Sell Texas homestead before chapter 7 bankruptcy case closed, may lose proceeds, says Houston BK Judge Bohm

Posted on Aug 05, 2014

The common wisdom is that Texans enjoy an "unlimited" homestead exemption from creditors. While this is basically true (100 acres with all improvements for single person, 200 acres for couple, with certain limitations if they file bankruptcy), the PROCEEDS OF SALE of a homestead are only safe from creditors for 6 months. If you have not re-invested the proceeds in another homestead by the end of the 6 months, the money becomes NON-EXEMPT and is subject to seizure.

The 5th Circuit Court of Appeals recently held in a chapter 13 bankruptcy case that since the debtor did not reinvest the proceeds within 6 months, the proceeds must be paid to the chapter 13 trustee. IN RE FROST, 744 F. 3d 384 - Court of Appeals, 5th Circuit 2014

In a case involving a chapter 7 case decided by Chief U.S. Bankruptcy Judge Jeff Bohm (S.D. Texas) on August 4, 2014, the Court stated that homestead proceeds can be taken by a chapter 7 trustee if not reinvested in the 6 month post-sale period, even if the bankrupt had already received their discharge of debts. Memorandum Opinion, Cage v. Smith, Adv. No. 14-03115, US BK Court, SD TX.

The Court held that the only way a debtor would be able to use the homestead proceeds for something other than a homestead, would be to wait to sell the homestead until the bankruptcy case was actually CLOSED. Then, the Court reasoned, Section 554(c) of the Bankruptcy Code provides that any property that is not administered in the bankruptcy is abandoned back to the debtor, and the debtor can do what he will with it. Most chapter 7 cases are closed fairly quickly, but some, "asset" cases, can be open for years.

So, it's just something else to have to counsel bankruptcy clients about. If you have to choose the Texas exemptions to save your home's equity, you can't sell the house until your bankruptcy is not only discharged, but closed. And in some cases, that can be long time, particularly chapter 13 cases (as in Frost), or chapter 7 asset cases (like Cage v Smith).

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