When you are in a Chapter 13, you must pay your unsecured creditors any amount of non-exempt property that you have. Under the bankruptcy code there are certain things that are considered necessary property to own. Anything above the necessary property is considered non-exempt property.
In Texas, Debtors can use either Federal exemptions or state exemptions. In most cases, the Federal exemptions give Debtors less non-exempt property. However, under Federal exemptions the homestead exemption has a limit. Which means, if you have a house with a lot of equity it might not be protected under Federal exemptions. State exemptions do not have a limit for homestead exemptions. This is very helpful for people whose house is paid off or who have accumulated equity over the years.
One benefit to Federal exemptions is that there is a wild card exemption. This means, anything not specifically exempt can be used as the wild card exemption if there is room. Texas exemptions don’t provide for a wild card. So, if it is not specifically exempted under State exemptions, it is non-exempt property, and you have to pay your unsecured creditors the value of that property.
Another important thing to understand is that is must be your homestead. Which means, you must be living in the house to get the exemption. I have a client who wants to rent out his house and move into an apartment. He has close to $50,000 equity in the house, which we exempted under State exemptions. However, his plan has not been confirmed yet, and if he moves out of the house it can no longer be exempt under the homestead exemptions. This is something that is easily overlooked and is just assumed that if a person only owns one house it should be exempt.
The reason a Debtor must be living in the house to get the homestead exemption is because it is not considered needed property if the Debtor is not living there. The exemptions are based on what is needed for the Debtor to live, and a place to live is one of the needed things. If the Debtor is not living in the house it is not considered needed under the bankruptcy code and any equity in the house becomes non-exempt property or must be exempted under Federal wild card exemption.