Bankruptcy and Texas Oil Royalties: Are They Protected Assets?

 Posted on August 26, 2025 in Bankruptcy

In 2024, the Texas Oil and Gas Association paid a record 27.3 billion dollars in royalties and state and local taxes. A large portion of these billions of dollars was distributed to individuals across the state, who typically receive 12-25 percent of production revenue annually in the form of royalties. These royalties are derived from ownership of the mineral rights beneath the land where oil is found.

While these oil and gas royalties are income, they can also represent a family’s legacy and long-term financial security. What happens when an individual receiving Texas oil royalties files for bankruptcy? Can creditors seize the payments, or are they protected under Texas bankruptcy law? The answer is: it depends.

Texas is known for having some of the most generous bankruptcy exemptions in the country; however, whether oil royalties fall under these exemptions will depend on several factors, including how they are classified and the language in the oil and gas lease. To understand these factors, consulting with an experienced Arlington, TX bankruptcy attorney can be highly beneficial.  

Are Oil Royalties Protected During Bankruptcy?

While a more technical explanation is provided below regarding "perfected security interests," in general, mineral rights are treated as land ownership under Texas law, and if they are part of the homestead, they may be exempt. Royalty payments are considered ongoing income streams, not just property, so future royalties could potentially be included in the bankruptcy estate, depending on the specific terms of the oil and gas lease.

Mineral rights denote ownership and responsibility, whereas royalties are considered a passive income stream; however, the two are often intertwined. If mineral rights are separated from surface property, the protections may differ. The Texas homestead exemption protects up to 200 acres of rural property or 10 acres of urban property. Mineral rights tied to homestead property are likely to be protected; however, any royalties from non-homestead properties will be treated as cash income, once paid.

Whether royalties will be included in the bankruptcy may also be determined by the type of bankruptcy – Chapter 7 or Chapter 13.  The above information pertains primarily to Chapter 7 bankruptcy. Under Chapter 13, which is a debt reorganization that implements a 3 to 5-year repayment plan, if the royalty interest is deemed a part of the bankruptcy estate, the debtor must include it in the repayment plan.

At the very least, the trustee will likely require the non-exempt portion of royalties to be paid to unsecured creditors, increasing the monthly payments. The timing of the royalty payment can make a significant difference. If the payment is received after the 180-day window following the bankruptcy filing, it will likely be excluded from the bankruptcy estate. Again, the language of the oil and gas lease can determine how the royalties are treated.

Unique Texas Protections for Oil and Gas Royalty Owners During Bankruptcy

Texas law provides unique protections for oil and gas royalty owners during bankruptcy, as outlined in the Texas Business & Commerce Code, Section 9.343. Royalty creditors are granted an "automatically perfected security interest" in the first purchaser’s obligation to pay for oil and gas production.

This means that royalty owners are considered secured creditors if their royalty interest is recorded in the real property records. Again, the language of the oil or gas lease matters. Operators of oil leases may seek court permission to continue paying royalties during bankruptcy to preserve valuable leases and avoid termination clauses.

Contact a Parker County, TX Bankruptcy Attorney

The intersection of oil and gas royalties and bankruptcy in Texas is complex. If you have gas or oil royalties and are considering bankruptcy, your financial future may hinge on how those royalties are classified. Your first step should be consulting a highly experienced Dallas, TX Chapter 13 bankruptcy lawyer from Acker Warren P.C..

At our firm, you will always speak with an attorney, not a paralegal. We typically have a swift turnaround on bankruptcy filings and can complete the case virtually when necessary. Call 817-752-9033 to schedule your free consultation.