In a recent case in the Houston Division of the U.S. Bankruptcy Court, Judge Letitia Paul ruled that a debtor could keep insurance money from a lawsuit settlement for damages to his home from Hurricane Ike. The name of the case was In re Navarette, Case No. 11-40956, in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division.
Mr. Navarette did not originally list in his bankruptcy that he had a claim, because he was unaware the lawyers had filed a suit, or even hired a lawyer. He had met with someone from the law firm briefly in a grocery store and apparently signed a lawyer's contract.
Anyway, right away after he realized he had a settlement, he amended his bankruptcy schedules. The judge believed his testimony, that he was not in bad faith, and allowed him to keep the insurance proceeds.
In Texas, insurance money from the loss of exempt property can be claimed as exempt, so you don't lose it to a bankruptcy trustee, so you can rebuild your house after a hurricane, for example, like here. I think this was absolutely the right result under Texas law. So far as I can tell, this has been the usual result in these kinds of cases, at least here in Houston.