In bankruptcy, the general rule is that all bankruptcy exemptions are fixed at the time of the filing of the bankruptcy petition and do not later lose their exempt status. See In re Zibman, 268 F.3d 298 (5th Cir. 2001). However, when you choose to exempt your home under state law versus federal law, it is the entire state law applicable at the time of filing that must be considered. This point was clearly set out by the United States Court of Appeals for the Fifth Circuit recently in In the Matter of Mark Allen Frost, ___ F.3d ___ (5th Cir. March 5, 2014) (Case No. 12-50811).
In Frost, Debtor filed for bankruptcy and choose to exempt his homestead under Texas law because it gave him a greater protection. Subsequently, Debtor sold his homestead and used a portion of the proceeds on non-bankruptcy expenses and 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. After the debtor failed to reinvest the proceeds within the six month period after the sale of the homestead, the bankruptcy court ordered the proceeds be used to pay other creditors. Debtor objected and argued that once the homestead exemption is fixed at time of filing the bankruptcy petition, the homestead is permanently exempted and any proceeds from the sale are also exempt. Debtor also argued that the 5th Circuit’s opinion In re Zibman did not apply because it involved a pre-petition sale of a homestead, not a post-petition sale. Rejecting these arguments, the bankruptcy court ordered that the sale proceeds be distributed to the estate’s creditors because they had not been reinvested within the six month period after the sale of debtor’s homestead and were no longer exempt. Debtor appealed to the district court. The district court affirmed the bankruptcy court’s order and held that there was no distinction between pre- and post-petition sale of a homestead and the six month reinvestment requirement applied in either instance, notwithstanding 11 U.S.C. 522(c).
The Fifth Circuit affirmed the district court’s rejection of debtor’s argument that 11 U.S.C. 522 (c) & (l) and the “snapshot rule” permanently exempted debtor’s homestead and its proceeds from post-certification sale of an exempted homestead. Relying on the holding of In re Zibman, 268 F.3d 298, 305, (5th Cir. 2001), and Texas law, the Fifth Circuit held that proceeds from sale of a Texas homestead are conditionally protected for six months from creditors applied, notwithstanding the terms of 11 U.S.C. 522(c). Once the six month period expired, the property was correctly recharacterized because a homestead is real property exempted under law but the proceeds are personal property and no longer exempt. The six month limit was also an integral feature of Texas law on the date of filing and continues in effect even during the pendency of a bankruptcy case. 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.” Once the conditional exemption under Texas law ended, so did the protection.