John Smith personally owns office furniture valued at $20,000 with a non-purchase-money, non-possessory lien against it in the amount of $80,000. Thus, Smith has no equity in the furniture.
Smith files a bankruptcy action and elects his state's exemptions, so that the $5,000 limitation applies (due to the federal cap). Further, Smith's state exemption for the office equipment makes it completely exempt.
Under the most common interpretation, Smith can eliminate $5,000 of the lien, and he still owes $75,000. He still will have no equity in the furniture.
Under the recent interpretation by a Texas bankruptcy court, the balance of the loan will be reduced to the difference between the value of the property, $20,000, and the $5,000 limitation. Here, that amount is $15,000. In this way, the debtor is left with a minimum equity of $5,000 in the property.
Thus, in this example, under the second interpretation, Smith's loan is reduced to $15,000, and he has $5,000 equity in the furniture ($20,000 less $15,000).
Under this second interpretation, Smith saves $60,000 (lien of $75,000 vs. lien of $15,000).