sections 41.001, 41.002, 41.003, 41.004, and

41.005 of the Texas Property Code and Section 50 of

Article 16 of the Texas Constitution discuss homestead

exemptions.

Article XVI, Section 50 of the Texas Constitution

and Section 41.001 of the Texas Property Code provide

for the homestead exemption with Article XVI, Section

51 of the Texas Constitution and Section 41.002 of the

Texas Property Code providing the number of acres

exempt and defining homestead as either rural or

urban. Additionally, Section 41.001 of the Texas

Property Code provides for the burial plot exemption.

Section 41.003 of the Texas Property Code governs the

temporary renting of a homestead and Section 41.004

limits how the homestead can be abandoned. Finally,

Section 41.005 legislates how to designate real estate

as homestead.

B. Burial Plots.

“[O]ne or more lots used for a place of burial

of the dead are exempt from seizure.” PROP.

§ 41.001(a).

C. The Homestead.

1. Generally.

Homestead rights should be liberally construed.

Tolman v. Overstreet, 590 S.W.2d 635, 637 (Tex. Civ.

App.—Tyler 1979, no writ) (citing Woods v. Alvarado

State Bank, 19 S.W.2d 35 (Tex. 1929)). There are no

homestead exemptions except those provided by law.

Whiteman v. Burkey, 282 S.W. 788, 788 (Tex. 1926).

Texas law should be the “sole vehicle” for determining

the type of homestead a debtor possesses exclusive of

any common law test. In re Bouchie, 324 F.3d 780,

782-84 (5th Cir. 2003) (per curiam).

2. Urban Homestead.

An urban homestead is one or more contiguous

lots totaling no more than ten acres of land together

with any improvements. TEX. CONST. art. XVI, § 51;

PROP. § 41.002(a). Unlike the exemptions for a rural

homestead or personal property, the exemption is the

same for a family or a single person. TEX. CONST. art.

XVI, § 51; PROP. § 41.002(a).

A homestead is defined as urban if, at the time the

designation for homestead is made, the property was:

“(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.” PROP. § 41.002(c).

3. Business Homestead.

A business homestead is a place in a city, town or

village at which a single adult or the head of a family

exercises his calling or business and uses the property

as his urban home. PROP. § 41.002(a). The

practitioner should note that prior to 1999, the Property

Code could be interpreted to allow a debtor to exempt

a home and a business at separate locations. PROP. §

41.002(a) (amended 1999); In re Jay, 432 F.3d 323,


2

325 (5th Cir. 2005) (discussing the statutory and

constitutional change in the meaning of “business

homestead” and its effect). With the addition of the

phrase “both an urban home” and the word

“contiguous”, claiming both an urban residential and

urban business should prove difficult if not impossible

for a debtor. See In re Julian, 163 B.R. 478, 480-82

(Bankr. N.D. Tex. 1994); In re Nelson, 134 B.R. 838,

844 (Bankr. N.D. Tex. 1991).

4. Rural Homestead.

Both the Texas Constitution and the Texas

Property Code distinguish between a family rural

homestead and a single person’s rural homestead. A

brief overview of what constitutes a family is included

in this article under Section IV, Subsection B(1).

A family is entitled to a rural homestead of one or

more parcels of land with improvements totaling no

more than 200 acres; whereas a single person who is

not a member of a family is entitled to a maximum of

100 acres. Challenges that the distinction violates the

equal protection clause have failed. See, e.g., In re

Moody, 862 F.2d 1194, 1201 (5th Cir. 1989).

A person must use the property for the purpose of

a rural home to claim the property as a rural

homestead.

5. Designation of a Homestead.

a. Statute. Section 41.005(c) of the Texas

Property Code provides the statutory process

for voluntarily designating the homestead.

b. Process. To designate a piece of real estate

as a homestead, an adult single person or the

head of family or spouse must make the

designation in an instrument that is “signed

and acknowledged or . . . in the manner

required for the recording of other

instruments” and which is filed with the

“county clerk of the county in which all or

part of the property is located.” PROP. §

41.005(c).

c. Contents of Designation. The designation

must contain: “(1) a description sufficient to

identify the property designated; (2) a

statement by the person or persons who

executed the instrument that the property is

designated as the homestead of the person's

family or as the homestead of a single adult

person not otherwise entitled to a homestead;

(3) the name of the current record title holder

of the property; and (4) for a rural

homestead, the number of acres designated

and, if there is more than one survey, the

number of acres in each.” PROP. § 41.005(c).

d. Changing a Designation. To change the

designation of a homestead, a single person

or the head of family or spouse must execute

and record an instrument in the same manner

as prescribed in Section 41.005(c). PROP. §

41.005(d).

e. Failure to Designate in accordance with

Texas Property Code §41.005(c).

(1) Designation in accordance with a prior

law. A voluntary designation of a

homestead is valid if performed with an

instrument that made a voluntary

designation of a homestead in

accordance with a prior law on file with

a county clerk on September 1, 1987.

PROP. § 41.005(g).

(2) Homestead Tax Exemption. A debtor is

considered to have designated a piece of

real estate as a homestead if the debtor

claims a homestead tax exemption and

the real estate is listed as the debtor’s

residence homestead on the appraisal

roll for the appraisal district in which the

property is located. PROP. § 41.005(e).

(3) Effect on Writ of Execution. If the

debtor has not made a voluntary

designation of a piece of real estate as a

homestead, then the judgment creditor

may send the judgment debtor notice

stating that if the debtor fails to

designate the real property as a

homestead in accordance with Texas

Property Code sections 41.002 and

41.005, the Court may appoint a

commissioner to make the designation

with costs taxed to the judgment debtor.

PROP. § 41.021. A judgment debtor has

until 10:00 a.m. on the Monday

following the expiration of 20 days to

make the designation. PROP. § 41.022.

The designation contemplated by

Section 41.022 must be filed with the

clerk of the court who issued the writ of

execution and include a plat. Id.

If the judgment debtor fails to make the

designation, the Court, upon motion by

the judgment creditor within 90 days

from the date the writ of execution was

issued, shall appoint a commissioner

and/or others to make the designation.

