Sell Home During Bankruptcy with Texas Exemptions - May Lose Equity

Posted on Mar 07, 2014

The 5th Circuit Court of Appeals just ruled March 5, 2014, that if a debtor in bankruptcy sells a home claimed as exempt under Texas law during a bankruptcy case, the proceeds are only exempt for 180 days unless all of the proceeds are reinvested in another Texas homestead. Matter of Frost, 5th Cir. 2014.

In other words, if you are in bankruptcy and have claimed your home as exempt under the Texas exemptions, so long as you stay in your homestead, it is permanently exempt and you cannot be forced to sell it. But if you sell your home during a bankruptcy in such a case, the proceeds are only exempt for 180 days unless you buy a new homestead and reinvest all the proceeds in the new homestead.

Any amount not used to purchase the new homestead becomes non-exempt, and must be turned over to the trustee for distribution to creditors.

This result does not occur if a Texas debtor claims the "federal" exemptions, but those exemptions limit the homestead exemption to $22,975 in value, for each debtor (double that in a joint case involving husband and wife). The 5th Circuit Court held:

But while the homestead is permanently exempt from the bankruptcy estate, Texas law provides that the proceeds from the sale of a homestead are only exempt for six months after the sale. Tex. Prop. Code § 41.001(c) ("The homestead claimant’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale."). Because Frost sold his homestead and did not reinvest the proceeds in another homestead within this six month period, the bankruptcy court ruled that the proceeds were no longer exempt from the estate.

The Court held that the Texas homestead exemption exempts the homestead itself, unconditionally. But once the homestead is sold, the proceeds are only conditionally exempt, and remain exempt only if reinvested in another homestead within 180 days of sale.

This is a big change, at least to our local practice here in the Houston Division of the U.S. Bankruptcy Court for the Southern District of Texas. Up to now, a chapter 13 debtor, for example, even if they claimed Texas exemptions, could sell their home during a chapter 13 case, and keep the equity that they realized from the sale, without worrying about it becoming non-exempt.

Now, a chapter 7 or 13 trustee in such a case could just wait for the 180 days to expire, and then demand the turnover of the money to pay creditors.

This Frost opinion makes it clear that to keep the benefit of the homestead equity, a debtor will have to reinvest the equity into a new homestead within 180 days of the sale of a homestead, at least if they had utilized the exemptions under Texas law to exempt it.

This is just one more example of why a person contemplating filing bankruptcy needs an experienced, expert bankruptcy attorney. There are just too many traps and possible errors that can be made.

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