Clearing up some confusion over what happens to home sale proceeds after someone files chapter 7 bankruptcy, the 5th Circuit Court of Appeals made a ruling in March 2018 in the case of Matter of Deberry. In that case, a Texan named Deberry filed chapter 7 bankruptcy and listed his home in San Antonio as exempt. No objections to the exemption were filed. Seven months later the bankruptcy court signed an order allowing him to sell his home, so he sold it and did not reinvest the proceeds in another home within 6 months. Instead he used the money to pay his wife and also to pay criminal defense lawyers to represent him in a criminal case.
The chapter 7 trustee Mr. Lowe brought an adversary proceeding (lawsuit) against the debtor, the law firm, and the debtor's wife to recover the money, saying that it became non-exempt when the debtor did not reinvest the money in another home within 6 months of sale. The appellants moved to dismiss the lawsuit, and the bankruptcy court granted it. The U.S. District Court reversed, and the case was appealed to the 5th Circuit Court of Appeals.
The 5th Circuit sided with the debtor and allowed him to remove the exempt homestead property from the bankruptcy estate, stating:
Upon filing a claim for bankruptcy, a debtor may remove certain property from the estate under federal or state law, thereby shielding it from creditors. See 11 U.S.C. § 522(b). A debtor must file a list of exempt property, and “[u]nless a party in interest objects, the property claimed as exempt on such list is exempt.” Id. § 522(l). Under the Texas Property Code, homesteads are eligible for exemption from the bankruptcy estate. Two provisions of the homestead statute are relevant. The basic rule allows a home to be “exempt from seizure for the claims of creditors except for encumbrances properly fixed on homestead property.” TEX. PROP. CODE § 41.001(a). The “proceeds rule” provides that “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.” Id. § 41.001(c). The proceeds rule was a late nineteenth century amendment to the homestead statute meant to “protect from garnishment the proceeds of a voluntary sale of the homestead for six months, thus giving a reasonable time in which to invest the proceeds in another home. (citations omitted)”
The 5th Circuit also said that it had recently rejected the Trustee's argument in Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017), a case concerning the exempt status of a retirement account instead of a homestead. Hawk held that funds withdrawn from an exempted retirement account after the filing of a Chapter 7 bankruptcy do not lose their exempt status even if the money is not redeposited in a similar account within 60 days pursuant to Texas’s proceeds rule. The 5th Circuit stated:
We see no reason why Hawk’s analysis should not also apply to Texas’s homestead exemption, which has much deeper roots than the protections afforded retirement accounts. See In re Perry, 345 F.3d 303, 316 (5th Cir. 2003) (“Homesteads are favorites of the law, and are liberally construed by Texas courts.”
So long as you own your homestead on the date of filing bankruptcy, properly claim it as exempt and there are no objections to the exemption, it now appears settled that a Texas may sell his or her homestead, and do what they want with the sale proceeds.