PROP. § 41.023(a). The commissioner

must then file a report designating the

homestead with a plat within 60 days of

his commission. Id. Any party can

challenge the commissioner’s findings

so long as the challenge is filed prior to

a hearing. PROP. § 41.023(b). Within

10 days after the commissioner files his


3

report, either party may request a

hearing to confirm, reject, or modify the

report. Id. At the hearing, the Court

may order the sale of the excess. Id.

6. Sale of a Judgment Debtor’s Homestead.

a. Partial Release. A judgment lien attaches to

all of a judgment debtor’s nonexempt real

property in the county of recordation. PROP.

§ 52.001. In 2007, the legislature amended

section 52.001 to provide that an abstract

does not attach to exempt property for

abstracts recorded on or after September 1,

2007, the effective date of the Act. Id.

Although an abstract does not create an

enforceable lien on a judgment debtor’s

homestead, it can still “cast a cloud on the

title.” Tarrant Bank v. Miller, 833 S.W.2d

666, 667 (Tex. App. – Eastland 1992, writ

denied). A judgment creditor may be liable

for actual and exemplary damages if it

refuses to release the lien. Id. at 669.

b. Homestead Affidavit in lieu of a Partial

Release. In 2007, the legislature also

provided a mechanism for the judgment

debtor to file a Homestead Affidavit as a

Release of Judgment so long as the judgment

debtor complied with Section 52.0012. This

process is only applicable to abstracts

recorded and indexed after September 1,

2007. PROP. § 52.001

c. Acquisition of a Homestead Prior to Sale.

Acquisition of a new homestead prior to

selling the first homestead destroys the

exemption. In re England, 975 F.2d 1168,

1173 (5th Cir. 1992). When a debtor buys a

second residence before selling the original

homestead, the effect is to render all proceeds

of the sale of the original homestead non-

exempt. In re Fehmel, No. 07-60831 FRM,

2008 WL 2151797, at *10 (Bankr. W.D. Tex.

May 22, 2008).

c. Proceeds.

i. Sale Proceeds. The proceeds of a

judgment debtor’s homestead are

exempt for six months after the sale date

or until a new homestead is acquired.

PROP. § 41.001(c); see Davis v. Davis,

(In re Davis), 170 F.3d 475, 483, 494

n.10 (5th Cir. 1999). If all the proceeds

are not used for a new homestead, the

excess is not exempt. Davis 170 F.3d at

483, n.10.; In re England, 975 F.2d at

1175 (5th Cir. 1992); In re Evans, 135

B.R. 261, 264 (Bankr. S.D. Tex 1991).

As a result, the debtor is free to use the

proceeds for any purpose during the six

month exemption period, including

paying other debts, making new

purchases, or giving the money away.

ii. Tax Foreclosure Proceeds. If a property

sells at a tax foreclosure sale, and if the

property is not exempt, the San Antonio

Court of Appeals has held that the

excess funds derived from the tax

foreclosure sale could be awarded to a

judgment creditor. Lares v. Garza, 2004

Tex. App. Lexis 2561 (Tex. App. - San

Antonio 2004)

d. Tolling of Six Month Period. It is important

to note that the six month period may be

tolled when the proceeds are in dispute and

rendered unavailable to the homestead

claimant, in situations such as when the

creditor ties up the homestead proceeds in

litigation until the expiration of the

exemption period. This type of action would

be in violation of the spirit of the statute,

designed to protect the proceeds of a

homestead sale for the sixth month period

following the sale.

7. Destroying the Homestead Exemption.

a. Abandonment. Real estate exempt as a

homestead can lose its exemption if the

claimant abandons his or her intent to occupy

the property as his or her homestead.

McFarland v. Rousseau, 667 S.W.2d 929,

931 (Tex. App. – Corpus Christi 1984, no

writ).

Abandonment is an affirmative defense.

Denmon v. Atlas Leasing L.L.C., 285 S.W.3d

591, 596 (Tex. App. – Dallas 2009, no pet.).

The creditor carries the burden of proving

that the debtor abandoned the homestead.

McFarland, 667 S.W.2d at 931. In order to

prove abandonment, the practitioner must

prove: (1) the debtor discontinued use of the

tract by overt acts and (2) the debtor

intended to permanently abandon the tract as

the homestead. Driver v. Conley, 320

S.W.3d 516, 519 (Tex. App. – Texarkana

2010, pet. denied).

It is important to note that the burden to

prove abandonment is heavy and once

acquired, homestead rights are not easily lost.

In re Estate of Casida, 13 S.W.3d 519, 521

(Tex. App. – Beaumont 2000, no pet.);

Conley, 320 S.W.3d at 519. As a result, the


4

evidence must be so convincing as to make

the abandonment “undeniably clear” and

beyond almost the shadow of reasonable

ground of dispute. Conley, 320 S.W.3d at

519.

Two of the issues that are often litigated

when abandonment is claimed revolve

around intent and whether the abandonment

was voluntary.

i. Voluntary. The abandonment of the

homestead must be voluntary. See

Taylor v. Mosty Bros. Nursery, Inc., 777

S.W.2d 568, 569 (Tex. App. – San

Antonio 1989, no writ) (husband

executed an unconditional deed to his

wife and left the state). However, an act

of necessity is not a voluntary

abandonment of the homestead. Florey

v. Estate of McConnell, 212 S.W.3d

439, 446-47 (Tex. App. – Austin 2006,

pet. denied). As well, physical absence

alone does not necessarily establish

abandonment. See Kendall Builders,

Inc. v. Chesson, 149 S.W.3d 796, 808

(Tex. App. – Austin 2004, pet. denied)

(“One does not necessarily abandon a

homestead merely by changing

residence.”). The physical absence must

be accompanied by an intention not to

use the home again to constitute

abandonment. Id.; see In re Leonard,

194 B.R. 807, 810 (Bankr. N.D. Tex.

1996) (“[I]n cases of physical absence,

the lack of definite intention of not to

return and use and occupy such

homestead is the controlling fact.”).

The Leonard Court made it a point to

note that a temporary renting of a

homestead does not change the

homestead characteristic. 194 B.R. at

810 (reasoning that a debtor that has not

lived in the residence for over three

years did not intend an abandonment.)

ii. Intent. In situations in which physical

absence from the property is shown, the

issue centers on intent. Pierce v. Wash.

Mut. Bank, 226 S.W.3d 711, 715 (Tex.

App. – Tyler 2007, pet. denied). As a

result, abandonment requires proof there

was never an intent to return, use, or

occupy the property as homestead.

