Fifth Circuit: Chapter 7 Debtor’s Post – Petition Sale of Home Does Not Impair Homestead Exemption

By Roger Cox *

The Headline:

The Fifth Circuit reinforces the “snapshot rule” in a Chapter 7 context.  The United States Court of Appeals for the Fifth Circuit, in In re DeBerry, 2018 WL 1178353 (5th Cir. 2018), found that the post-petition sale of a Chapter 7 debtor’s properly claimed exempt homestead, did not destroy the exempt nature of the homestead, despite the lack of a subsequent reinvestment in another homestead.  This was consistent with a recent ruling in In re Hawk, which held that an IRA that had timely been claimed as exempt did not lose its exempt status when liquidated and converted to non-exempt property by a Chapter 7 debtor post-petition.

Background/Facts:

A Chapter 7 debtor (who, by the way had waived his discharge) owned and claimed a Texas homestead as of the day he sought Chapter 7 relief.  Some seven months later, the debtor sold his home, but he did not reinvest the proceeds in another home within the six month window allowed under Texas law.

Judge Gargotta of the Western District ruled that the proceeds were exempt, because the homestead was exempt on the filing date, and in a Chapter 7 context, the subsequent sale did not destroy the homestead character that existed on the petition date.  The district court reversed, and the Fifth Circuit reversed the district court, effectively upholding Judge Gargotta’s original decision.

The Chapter 7 “Snapshot Rule” and In re Hawk:

 In late 2017, in In re Hawk, 871 F.3d 287 (5th Cir. 2017), the Fifth Circuit provided similar protection to a debtor who had: (a) timely claimed an IRA as exempt, but (b) liquidated that account post-petition, while not reinvesting those proceeds within the sixty day window applicable to the IRA exemption.  The Fifth Circuit effectively followed the so-called “snapshot” rule, which in effect takes a look at the status of the Chapter 7 debtor’s assets and exemption claims effective as of the filing date.  This is distinguished from, for example, a Chapter 13 case, in which property interests acquired post-petition can effectively become property of the bankruptcy estate.

The Hawk opinion came on rehearing, which involved the Fifth Circuit vacating a prior ruling to the contrary.  The net effect of this is that in a Chapter 7 context, the “snapshot rule” is alive and well in the Fifth Circuit.

Our Take:

This is an appropriate outcome based upon the intersection of the statute and rules applicable to Chapter 7 cases, especially in the context of exemption claims.  In Hawk and DeBerry, the debtors had timely claimed exemptions in those items as of the applicable petition dates, and no objections had been timely filed.  Thus, the Hawk IRA and the DeBerry homestead were established as exempt, and therefore, not part of the Chapter 7 bankruptcy estates. 

The reader is cautioned to note, however, that these rulings likely do not apply in a Chapter 13 case, for example, where the notion of estate assets is much more fluid and continues post-petition.  Additionally, In re Zibman, 268 F.3d 298 (5th Cir. 2001) still appears to be good law, because that involved the sale of a homestead prepetition, followed a bankruptcy filing while the conditional six month conditional proceeds exemption was still in play.  Likewise, these cases can be distinguished from In re Frost, 744 F.3d 384 (5th Cir. 2014), which arose in a Chapter 13 context.

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2017), and a former contributor to the SMU Law Review.  He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization.  Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.

 

 

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