Texas happens to be one of the most generous states when it comes to homestead exemption as it allows unlimited dollar value exemption on homestead. However, there is a limit to the exempt area which is based on the location of the homestead i.e. whether it’s urban or rural. The area for the urban homestead is capped at 10 acres for both families and individuals (single adult) which includes any improvements on the land; whereas, for rural homestead, it’s capped at 200 acres for families and at 100 acres for a single adult person where any improvements on the land are also included (Texas Property Code § 41.002.).
Hence, if you file for a Chapter 7 or Chapter 13 bankruptcy in Texas, the total value of the house will be exempted and will not become the part of the estate which could be distributed to the creditors (Chapter 7) or goes into the repayment plan (Chapter 13). However, there is an important point that must be kept in mind; the proceeds of a sale of a homestead is exempt from the creditors’ claim for only six months from the date of sale (Texas Property Code § 41.001(c)). This means that this sales proceeds of a homestead must be reinvested to buy a new house in this six-month period or it becomes available to the trustee as a non-exempt asset.
This is a contentious issue as the Bankruptcy Code categorically states that once an asset is determined as an exempt asset, it will stay the same even after the bankruptcy discharge (11 U.S.C. §522(c)). This is a clear case of disparity between the Federal & State law. The Fifth Circuit has its fair share of such cases and the general consensual decision in these cases states that the homestead stays exempted even after the discharge but as soon as it’s sold, the nature of the asset changes that makes it non-exempt from that point onwards. Therefore, if you are looking to sell your house after completing Chapter 7 or Chapter 13 bankruptcy in Texas, then you must reinvest the sales proceeds of the homestead within the six month period from the date of sale.
Apart from the very important point discussed above, there is one more time-bound condition for the exempt homestead. To get the unlimited dollar value exemption on homestead in Texas, the said property as defined in Texas Property Code § 41.002. must have been purchased at least 1,215 days before the petition for bankruptcy was filed. If you have purchased & owned the homestead inside this duration then Texas exemption will not be applicable and you will only get exemption as per the Federal bankruptcy law (11 U.S.C. § 522(p)). However, there are some exceptions to this section. One notable one is that if you had sold your earlier homestead before the 1,215-day period and invested that amount in buying the current homestead (within the 1,215-day period), then that amount is exempt over & above the exemption allowed under the Federal bankruptcy law provided that the previous as well as current homestead exist within Texas (§ 522(p)(2)(B)). Many words (terms) in these sections such as “interest” are open to interpretation and you must take legal advise from an experienced Chapter 7 (Chapter 13) bankruptcy attorney before filing the bankruptcy petition.