Florey, 212 S.W.3d at 444. The intent

not to return must be present, definite,

and permanent. Union Square Fed.

Credit Union v. Clay, Nos. 2-07-167-

CV, 2-07-168-CV, 2009 WL 1099434,

at *12 n. 80 (Tex. App. – Fort Worth

April 23, 2009). That intent not to

return can be formed at the time of

discontinued use or afterwards. See

Coury v. Prot, 85 F.3d 244, 254 (5th

Cir. 1996).

b. Rental. Temporary renting of a homestead

does not change its homestead character if

the homestead claimant has not acquired

another homestead. PROP. § 41.003. Drake

Interiors, L.L.C. v. Thomas, 433, 848 (Tex.

App. – Houston [14th Dist] 2014, no pet.)

(“Merely changing residences is not an

abandonment of the homestead. . . . Nor does

temporary renting of the homestead

constitute abandonment.”) Renting property

is ultimately determined by the question of

whether the income is for helping the

comfort and/or convenience of the debtor’s

property. In re Norra, 421 B.R. 782, 791-92

(Bankr. S.D. Tex. 2009).

c. Death. In some situations, the homestead

may be terminated by the death of the

homestead claimant. Id. An interest in real

estate vests immediately in the beneficiary

upon the death of a homestead claimant

subject to payment of the debts of the

decedent. Therefore, a property filed abstract

by a diligent creditor who properly records

an abstract in the county the property resides

will create a lien on that property.

Notwithstanding, the death of the homestead

claimant will not terminate the family

homestead if (1) the estate is insolvent and

(2) the claimant is survived by a spouse,

minor child, or unmarried adult child

remaining with the family. Nat’l Union Fire

Ins. Co. v. Olson, 920 S.W.2d 458, 461 (Tex.

App. – Austin 1996, no writ). Once these

conditions are satisfied, the homestead will

descend to those entitled to inherit it,

unburdened by the claims of any creditors

(except for constitutionally permissible

claims). Id. Keep in mind that beyond the

previously listed conditions, homestead

rights cannot be inherited. George v. Taylor,

296 S.W.2d 620, 623-24 (Tex. Civ. App. –

Fort Worth 1956, writ ref’d n.r.e.). However,

minor children and surviving spouses are

protected. Id.; TEX. CONST. art. XVI, § 52;

TEX. PROB. CODE §271(a)(2). Effective

January 1, 2014, the Estates Code Section

102.004 provides that a homesteads isn’t

liable if the descendent was survived by a

spouse or minor child except for certain

debts.


5

d. Fraudulent Transfer of Homestead. A

transfer to shield a homestead from creditors

that is not intended to pass title is void.

Hughes v. Parmer, 164 S.W.2d 576, 577

(Tex. Civ. App. Austin 1942, no writ);

Moody, 862 F.2d at 1199; Perry, 289 B.R. at

865. A void transfer cannot constitute an

abandonment of homestead rights. Perry,

862 F.2d at 865; McGahey v. Ford, 563

S.W.2d 857, 861 (Tex. Civ. App. – Fort

Worth 1978, writ ref’d n.r.e.). The rationale

cited for this rule is that the law has already

removed the homestead property from the

creditors’ reach thereby failing to deprive a

creditor of any rights in the property despite

the characterization of the transfer. Duran v.

Henderson, 71 S.W.3d 833, 843 (Tex. App. –

Texarkana 2002, pet. denied). However, the

same Court in Duran noted if the original

owner ceased to use the land for a homestead

after the sham transaction, the property could

be available to creditors. Id.

8. Allowed Liens.

The three encumbrances allowed to be placed on a

homestead according to the Texas Constitution are: (1)

purchase money; (2) taxes on property; and (3) work

and material used in constructing improvements on the

property if contracted for in accordance with Chapter

53 of the Texas Property Code. In addition to the

constitutional encumbrances, Texas allows additional

encumbrances based on (1) “an owelty of partition

imposed against the entirety of the property by a court

order or by a written agreement of the parties to the

partition, including a debt of one spouse in favor of the

other spouse resulting from a division on an award of a

family homestead in a divorce proceeding; [(2)] the

refinance of a lien against a homestead, including a

federal tax lien resulting from the tax debt of both

spouses, if the homestead is a family homestead or

from the tax debt of the owner”; (3) home equity loan;

and (4) a reverse mortgage that meets the requirements

of Section 50(a)(6), Article XVI, Texas Constitution or

Sections 50(k)-(p), Article XVI, Texas Constitution,

respectively.

9. Homesteads in Qualifying Trust.

Section 41.0021 of the Texas Property Code,

which was added in 2009, protects a homestead that is

transferred into a Qualifying Trust. “Qualifying Trust”

is defined in Section of 41.0021(a) of the Texas

Property Code. 41.0021(c) provides that “a married

person who transfers property to the trustee of a

qualifying trust must comply with the requirements

relating to the joinder of the person’s spouse as

provided by Chapter 5 of the Family Code.”

This section applies to transfers effective on or

after September 1, 2009. A transfer prior to September

1, 2009 is subject to the law in effect at the time of the

transfer. Acts 2009, 81st Leg., Ch. 984 (H.B. 3767),

Section 2

IV. PERSONAL PROPERTY EXEMPTIONS

A. Texas Property Code.

The statutes in the Texas Property Code that

discuss personal property exemptions are Sections

42.001, 42.002, 42.0021, 42.0022 and 42.003.

Section 42.001(a) provides for the exemption and

42.002 defines the property contemplated by the

exemption. Sections 42.001(b) – (e), 42.0021 and

42.0022 provide additional exemptions separate and in

addition to the exemption provided by Section 42.001.

Finally, Section 42.003 controls how property is

designated when the property value exceeds the

exemption allowed by Sections 42.002 and 42.001(a).

B. Personal Property Exemption.

Section 42.001(a) of the Texas Property Code

exempts from garnishment, attachment, execution, or

other seizure any

(1) property provided for a family that has an

aggregate fair market value of not more than

$60,000 exclusive of the amount of any liens,

security interests or other charges

encumbering the property; or

(2) property owned by a single adult who is not a

member of a family and has an aggregate fair

market value of not more than $30,000,

exclusive of the amount of any liens, security

interests or other charges encumbering the

property.

