According to a ruling in the bankruptcy case Villarreal, Gregorio and Estela; In re, (Bankr. S.D. Tex. 2009) a bankruptcy court allowed debtors to claim the business as their exempt homestead. That's the good news. The bad news is that because the noteholder was unaware of the business being used as a residence, the debtor could not assert the exemption against the noteholder.
The is a case where the debtors lost their home in foreclosure and secretly moved into their restaurant in 2005. In 2007 the debtor-husband signed a promissory note secured by the restaurant. The debtor did not reveal to the noteholder that the restaurant was in fact a homestead. Eventually, the noteholder foreclosed on the restaurant and afterwards the debtors filed for Chapter 13 Bankruptcy . The debtors challenged the foreclosure claiming the Texas homestead exemption. The bankruptcy court ruled that while the restaurant was in fact a homestead, they could not stop the foreclosure using the homestead exemption because they failed to disclose the fact that they were living in the restaurant to the noteholder at the time of signing the promissory note.
The good news is that debtors made homeless by foreclosure may be able to claim other property, such as a business, as a homestead if the property is their primary residence. But a debtor must reveal the fact that he/she is living in the property to any noteholder. If you are living in a non-traditional residence and are considering bankruptcy speak with a bankruptcy attorney to find out how bankruptcy exemptions can work on your behalf.