Bankruptcy judges in Texas have reached different results when a chapter 7 debtor sells a home after bankruptcy but does not reinvest the proceeds within six months as required by the state’s exemption statute. Look for the issue to end up in the Fifth Circuit.
The Texas statute exempts the entire value of a home, assuming the underlying acreage does not exceed the permitted maximum. The statute provides that proceeds from the sale of a homestead are protected for six months. If not reinvested in another home within that time, the proceeds lose their exempt status.
The issue dividing bankruptcy courts in Texas arises when a chapter 7 debtor claims a homestead exemption and the trustee does not object. If the debtor sells the home after bankruptcy but does not reinvest the proceeds within six months, do the proceeds become part of the chapter 7 estate for distribution to creditors with filed claims?
Although the Fifth Circuit has written several times about the failure of a bankrupt to reinvest proceeds, the most recent and seemingly dispositive decision was In re Frost in 2014.
Without specifying the chapter of the Bankruptcy Code under which the debtor had filed, Frost held that proceeds not reinvested lose their exempt status and become part of the estate for distribution to creditors.
In his 55-page opinion on March 9, Bankruptcy Judge Eduardo V. Rodriguez of Brownsville, Texas, reached the opposite conclusion by holding that the proceeds did not revert to the chapter 7 estate.
To reach his conclusion, Judge Rodriguez looked behind the scenes and found that Frost involved a debtor in chapter 13. The result is different under the two chapters, he said, because exempted property in chapter 13 does not leave the estate until the discharge is granted years later.
In chapter 7, by contrast, the home and its later proceeds are exempted, Judge Rodriguez said, when the time for objection to the exemption lapses. As a consequence, proceeds not reinvested do not become part of the chapter 7 estate. Without deciding the issue, Judge Rodriguez indicated that the remaining proceeds are subject to the claims of creditors arising after bankruptcy.
Judge Rodriguez is not alone. Other Texas judges reaching the same result are Bankruptcy Judges Tony M. Davis of Austin, Craig A. Gargotta of San Antonio, and Leif Clark, now retired.