Use It or Lose It: Grappling with Classification of Post-Petition Sale Proceeds under Chapter Seven Bankruptcy for Consumer Debtors in the Lone Star State.

Texas affords consumer debtors some of the most generous state bankruptcy exemptions in the United States. This includes the homestead exemption, which permits consumer debtors to exempt a homestead of unlimited value from forced sale, subject to certain enumerated exceptions. Bankruptcy courts throughout the state are grappling with how to characterize proceeds from the sale of an exempted homestead once a consumer debtor files a Chapter Seven bankruptcy petition. Specifically, courts consider whether a debtor may personally retain funds from the sale of a homestead or whether a Chapter Seven Trustee should receive the sale proceeds on behalf of the debtor’s bankruptcy estate for payment of creditors. This Recent Development discusses the Texas homestead exemption as applied to Chapter Seven bankruptcy cases filed by consumer debtors. A major goal of Chapter Seven bankruptcy is to provide debtors with a fresh start. For those consumer debtors owning, claiming, and exempting a homestead, the characterization of the proceeds as a potential post-petition sale is of great importance. This is especially true with regard to the Texas Proceeds Rule which affords Texas residents protection of the proceeds from the sale of a homestead for six months from the date of sale, as long as the owner reinvests those funds in another homestead within the time allotted. Debtors should contemplate such a sale prior to filing, as it may be considered property of the bankruptcy estate, depending upon when it was sold. Until the Fifth Circuit makes the determination, Chapter Seven debtors run the risk of losing this protection if those proceeds are not reinvested within six months