If the personal property exceeds the number or amount

allowed under Section 42.002 and the debtor can be

found in the county where the property is located, the

officer making the levy shall ask the debtor to

designate the personal property to be levied. PROP. §

42.003(a). If the debtor cannot be found or if the

debtor does not within a reasonable time make a

designation, the officer shall make the designation. Id.

If the personal property exceeds the aggregate

amount allowed under Section 42.001, the debtor may

designate the personal property to be levied. PROP. §

42.003(b). If the debtor does not within a reasonable

time make a designation, the court shall make the

designation once it is requested. Id.

In construing Section 42.001, this author has

focused on three words in the statute that have been the

subject of various litigation, i.e. the definition of

family, valuation, and property.


6

1. Family.

For the purposes of construing the term “family”,

“family” may consist of something less than the

traditional husband-wife, wife-mother and children

living together under the same roof. In re Evans, 25

B.R. 105, 107 (Bankr.N.D.Tex. 1982). Since Roco v.

Green, 50 Tex. 483, (1878), Texas courts have held 1)

that the family relation is one of status, not of mere

contract, 2) that the head of the family must have a

legal or moral obligation to support the other members,

and 3) that there must be a corresponding state of

dependence on the part of the other members for this

support. See Henry S. Miller Co. v. Shoaf, 434 S.W.2d

243, 244-45 (Tex.Civ.App.–Eastland 1968, writ ref’d

n.r.e.) (holding an adult daughter living with older

mother was a family); Cent. Life Assurance Soc’y v.

Gray, 32 S.W.2d 259, 260 (Tex.Civ.App.–Waco 1930,

writ ref’d) (holding brother and sister constituted a

family); Zielinski v. Hill, 972 F.2d 116, 119-20 (5th

Cir. 1992) (per curiam) (affirming judgment where

lower court found debtor, adult daughter and

granddaughter to be a family); In re Leva, 96 B.R. 723,

737-38 (Bankr. W.D. Tex. 1989) (ruling debtor’s

relationship with girlfriend and her son was a family).

i. Effect of Marriage, Divorce, and Death on

“Family” Status

a. Marriage. A family unit can only have

one homestead at a time. Denmon, 285

S.W.3d at 596. As a result, a married

man and woman cannot maintain

individual homesteads during the

marriage. Id.

b. Divorce. If a divorce occurs, there

would consequently be two heads of a

family that could each claim a

homestead. Patterson v. First Nat'l

Bank of Lake Jackson, 921 S.W.2d 240,

246 (Tex. App. – Houston [1st Dist.]

1995, no writ). It is important to

remember that a separate homestead

cannot be claimed until a final and

enforceable divorce decree has been

entered. Denmon, 285 S.W.3d at 596.

The divorce decree is final when a court

makes an official announcement either

in writing or in open court. In re

Dawson, 266 B.R. 355, 359, n.3 (Bankr.

N.D. Tex. 2001). Only until the divorce

decree has been finalized does the

family relationship terminate. Id. at

359.

c. Death. When a marriage is terminated

by the death of one spouse, the “family”

status of the surviving spouse is not

terminated. Border v. McDaniel (In re

McDaniel), 70 F.3d 841, 844 (5th Cir.

1995). As a result, the surviving spouse

has the same homestead rights that both

spouses had prior to the death of one of

the spouses. Majeski v. Estate of

Majeski, 163 S.W.3d 102, 107 (Tex.

App. – Austin 2005, no pet.).

2. Valuation.

Personal property exemption is to be valued on

the basis of fair market value and not on the basis of

the debtor’s equity in the property. In re Barnett, 33

B.R. 70, 72 (Bankr. N.D. Tex. 1983). In In re Shurley,

163 B.R. 286, 291 (Bankr. W.D. Tex. 1993) (quoting

In re Markowitz Bldg. Co., 84 B.R. 484, 487 (Bankr.

N.D. Ohio 1988)), the Court stated that the fair market

value was “the price which a willing seller under no

compulsion to sell, and a willing buyer under no

compulsion to buy, would agree upon after the

property has been exposed to the market for a

reasonable amount of time.” To determine the fair

market value, courts consider all evidence produced by

both parties, but that merely guides the court in its

determination. Shurley, 163 B.R. at 291. So, a

debtor’s valuation and the actual purchase price will

constitute “some evidence of value,” but that in itself is

not sufficient in determining the proper valuation given

to a piece of personal property. Id. The scales are

tipped in favor of the debtors; “the objecting party

cannot carry its burden of proof merely by impeaching

the Debtors’ valuation.” Id. The debtors do not have

to prove that their valuation of the property is correct.

Id.

3. Property.

Property is defined by Section 42.002 of the

Texas Property Code. Section 42.002 provides that the

following personal property is exempt in accordance

with the aggregate limitations provided in 42.001:

“(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


7

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.”

This subsection will focus on three exemptions that are

frequently encountered when levying against an

individual: tools of trade, athletic and sporting

equipment, and vehicles and watercrafts.

a. Tools of Trade. Section 42.002(a)(4)

exempts “tools, equipment, books, and

apparatus, including boats and motor

vehicles used in a trade or profession.” The

requirements to obtain an exemption under

this section are laid out in a three part test in

In re Fehmel, 2008 WL 2151797 at *4. First,

the items in question must qualify as tools,

equipment, books, apparatus, boats, or motor

vehicles. Id. Second, the debtor must

actually be engaged in a trade or profession.

Id. Finally, the tools must actually be used in

the trade. Id.

1. Engaged in Trade or Profession.

Courts construe the “trade or profession

requirement” to include “any legitimate

self-employment.” In re Legg, 164 B.R.

69, 73 (Bankr. N.D. Tex. 1994). Factors

to consider are whether the debtor

reports any income from the purported

trade or profession, how often he

engages in the purported trade or

profession, whether the debtor clearly

intends to continue the purported trade

or profession, and whether the debtor

has other employment. See, e.g.,

Fehmel, 2008 WL 2151797 at *5

(denying exemption because debtor had

no income from using the items and also

had outside employment); Hrncirik v.

Farmers Nat’l Bank of Seymour, 138

B.R. 835, 840-41 (Bankr. N.D. Tex.

1992) (denying exemption because

debtor had scaled back farm operations

and demonstrated no intent to continue

farming).

The statute does not explicitly require

the debtor to be self-employed, but at

least one case has denied an exemption

where the debtor was not self-employed.

