Texas Homestead Exemption
According to Texas state law, a homeowner's profits from the sale of their homestead is exempt from creditor claims for six months.
However, if a debtor is considering selling their home and filing bankruptcy, there are a few things they should consider first:
No Compulsion To Sell
A creditor cannot foreclose on a homestead in an attempt to satisfy a debt which is unrelated to the home. Even if the creditor has a judgment, they cannot force the debtor to sell their home. If the debtor chooses to sell their home, the proceeds from the sale are exempt from seizure for up to six months according to Texas state law.
Debtor's Intention Is Relevant
If a debtor files bankruptcy soon after selling their homestead, the bankruptcy court will look at the intentions held by the debtor when they sold their home. Did they sell the home simply because they wanted to avoid handing over the proceeds of the sale to creditors during bankruptcy? How did they use the profits earned from the sale? If the bankruptcy court finds that the debtor sold their homestead with the intention of defrauding creditors, they may demand that the proceeds from the sale are turned over to the bankruptcy estate.
In a 2007 bankruptcy case, the court denied a debtor's discharge when it was discovered that he gave the proceeds of his homestead sale to his fiancé and then had her buy a truck in her name to avoid detection by creditors. Such pre-bankruptcy behavior jeopardizes the discharge of any debtor who sells his homestead before filing bankruptcy.
On the other hand, if a debtor sold their home because they needed to and with no intention of defrauding creditors, their bankruptcy discharge is not at risk. It might be allowable for a bankruptcy debtor to use their homestead sale proceeds to purchase another home, or to purchase necessary exempt assets. For example, using proceeds to rent an apartment or to purchase a vehicle in the debtor's name is often considered a legitimate use of cash earned from a property sale. However, if this is being done right before filing bankruptcy, it's best to speak with a Dallas bankruptcy attorney about how such actions might impact he bankruptcy case.
Waiving The Homestead Exemption
If the debtor does not use their homestead exemption to purchase another property within six months, there is a risk that the bankruptcy court will rule that the cash is no longer exempt from creditors. If the cash from a homestead sale is used to pay other creditors, there is also a risk that the bankruptcy trustee could rule that such transfers are illegal because they favor some creditors over others. Once again, consult a bankruptcy attorney before using homestead proceeds for purposes other than purchasing another home.