Bankruptcy Court Rules Not A Homestead Abandonment

In a recent Chapter 13 bankruptcy case, the debtors faced a challenge to their homestead exemption by the bankruptcy trustee because they sold part of their homestead and did not reinvest the proceeds within six months. The debtors in this bankruptcy case were in a situation where their home was damaged by Hurricane Ike. The city deemed the house a safety hazard and demanded that the debtors demolish the property. The debtors moved into an outhouse on the same property; but did not have the funds to demolish the main house. Because of this, the debtors sold part of their land under the condition that they would receive a lump sum payment and then two installment payments over two years.  When the debtors filed bankruptcy, while they had received the initial lump sum payment, they still had not received any of the other installments. The bankruptcy trustee said that they lost their homestead exemption because they sold part of the homestead and did not invest the money within 6 months in their remaining property. The debtors appealed the trustee’s decision and bankruptcy court overruled the trustee’s ruling.

The instant case is an unusual fact situation, and the court’s holding is limited to the narrow situation presented. In the instant case, Debtors were forced to sell a portion of their homestead, in order to comply with an order of the city to eliminate a safety hazard. The sale of a portion of the homestead was not a voluntary alienation of the entire homestead, and was not an arms-length transaction. The transaction was not complete on the petition date, and remains incomplete.2 If the note was required to be turned over to creditors, it would deprive Debtors of the opportunity to rebuild a home on the homestead property, and either relegate them to a permanent subsistence in their out-building, or require them to sell the entirety of the homestead. The court concludes that, in the instant case, the six month period under Section 41.001(c) of the Texas Property Code for reinvesting the proceeds of sale commences upon receipt of each of the installments due under the note. Thus, there are no proceeds as to which Section 41.001(c) could have operated as yet. The court concludes that the instant objection to exemptions should be overruled.

Two factors that determined that the debtors had not abandoned their property was 1) the sale was basically involuntary and done to comply with a city mandate and 2) the transaction on the sale of the property is still in progress because of the two outstanding payments, therefore the debtors have not violated the six months rule.