In re Erwin, 199 B.R. 628, 631 (Bankr.

S.D. Tex. 1996). In denying the

debtor’s claim to exempt his 1988 Ford

Crown Victoria, the Erwin court

considered, among other things, that the

debtor was employed by Harris County,

even though he used the car in his job as

a constable. Id.

2. Must Be Used in Trade.

Items which cannot or merely are not

being used in the debtor’s trade or

profession cannot qualify for the tools of

trade exemption. Willis v. Morris, 1

S.W. 799, 803 (1886) (holding that

when a mechanic abandons his trade, his

tools are no longer exempt from

execution); Fehmel, 2008 WL 2151797

at *5 (denying exemption because

debtor was not using the items in any

trade or profession); Hrncirik, 138 B.R.

at 840-841 (denying exemption on farm

equipment because it was rarely used

and debtor expressed no intent to

resume farming operations); In re

Hernandez, 131 B.R. 61, 63 (Bankr.

W.D. Tex. 1991) (denying exemption on

wrecked pick-up truck because it could

not be used in the debtor’s trade).

Courts will also consider whether the

item is used with sufficient regularity in

the debtor’s trade to indicate actual use.

See, e.g., Liebman v. Grand, 981

S.W.2d 426, 434 (Tex.App.—El Paso

1998, no pet.) (denying exemption of

sailboat for “sailboat instructor” where

he had had only one “student” and the

student did not pay for the lessons);

Goffney v. Prime Bank, 2002 WL

122155, *4 (Tex. App.—Houston [14th

Dist.] 2002, no pet.) (not designated for

publication) (denying exemption on

certificates of deposit assigned to the

sheriff as security for bail by debtor, a

criminal attorney, because she only used

them four times in five years and could

not use them at all as long as the

judgment remained valid against her);

but see In re Nash, 142 B.R. 148, 152

(Bankr. N.D. Tex. 1992) (holding that

after 1991 amendments to §

42.002(a)(4), it is no longer necessary to


8

show tractors were in regular use to be

exempt under Texas law), superseded

on other grounds by statute, as stated in

Legg, 164 B.R. at 72-73.

Note that it has been held that the

quantity of each item and its use for

private family matters is not a relevant

consideration in deciding whether items

qualify as exempt tools of the trade. In

re Baldowski, 191 B.R. 102, 106 (Bankr.

N.D. Tex. 1996).

3. Qualifies as a Tool. By far the most difficult aspect of

applying the tools of trade exemption,

the practitioner must finally determine

whether the item qualifies as a “tool of

trade.” Courts have historically split

between a restrictive view and a liberal

view of what constitutes a “tool of

trade.” The restrictive view initially

limited the definition of “tools of trade”

to simple implements or minor

machinery used by hand.” See, e.g.,

Willis, 1 S.W. at 803 (holding that the

“large and expensive” machinery used

to manufacture cotton gins was not

exempt); Comer v. Powell, 189 S.W. 88,

91 (Tex. Civ. App.—Amarillo 1916, no

writ hist.) (holding that a thrashing outfit

was not exempt); McMillan v. Dean,

174 S.W.2d 737, 740 (Tex. Civ. App.—

Austin 1943, writ ref’d w.o. merit)

(holding that large, motor propelled

trucks and trailers were not exempt).

The liberal view, citing the Texas policy

to construe exemption statutes liberally,

included any item that was used in the

debtor’s trade, regardless of its cost,

size, or power source. See, e.g., Green

v. Raymond, 58 Tex. 80, 84 (1882)

(holding that printing press, type, and

cases used in printing office were

exempt); McBrayer v. Cravens, Dargan,

& Roberts, 265 S.W. 694, 694 (Tex.

Comm’n App. 1924, opinion adopted)

(holding that books, rugs, and office

furniture of attorney were exempt).

The Texas Legislature made changes to

the exemption statute in 1973 and 1991

that have caused courts to shift their

focus from the character of the item

itself to how it is used in the debtor’s

trade or profession.

First, in 1973, the Legislature revised

the statute to include “equipment” and

“boats,” to exempt items “used” in the

trade instead of those “belonging” to the

trade, and to impose a monetary limit of

$30,000.00 for a single person. England

v. First Nat’l Bank (In re England), 22

B.R. 389, 390-91 (Bankr. N.D. Tex.

1982). The changes were interpreted as

a legislative intent to include more

property under the tools of trade

exemption while safeguarding creditors

by establishing a monetary limit to the

exemptions that could be taken. Id.;

Baldowski, 191 B.R. at 105-06.

Nonetheless, courts were still split over

whether the item had to be “peculiarly

essential” to the trade or merely

necessary to continue the trade or

profession in the same manner as

previously practiced. See, e.g., Segraves

v. Weitzel, 734 S.W.2d 773, 775-76

(Tex. App.—Fort Worth 1987, writ

ref’d n.r.e.); England, 22 B.R. at 391.

The Segraves court applied the more

restrictive view and denied an

exemption for desks, a storage cabinet,

chairs, a lamp, a file cabinet, and other

general office furnishings, reasoning

that a tool must be peculiarly essential to

the use of said trade or profession and

not merely of general value and use in

setting up a business. Segraves, 734

S.W.2d at 775-76; see also In re Weiss,

92 B.R. 677, 679 (Bankr. N.D. Tex.

1988) (holding that trailers were of

general value but were not “peculiarly

adapted” to the business of a custom

harvester and thus not exempt); In re

Leva, 96 B.R. 723, 739 (Bankr. W.D.

Tex. 1989) (holding that a mobile phone

and hand-held recorder were not

peculiarly adapted to businessman’s

trade or profession); In re Swift, 124

B.R. 475, 480-81 (Bankr. W.D. Tex.

1991) (holding that typewriters, desks,

chairs, paintings, cabinets, a fax

machine, calculators, a copier, and a

phone system were not peculiarly

adapted to insurance business and were

therefore not exempt, even though the

items were necessary to run an

insurance business productively);

Hrncirik, 138 B.R. at 840 (holding that a

pick-up truck was non-exempt because

it was not peculiarly adapted or essential

to farming operations, but of general

value only); cf. Nash, 142 B.R. at 152

(holding that farm tractors are peculiarly


9

adapted to the trade of farming, and thus

exempt as tool of trade for farmer).

