“Under Fifth Circuit precedent, both proceeds from a lawsuit filed to recover damages on a homestead or from an insurance policy settlement become part of the bankruptcy estate and are potentially exemptible…Accordingly, the proceeds from the settlement of the State Court lawsuit, no matter what their characterization, are eligible to be exempted from the estate.” This conclusion was not changed by the fact that the lawsuit contained many counts. The court found that the debtor did not have the initial burden to break down the lump sum settlement into exempt and non-exempt proceeds. Once the debtor asserted the exemption, it was up to the trustee to provide specific proof that the exemption was not available. In other words, the trustee failed to carry the burden of proof to show that debtor did not qualify for the exemption claimed on the proceeds. In addition, the outcome was not changed by the fact that the debtor held on to the insurance proceeds for more than six months. The court found that the requirement that the money be reinvested within six months applied only when the homestead was sold.

Thus, at least in Texas, if debtor’s lawsuit against his homeowner’s insurance provider originates from a suit over insurance regarding the debtor’s homestead, the proceeds received from the settlement of the suit are exempt. It is safer, however, to use the proceeds to complete repairs on the house first, before filing for bankruptcy relief, to avoid tangling with the trustee over the insurance proceeds. Prevention is better than cure.

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.