In the last few years, there have been conflicting decisions whether or not an asset claimed as exempt loses it exempt status if there is a change in the character of the property such as the sale of a homestead or distribution from an exempt IRA or retirement account.
The Fifth Circuit;s decision in In re: Hawk, No. 16-20641 filed September 5, 2017, has resolved the conflict. The Court discussed In re Zibman, 268 F.3d 298 (5th Cir. 2001), a Chapter 7 case, and In re Frost, 744 F.3d 384 (5th Cir. 2014), a Chapter 13 case. The Court distinguished the two cases.
In Zibman the Debtor has sold their homestead before filing their Chapter 7 bankruptcy case. According to Texas Property Code, the proceeds from the sale of a homestead have to be reinvested into another homestead or the proceeds lose their exempt status from creditors within 6 months. The 5th Circuit ruled that because the house was sold before filing their Chapter 7 bankruptcy case, that the proceeds were still only exempt for the six-month period after the sale of the property. Therefore, since the Debtors did not reinvest their homestead proceeds into another homestead, the proceeds had to be turned over to pay their creditors.
In Frost, the Debtors sold their homestead after the filing of the Chapter 13 bankruptcy case. Unlike Chapter 7, Chapter 13 under 11 U.S.C. §1306(a)(1) provides that property acquired after the commencement of the case but before the case is closed, dismissed, or converted is property of the estate. The Debtors did not use their proceeds from the sale of their homestead to buy another homestead. Therefore, the proceeds lost their homestead exemption and had to be turned over to the Chapter 13 Trustee for distribution to unsecured creditors.
In the Hawk case, the Debtors exempted their retirement account. No objection was filed to the exemption. The Hawks took a distribution from their retirement account during the pendency of their case. The Bankruptcy Court and the Appellate Court ruled the Hawks had to turn over the funds from their retirement account. The 5th Circuit overturned the decision of the Appellate and Bankruptcy Courts. The Court held that Chapter 7 exemptions filed in the beginning of the case and not objected to within 30 days keep their exempt status because Chapter 7 does not have the same provision that Chapter 13 has under §1306(a)(1). Therefore, the Hawks were able to keep their proceeds.
The moral to this story is ALWAYS contact your bankruptcy attorney before you do anything with your property !!!