Courts espousing the more liberal view

considered whether the item was

necessary to carry on the debtor’s

business in the same manner as he had

before. See, e.g., England, 22 B.R. at

391 (holding that 5-1/2 ton automatic

screw machine necessary for debtor’s

business was exempt); Hernandez, 131

B.R. at 63 (holding that trailers were

exempt because even though they were

not peculiarly adapted to debtor’s

paving business, they were required for

his business to operate); In re Neal, 140

B.R. 634, 637-38 (Bankr. W.D. Tex.

1992) (holding computer to be exempt

even though it was not peculiarly

adapted to computer-aided drafting and

scanning service because it was

necessary to run debtor’s software to

generate engineering drawings and

schematics); Baldowski, 191 B.R. at 106

(holding that booths, cash register,

plates, platters, knives, forks, spoons,

tables, chairs, and glasses are all exempt

for restaurant operator because they are

necessary to carry on a restaurant

business).

In 1991, the Legislature removed the

requirement that tools of the trade be

“reasonably necessary for the family”

and added motor vehicles. See

Baldowski, 191 B.R. at 106; Legg, 164

B.R. at 70-72. The Legg court

construed the deletion of “reasonably

necessary” as a legislative endorsement

of the more liberal view that an item did

not have to be “peculiarly adapted” to

the trade or profession. 164 B.R. at 72-

73 (holding that a front-end loader,

Mack truck, radio tower, and flatbed

trailer to be exempt because they were

necessary to the debtor’s fertilizer

business). Since then, courts appear to

have widely adopted the somewhat

hybrid view, now known as the “use

test” and first set forth in Meritz v.

Palmer, 266 F.2d 265, 268 (5th Cir.

1959): that an item need be “fairly

belonging to or usable in the [debtor’s]

trade,” but that items of mere general

value and use in the trade and

profession, such as office furnishings,

are not exempt. See, e.g., Erwin, 199

B.R. at 630-31 (holding that motor

vehicle was of mere general value to

debtor’s work as a constable); Liebman,

981 S.W.2d at 434 (concluding that

sailboat was not fairly belonging to or

usable in debtor’s trade as an electrical

engineer, despite debtor’s testimony that

he entertained potential clients on it);

Goffney, 2002 WL 122155 at *4

(certificates of deposit were of general

value to attorney’s practice of law and

thus were not exempt).

One place the “peculiarly adapted” test

survives intact, however, is with motor

vehicles. Reasoning that a motor

vehicle could be “fairly belonging or

usable” in almost any trade or

profession, courts have maintained that

in order to fall under the tools of trade

exemption, a motor vehicle must be

peculiarly adapted to the debtor’s

business. See, e.g., In re Juhasz, 208

B.R. 32, 35 (Bankr. S.D. Tex. 1995);

Erwin, 199 B.R. at 631. The debtor in

Juhasz was in the business of selling

jewelry and used his vehicle (a 1986

Porsche 944 Turbo) to deliver goods,

call on customers, and to conduct

appraisals. Juhasz, 208 B.R. at 35. The

court concluded that because there was

no special modification of the car that

adapted it for particular use as a delivery

vehicle, the vehicle could not be

exempted as a tool of trade. Id. The

Erwin court was even harsher, holding

that a constable’s car was not

particularly adapted to his trade even

though it had emergency lights, a

spotlight, and communications

equipment, because the constable

testified that any car, even a rental car,

could be used, that he used the car for

personal purposes, and that he received

a car allowance from his employer

based on his use of the vehicle for

professional purposes. 199 B.R. at 631.

So it appears that the courts will look for

some sort of modification that makes a

vehicle both specifically adapted for and

unique to a debtor’s trade or profession

before granting an exemption on a

motor vehicle as a tool of trade.

B. Athletic and sporting equipment vs.

Watercrafts.

Watercrafts, such as boats and jet skis, are

not considered athletic and sport equipment

and are therefore non-exempt. In re Gibson,

69 B.R. 534, 535 (Bankr. N.D.Tex. 1987)


10

(1968 power boat is non-exempt); In re

Griffin, 139 B.R. 415, 417 (Bankr. W.D. Tex.

1992) (sailboat is non-exempt); Norris v.

Thompson, 215 S.W.3d 851, 859 (Tex. 2007)

(68’ yacht is non-exempt); In re Payton, 73

B.R. 31, 33 (Bankr. W.D. Tex. 1987) (boat is

not a sporting good); In re Cypert, 8 B.R.

449, 451-52 (Bankr. N.D. Tex. 1987) (Glass

Par fishing boat is non-exempt); Hickey v.

Couchman, 797 S.W.2d 103, 110 (Tex.

App.–Corpus Christi 1990, writ denied); In

re Crockett, 158 F.3d 332, 334-35 (5th Cir.

1998) (jet ski is non-exempt). As a general

rule, if it floats on the waterway and has a

means of propulsion independent from

human power, it will probably not qualify as

sports equipment. Crockett, 158 F.3d at 334-

35.

C. Vehicles.

Each member of a family or a 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 his

or her benefit is entitled to a two, three or

four wheeled motor vehicle. PROP. §

42.002(a)(9).

C. Wages.

Section 42.001(b) excludes current wages for

personal services. In Brink v. Ayre, 855 S.W.2d 44, 45

(Tex.App.–Houston [14th Dist.] 1993, no writ) (citing

Brasher v. Carnation Co., 92 S.W.2d 573

(Tex.Civ.App.–Austin 1936, writ dism’d), the court

upheld that “current wages” imply a master-servant

relationship and not an independent contractor

relationship. See In re Perciavalle, 92 B.R. 688, 691

(Bankr. WD. Tex. 1988) (monies received not exempt

because general agent and district agent for insurance

company was independent contractor); In re Martin,

117 B.R. 243, 246 (Bankr. N.D. Tex. 1990) (monies

received not exempt because business consultant was

independent contractor) (citing Hennigan v. Hennigan,

666 S.W.2d 322, 324 (Tex. App. – Houston [14th Dist.]

1984, writ ref’d n.r.e.)); DeVore v. Central Bank &

Trust, 908 S.W. 2d 605, 610 (Tex.App.–Fort Worth

1995, no writ) (monies received not exempt because

attorney was independent contractor).

