J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization

Texas residents enjoy an "unlimited" or nearly unlimited real property homestead exemption. That is, in an urban area a single person or a couple can claim up to 10 acres of land and all improvements as safe from most creditors, so long as it is used as a homestead (a Texan can exempt 100 for a single person-200 acres for a family in a rural area). But there is no exemption for cash or "cash equivalents" such as stocks and bonds, money in the bank, etc.

Texas "exemption" laws were largely written during prairie days, when people didn't need cash and didn't have bank accounts. They bartered for goods and services, or just hunted and fished or raised their own food on the land.

But today, people in debt trouble are tempted to take what cash that they have, and pay it towards or pay off the mortgage on their home, and then file bankruptcy, to avoid losing the cash to a bankruptcy trustee. If you are thinking of possibly doing this, find an experienced bankruptcy attorney to advise you before you do it. How come?

Because in 2005, the Bankruptcy Code was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to provide in Section 522(o) that if in the 10 years before you file bankruptcy, you put money that would not have been exempt, towards your homestead, with the intent to "hinder, delay or defraud" your creditors, the value of that property is not exempt. You could lose your property.

So if you paid the money towards your mortgage to avoid paying your creditors, for example, and the bankruptcy trustee or a creditor objects and the court agrees with them, then they would be able to sell your homestead, pay off any mortgages, take the money that you had paid down in anticipation of filing bankruptcy, and give you the rest. Not so good for you!

In a recent court case from the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, a widow unwisely used some of her deceased husband's life insurance money to invest in a pizza business, which failed. She was also on the hook for the remaining debts of the business, which were substantial. In 2012 she paid $240,000 towards her home mortgage on her home in Magnolia, Texas, and then filed chapter 7 bankruptcy in Houston in 2013. In re Love-Baker, Bankr. SD Texas 2013.

The trustee and a bank objected to her exemption of her home using 11 USC Sec. 522(o), saying that she paid the $240,000 towards her home to avoid creditors, and that amount should not be exempt. But the Bankruptcy Court agreed with the widow, after she testified that the only reason that she paid the money down on her home, was because she had received investment information from 3 different investment firms that the stock market was going to tank, and there were other uncertainties in the market.

So it was a happy result for the debtor in this case (at least so far, there could be an appeal), but I don't recommend that you count on it in every case. Before you pay money down on your homestead mortgage before filing a bankruptcy, or certainly before you pay it off, consult with an experienced bankruptcy lawyer.

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