Surprisingly, the Fifth Circuit Court of Appeals recently ruled that the proceeds from the sale of a Debtor’s homestead lose their exempt character if not reinvested within six-months — even when the sale takes place post-petition! In the Matter of Mark Allen Frost, ___ F.3d ___ (5th Cir. March 5, 2014) (Case No. 12-50811), the Court expanded on its prior decision in Matter of Zibman, 268 F.3d 298 (5th Cir. 2001).
In Frost, the Debtor filed for bankruptcy and exempted his homestead elected to protect the property using the exemptions provided under the Texas Property Code. Subsequently, Debtor sold his homestead and used a portion of the proceeds to pay ordinary expenses expenses. The Debtor did not purchase a new homestead as required under Tex. Prop. Code 41.001(c), which states that proceeds from the sale of a homestead are not subject to seizure by creditors for six months after date of sale. This ruling was surprising because it has long be held that a Debtor’s exemptions are fixed at the time of filing and are unchangeable.
Ordinarily, the “Snapshot” rule says that a debtors exemptions are fixed at the time the bankruptcy is filed and do not later change their character. However, here the Court rejected this argument and indicated that the proceeds from the sale of the debtors exempt homestead are only conditionally exempt and remain subject to the six-month reinvestment requirement. The 5th Circuit reiterated that when claiming an exemption under state law, it is important to remember that “it is the entire state law applicable on the filing date that is determinative.”
If you are thinking of filing bankruptcy, be sure to discuss this issue with your attorney. Failing to do so could cost you big.