Texas courts have consistently held that, once

received by the debtor, wages, paychecks, retirement

checks and other similar assets lost their “current

wage” status and were no longer exempt. Brink, 855

S.W.2d at 45; Schmerbeck v. River Oaks Bank, 786

S.W.2d 521, 522 (Tex.App.–Texarkana 1990, no writ);

Barlow v. Lane, 745 S.W.2d 451, 453-54 (Tex.App.–

Waco 1988, writ denied). In 1989, the Texas

legislature amended Texas Civil Practice and

Remedies Code section 31.002 and added subsection

(f) preventing courts from entering or enforcing an

order that requires the turnover of “proceeds of or the

disbursement of property exempt under any statute,

including Section 42.0021” See Burns v. Miller,

Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317,

322-23 (Tex.App–Dallas 1997, writ denied)

(discussing §31.002(f)); cf. Leibman v. Grand, 981

S.W.2d 426, 435 (Tex.App.–El Paso 1998, no pet.)

(refusing to exempt proceeds from sale of exempt

property where funds were held for several months and

subsequently used to purchase an exempt annuity).

D. Commissions.

Unpaid commission for personal services not to

exceed 25 percent of the aggregate limitations

prescribed by subsection (a) of 42.001 of the Texas

Property Code are exempt from seizure and included in

the aggregate. The exemption is applied to each

commission payment instead of applying it once to the

sum of the commission payment. Mass. Mut. Life Ins.

Co. v. Shoemaker, 849 F. Supp. 30, 33 (S.D. Tex.

1994).

E. Religious Books and Sacred Texts.

In 2007, the Texas legislature passed amended

Section 42.001 and added subsection (e) exempting

religious bibles or other books containing sacred

writings from the the aggregate limitations prescribed

by Section 42.001(a) of the Texas Property Code.

(House: Yeas 145, Nays 0, 2 present, not voting;

Senate: Yeas 144, Nays 0, 1 present, not voting).

V. RETIREMENT ACCOUNTS, HEALTH

SAVINGS PLANS, AND COLLEGE

SAVINGS PLANS

A. Retirement Accounts.

1. Exemption.

Section 42.0021 provides an exemption for

various types of retirement accounts. An analysis of

this section is incomplete without an analysis of the

Internal Revenue Code. Should a practitioner

encounter a debtor with a retirement account that he or

she finds suspect, he or she should be cautioned to read

Section 42.0021 in conjunction with the Internal

Revenue Code. A careful examination should ensue as

to how the retirement account was created, how the

retirement account has been maintained, and how the

retirement account has been used.

According to Section 42.0021, the following

items, whether vested or not, are exempt so long as the

plan, contract, or account qualifies under the applicable

provisions of the Internal Revenue Code of 1986 and

subsequent amendments thereto:

1. Stock bonus, pension, annuity, deferred

compensation, profit-sharing, or similar plan,

including a retirement plan for self-employed


11

individuals, and under any annuity or similar

contract purchased with assets distributed

from that type of plan and under any

retirement annuity or account described by

section 403(b) or 408 A of the Internal

Revenue Code of 1986 and subsequent

amendments thereto;

2. an individual retirement account;

3. an individual retirement annuity; and,

4. rights to payments or assets held in

government of church contracts pursuant to

the federal Employee Retirement Income

Security Act of 1974.

2. Requirements.

In order to claim the exemption, the plan, contract

or account must be qualified under the applicable

provisions of the Internal Revenue Code of 1986 and

subsequent amendments. However, a plan that has

been deemed “structurally qualified” upon its creation

by the IRS but abused by a debtor rendering it

operationally unqualified loses its exempt status. In re

Jarboe, 365 B.R. 717, 722 (Bankr.SD.Tex. 2007)

(citing In re Plunk, 481 F.3d 302, 304-05).

Additionally, contributions, along with any accrued

earnings, in excess of the allowable amounts

prescribed under the applicable provision of the

Internal Revenue Code of 1986 are generally not

exempt. PROP. § 42.0021(b).

B. Health Savings Accounts.

Health Savings Accounts as described by section

223 of the Internal Revenue Code of 1986 and

subsequent amendments thereto are exempt in the same

manner retirement accounts are exempt. PROP. §

42.0021(a).

C. College Savings Plans.

College Savings Plans as described by Section

42.0022 of the Texas Property Code are exempt. It is

the author’s understanding that College Savings Plans

are designed to help families save for college expenses

by offering potential tax-deferred growth and tax-free

withdrawals for qualified educational expenses such as

tuition, fees, certain room and board expenses,

textbooks, supplies and equipment required for school.

The Texas Comptroller maintains a website at

www.texascollegesavings.com.

VI. COMMUNITY PROPERTY

A. Texas Family Code.

Marital property in Texas is divided into three

categories: separate property, sole management

community property and joint management community

property. Sections 3.201, 3.202 and 3.203 of the Texas

Family Code discuss spousal liability and the

availability of community and separate property to

satisfy liabilities. Specifically, Section 3.201 of the

Texas Family Code provides when a spouse is liable

for the debts of the other spouse. Section 3.202

discusses when community and separate property can

be used to satisfy a debt and Section 3.203 discusses

the order in which community and separate property is

subject to the execution and/or sale to satisfy a

judgment.

B. Generally.

If a judgment is against both spouses, all property,

joint management and separate, is available to satisfy a

judgment unless it is exempt by some other rule of law.

TEX. FAM. CODE § 3.202(a); Cockerham v.

Cockerham, 527 S.W.2d 162, 172 (Tex. 1975)

(although the marital property liability statute at issue

in Cockerham has since been amended, the amendment

was only stylistic and not substantive).

C. Community Property Presumption.

It is presumed that property possessed by either

spouse during the marriage is community property;

clear and convincing evidence that the property is

separate is needed to overcome the presumption of

community property. TEX. FAM. CODE § 3.003. To

satisfy the burden that an item of property is the

separate property of one spouse, the spouse “must trace

and clearly identify property claimed as separate

property.” Moroch v. Collins, 174 S.W.3d 849, 856

(Tex. App. – Dallas, 2005, pet. denied). “Tracing

involves establishing the separate origin of the property

through evidence showing the time and means by

which the spouse originally obtained possession of the

property.” Id. at 856-57. The classification of the

property is determined by the time and circumstances

of its acquisition. Leighton v. Leighton, 921 S.W.2d

365, 367 (Tex. App. – Houston [1st Dist.] 1996, no

writ). This is a difficult burden to sustain. Moroch,

174 S.W.3d at 856. Any doubt as to the property’s

characterization should be resolved in favor of the

community estate. Graves v. Tomlinson, 329 S.W.3d

128, 139 (Tex. App. – Houston [14th Dist.] 2010, pet.

denied).

