What Happens When I Sell My House While in a Chapter 7 Bankruptcy?

Post-Petition Proceeds from Homestead are Unconditionally Exempt in Ch. 7 Bankruptcy Cases.

Until recently, confusion existed as to whether the post-petition proceeds from a homestead or distributions from an IRA would be limited by the 6-month or 60-day reinvestment rules, respectively. In other words, if those proceeds were not reinvested within the time requirements, would those proceeds lose their exempt nature and be available to debtor’s creditors? Bankruptcy filers now have some clarity on this issue.

On March 7, 2018, the Fifth Circuit issued an opinion in DeBerry clarifying the exempt nature of proceeds from the sale of a homestead. In that case, the debtor sold his homestead after his exemptions became final in Chapter 7 bankruptcy. The Court held that the proceeds were unconditionally exempt and were not subject to the 6-month reinvestment rule.

DeBerry follows in the footsteps of a similar holding Hawk from this past fall, where the Fifth Circuit held that IRA proceeds distributed post-petition to a Chapter 7 debtor were not part of the debtor’s bankruptcy estate and did not have to be turned over to the trustee or debtor’s creditors.

It is important to know that the DeBerry and Hawk cases turn on three essential facts: (1) the debtor filed bankruptcy under Chapter 7; (2) the assets were liquidated after the exemptions became final; (3) no party timely objected to debtor’s exemptions.

The timing of the sale or withdrawal is crucial. Receiving the proceeds before you file your bankruptcy would subject you to the 6-month / 60-day reinvestment rule and any proceeds not reinvested would become the property of your estate and go to pay your creditors.

For debtors in a Chapter 13 case, selling your homestead or liquidating your retirement account at any point before or during your bankruptcy case would potentially subject those proceeds to the reinvestment rule. As the Fifth Circuit stated in Frost, proceeds from the sale of an exempt asset during a Chapter 13 bankruptcy case lose their protection of the Texas bankruptcy law and are no longer exempt from creditors.

If you are in or are considering a bankruptcy and need to sell your home or other exempt assets such as your retirement account, you need to discuss the possible consequences with a knowledgeable bankruptcy expert before taking any actions you might regret.

With questions, contact Clayton Everett.

CITATIONS:

  • Lowe v. DeBerry (In re DeBerry), 2018 U.S. App. LEXIS 5772 (5th Cir. Mar. 7, 2018).
  • Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017).
  • Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014).
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