Opinion ID: 4201280
Heading Depth: 2
Heading Rank: 2

Heading: Fifth Circuit Homestead Precedent

Text: This court has applied the snapshot rule in two distinct types of bankruptcy proceedings: Chapter 7 and Chapter 13 cases. See In re Zibman, 268 F.3d at 303–04 (Chapter 7 case); In re Frost, 744 F.3d 384, 386–89 (5th Cir. 2014) (Chapter 13 case). “Chapter 7 allows a debtor to make a clean break from his financial past, but at a steep price: prompt liquidation of the debtor’s 6 Case: 16-20641 Document: 00514143347 Page: 7 Date Filed: 09/05/2017 No. 16-20641 assets. When a debtor files a Chapter 7 petition, his assets, with specified exemptions, are immediately transferred to a bankruptcy estate.” Harris v. Viegelahn, 135 S. Ct. 1829, 1835 (2015). The trustee then sells the property of the estate and distributes the proceeds to the debtor’s creditors. 11 U.S.C. §§ 704(a)(1), 726. “Crucially, however, a Chapter 7 estate does not include the wages a debtor earns or the assets he acquires after the bankruptcy filing.” Harris, 135 S. Ct. at 1835. Though “a Chapter 7 debtor must forfeit virtually all his prepetition property, he is able to make a ‘fresh start’ by shielding from creditors his postpetition earnings and acquisitions.” Id. “Chapter 13 works differently. A wholly voluntary alternative to Chapter 7, Chapter 13 allows a debtor to retain his property if he proposes, and gains court confirmation of, a plan to repay his debts over a three- to five-year period.” Id.; see 11 U.S.C. §§ 1321, 1322, 1325. Pursuant to 11 U.S.C. § 1306(a), “the Chapter 13 estate from which creditors may be paid includes both the debtor’s property at the time of his bankruptcy petition, and any wages and property acquired after filing.” Harris, 135 S. Ct. at 1835. We will discuss our Chapter 7 and Chapter 13 precedents in order.
In Zibman, the debtors sold their Texas homestead roughly two months before filing for Chapter 7 bankruptcy; they did not reinvest the sale proceeds in another homestead within six months of the sale. 268 F.3d at 300–01. We observed that under Myers and White, “the law and facts existing on the date of filing the bankruptcy petition determine the existence of available exemptions, but . . . it is the entire state law applicable on the filing date that is determinative.” Id. at 304. Although the debtors filed the bankruptcy petition before the six-month exemption period had ended, “‘freezing’ the exemption for the proceeds simply because it was in effect at the date the petition was filed, [would] effectively read the 6–month limitation out of the 7 Case: 16-20641 Document: 00514143347 Page: 8 Date Filed: 09/05/2017 No. 16-20641 statute, and transform[] an explicitly limited exemption into a permanent one.” Id. Furthermore, the intent of “the proceeds exemption statute was solely to allow the claimant to invest the proceeds in another homestead, not to protect the proceeds, in and of themselves.” Id. at 305 (quoting In re England, 975 F.2d 1168, 1174–75 (5th Cir. 1992)). Accordingly, we held that when the debtors “failed to reinvest the proceeds in another Texas homestead within the statutory time period, those proceeds lost their exemption, freeing the Trustee to reach the proceeds as part of the bankruptcy estate.” Id. (footnote omitted).
This court later applied Zibman’s reasoning to a Chapter 13 case in which a homestead was sold during the pendency of bankruptcy proceedings. See In re Frost, 744 F.3d 384, 387 (5th Cir. 2014). The debtor in Frost sold his Texas homestead after filing for Chapter 13 bankruptcy, but because he failed to reinvest the sale proceeds in another homestead within six months of the sale, we held that the proceeds were “removed from the protection of Texas bankruptcy law and no longer exempt from the estate.” Id. at 385, 387. Frost argued that Zibman was “distinguishable because it concerned proceeds obtained prior to filing bankruptcy, whereas he sold his homestead after petitioning for bankruptcy, at a time when the homestead had already been declared exempt from the estate.” Id. at 387. Frost pointed out that 11 U.S.C. § 522(c) provides that “property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case.” Id. (quoting 11 U.S.C. § 522(c)). He also suggested “that all bankruptcy exemptions are fixed at the time of the bankruptcy petition and do not later lose their exempt status.” Id. at 386. Thus, Frost argued that “while the proceeds in Zibman were already temporarily exempted at the time of filing, the homestead was a permanent exemption and placed forever outside the estate.” Id. at 388. 8 Case: 16-20641 Document: 00514143347 Page: 9 Date Filed: 09/05/2017 No. 16-20641 Responding to Frost’s arguments, we emphasized that an “essential element of the exemption must continue in effect even during the pendency of the bankruptcy case.” Id. (quoting In re Zibman, 268 F.3d at 301). Therefore, “a change in the character of the property that eliminates an element required for the exemption voids the exemption, even if the bankruptcy proceedings have already begun.” Id. We explained: Adopting Frost’s argument would require rejecting this court’s determination in Zibman that § 522(c) does not prevent exempt property from losing its exempt status. If § 522(c) requires strict enforcement of the “snapshot rule” such that property exempted at the moment of filing can never be liable—regardless of restrictions placed on that exemption by state law or a change in the essential character of the property—then the proceeds from the sale in Zibman would have been exempted indefinitely, despite the six month limitation on that exception. Id. at 389. When Frost sold his homestead, his “interest in his homestead changed from an unconditionally exempted interest in the real property itself to a conditionally exempted interest in the monetized proceeds from the sale of that property.” Id. The “conditional exemption” that applied to the newly acquired sale proceeds “expired” when Frost failed to reinvest them in another homestead within six months. Id. Thus, we concluded that “Frost lost his right to withhold the sale proceeds from the estate.” Id.