The spouses can agree that property that would be

classified as joint management community property

will instead be classified otherwise. TEX. FAM. CODE

§ 3.102 (b), (c); see LeBlanc v. Waller, 603 S.W.2d

265, 267 (Tex. App. – Houston [14th Dist.] 1980, no

writ) (holding that an oral agreement to divide the

estate fell within the “other agreement” provision

because the legislature chose to remove the

requirement that the agreement be in writing).

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D. Community Property Types.

“Community property consists of the property,

other than separate property, acquired by either spouse

during marriage.” TEX. FAM. CODE § 3.002. The

availability of community property to satisfy a debt

depends on its classification as either sole management

community property or joint management community

property.

1. Sole Management Community Property.

A debtor spouse’s sole management

community property is subject to the

liabilities incurred by the debtor before or

during the marriage, TEX. FAM. CODE §

3.202(c) except that a spouse’s sole

management community property is not

subject to: “(1) any liabilities that the other

spouse incurred before marriage; or (2) any

nontortious liabilities that the other spouse

incurs during marriage.” Id. § 3.202(b).

However, all community property, including

the non-debtor spouse’s sole management

community property, is subject to tortious

liability of either spouse incurred during the

marriage. Id. § 3.202(d). “Sole management

community property is that property which,

although acquired during the marriage,

would have belonged to that spouse if

single.” Douglas v. Delp, 987 S.W.2d 879,

883 (Tex. 1999). Such property includes:

“(1) personal earnings; (2) revenue from

separate property; (3) recoveries for personal

injuries; and (4) the increase and mutations

of, and the revenue from, all property subject

to the spouse’s sole management, control,

and disposition.” TEX. FAM. CODE §

3.102(a).

For example, in Montemayor v. Ortiz, 208

S.W.3d 627 (Tex. App. – Corpus Christi

2006, pet. denied), the underlying judgment

against the debtor husband was one for debt

rather than tort. The Court found that the

non-debtor wife’s business remained under

her sole management and control; and the

debtor husband had no input in the business’s

management or operations. Id. at 643-45.

As a result, the Court held that the business

was the sole management community

property of the wife and thus was not subject

to the nontortious debts of the husband. Id.

at 645. For a discussion of when a non-

debtor spouse’s sole management community

property is available to satisfy the other

spouse’s tort liability, see James W. Paulsen,

The Unsecured Texas Creditor’s Post-

Divorce Claim to Former Community

Property, 63 BAYLOR L.REV. 781, 788

(2011).

2. Joint Management Community Property.

Under TEX FAM. CODE § 3.202(c) and (d),

joint management community property is

subject to liabilities incurred by that spouse

either before or during the marriage. Joint

management community property can be

characterized as “sole management property

commingled beyond segregation or

community property of unprovable origin.”

James W. Paulsen, The Unsecured Texas

Creditor’s Post-Divorce Claim to Former

Community Property, 63 Baylor L.Rev. 781,

787 (2011).

“[C]ommunity property that is jointly managed

cannot belong to one spouse and not the

other. If one spouse incurs a nontortious

liability before or during marriage, the entire

joint management community property may

be reached to satisfy the liability.” Drake

Interiors, L.L.C. v. Thomas, 433 S.W.3d 841,

850 (Tex. App. – Houston [14th Dist.] 2014,

no pet.). In Drake, the creditor was able to

reach jointly managed community property, a

townhome, to satisfy a debt incurred prior to

marriage, even though the property was

jointly managed by the non-debtor wife. Id.

at 849. The wife’s interest in the joint

management community property could be

reached to satisfy her husband’s liabilities.

Id. The non-debtor spouse did not need to be

named in the earlier lawsuit for the creditor

to reach the jointly managed community

property. Id.; see also Nelson v. Citizens

Bank & Trust Co. of Baytown, Tex., 881

S.W.2d 128, 131 (Tex. App. – Houston [1st

Dist.] 1994, no writ) (although non-debtor

wife was not “personally liable” for

husband’s debt from promissory note, her

interest in their jointly managed community

property was subject to the debt).

Under Texas law, the non-debtor spouse does

have a one-half ownership interest in the

couple’s community property. U.S. v. Loftis,

607 F.3d 173, 178 (5th Cir. 2010). But, that

ownership interest “does not define what

community assets may be seized by [the

debtor spouse’s] creditors, a question that is

determined by reference to whether the

community assets are solely or jointly

controlled.” Id. Under Section 3.202(c), the

government was able to garnish a wife’s one-

half interest in jointly managed community

property to satisfy the debts of her husband;

thus, “the entirety of the couple’s jointly

managed community property was subject to


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garnishment.” Id. at 176, 178; see also

Genheimer v. Kneisley, 778 S.W.2d 138, 140

(Tex. App – Texarkana 1989, no writ)

(abstract of judgment against debtor spouse

constituted a valid lien against the entirety of

the jointly held community property).

E. Separate Property.

All property owned or claimed before marriage,

and property acquired during marriage by gift, devise,

or descent is considered separate property of that

spouse. TEX. CONST. art. XVI, § 15. Only the debtor’s

separate property is subject to liabilities; separate

property belonging to the debtor’s spouse is not

available. FAM. § 3.202(a). In other words, one

spouse’s separate property cannot be used to satisfy a

judgment against the other spouse, unless both spouses

are personally liable under another rule of law. Id.

The non-debtor spouse’s separate property is safe from

seizure, even when the debtor spouse commits a tort

during the marriage.

VII. CONCLUSION

Despite the various flags flown over Texas, Texas

has never wavered in its protection of debtors. No one,

especially the collection attorney on a contingency, is

interested in a paper judgment. It is the author’s belief

that “a judgment only wins you the battle and

collection wins you the war.” The vigilant judgment

creditor represented by its zealous advocate should

“look behind” any suspicious transactions. A complete

examination of such transactions coupled with an

understanding of exemption limits are invaluable if one

is to have a successful collections practice.

Documents

Exempt Property – Matt Garcia