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Going through a bankruptcy is never easy for individuals. While the resulting freedom from debt can be life changing, failing to follow the rules can result in a bankruptcy petition being rejected, or certain assets not being protecting from creditors.
Recently, in a Fifth Circuit appeal from a Texas bankruptcy matter, a petitioner almost lost the proceeds from the sale of their home to the bankruptcy trustee due to a misunderstood technicality of the timing for the Texas homestead exemption. The appellate court provided some much needed guidance on the issue and reversed the district court's reversal of the bankruptcy court's order protecting the proceeds from the sale of a homestead post-petition that were not reinvested in a new homestead.
Pre- or Post- Petition Sale of Homestead
At issue in this case was whether the post-bankruptcy petition sale of the petitioner's exempt homestead converted the proceeds of the sale into non-exempt property. Basically, the court was tasked with determining whether the proceeds of the sale of exempted property post-filing of a bankruptcy petition resulted in those proceeds being reachable by the bankruptcy estate. This issue seems to come up more often in Texas for some reason.
In short, the court found that once a petition is filed, exempt property remains exempt, and if it is sold, the proceeds are also exempt. In the case at bar, the proceeds were used to pay for the petitioners attorneys related to a criminal matter.
Notably, the rule is not the same for property that would be exempt but is sold before the filing of a bankruptcy petition. In the case of a home sold before the filing of a bankruptcy petition in Texas, the petitioner has six months to use those proceeds on another homestead, or else the proceeds convert to non-exempt and can be reached by creditors. This rule allows petitioners to use the proceeds from the sale of one exempt homestead to purchase a new homestead without creditors being able to prevent them from doing so.