Debtor Protection Laws in Texas
A personal liability or judgment against you can have financially catastrophic effects. Creditors have a host of judgment enforcement tools they can use to reach your assets to satisfy a judgment.
However, Texas law defines a long list of assets that creditors cannot reach. These exempt assets generally include your homestead, automobiles, wages, certain investment plans & accounts, and certain personal property.
For assets that fall outside this list, especially real estate, a more proactive approach must be taken.
Homestead Protection – The Highest Level
One of the most valuable protections afforded to Texas citizens is the Texas Homestead Law. With few exceptions, the homestead law states that your home cannot be seized and sold to satisfy creditors.
In order to qualify as your homestead, the real property must be used as your primary residence. Please note that taking the homestead property tax exemption on a property, alone does not make a property your homestead.
Texas law defines two types of homesteads:
1. Urban – No more than 10 contiguous acres of land; and
2. Rural – No more than 200 acres for a family or 100 for a single person
Drawbacks of Owning Real Estate Personally
While the homestead protection is a powerful tool for protecting your homestead, it leaves a major gap in your asset protection plan for any other real estate you own.
Personally-owned, non-homestead real estate remains a great target for those seeking to satisfy a judgment against you.
Real estate is generally:
1. Easy to find – By a search of the local County Tax Assessor’s Website;
2. Easy to collect information on – Through title searches which can reveal owner; purchase price; existing mortgages; judgments filed against the owner; tax liens filed against the owner; details of probates, etc.; and
3. Easy to take – By filing an appropriate judgment lien and utilizing some simple judgment enforcement strategies.
Asset Protection Strategies
Generally speaking, creditors cannot take assets that you don’t own.
As such, real estate asset protection strategies often involve transferring real estate out of your personal name and into various types of business entities and trusts to create 3 levels of separation:
1. Separating assets from yourself;
2. Separating assets from each other; and
3. Separating assets from services.
When advising our clients, we almost always recommend that any non-homestead real property be placed in an appropriate business entity. This achieves the first level of separation, separating assets from yourself.
We further recommend that clients place each property (or groups of properties) into separate entities. This achieves the second level of separation, separating assets from each other.
Finally, owners with multiple investment properties should reserve the service aspects of their real estate business to a different entity altogether.
Well drafted business entities can provide the following benefits for real estate owners:
Ease of conveyance
Clear agreement between the owners
Avoidance of probate
A comprehensive asset protection plan can include strategies as basic as gifting properties to family members and charities or channeling non-exempt assets into exempt assets, always keeping in mind the “fraudulent transfer” rules.