Let’s say that your house was partially destroyed by fire. You file a claim with your house insurance company for $200,000 for repairs. At the time of the fire, the value of your house was $300,000. You owed a mortgage on the house of $200,000. Thus, your equity was $100,000. The insurance company denies your claim. You file a lawsuit against the insurance company for breach of contract and everything else that you can think of. The insurance company settles the lawsuit for $100,000. The insurance company sends you a check for $100,000 which you deposit in the bank. Then, you file for Chapter 7 bankruptcy relief to get rid of $60,000 of credit card debt. In your bankruptcy petition, you claim the $100,000 as exempt under the homestead exemption. The trustee objects to your claim of exemption alleging that the homestead exemption does not apply to settlement proceeds of an insurance dispute. Who is correct?

In Re Carlew, when the debtor filed for Chapter 7 relief on September 13, 2011, he scheduled insurance proceeds of $73,000 being held for home repair. This money came from the settlement of a lawsuit that the debtor filed in state court against the provider of his homeowner’s insurance. Mr. Carlew sued the insurance company based on the following: breach of insurance contract, violations of the Texas Deceptive Trade Practices Act, breach of common law duty of good faith and fair dealing, common law fraud, violations of the Texas Insurance Code, negligence, negligent misrepresentation, intentional infliction of emotional distress, and conspiracy to commit each of the foregoing claims. He forgot to include racketeering under the RICO act, drug dealing, illegal immigration, treason and bribery. Debtor asserted that this money was exempt pursuant to the homestead exemption under Texas Property Code §§41.001-.002.

The bankruptcy court sided with Mr. Carlew. “Admittedly, the matter at bar is not a typical homestead exemption dispute, but rather a dispute over whether the debtor may exempt all proceeds from the settlement of a lawsuit where the debtor sought relief on several separate and distinct ground, none of which can be exempt property. Nevertheless, because the dispute could not have arisen but for the existence of the debtor’s homestead, this Court believes that it should take into account the Fifth Circuit’s lengthy history of favoring homestead exemptions in concluding that the debtor will be allowed to exempt the entire $73,000 under Texas Property Code §§41.001-.002,” the court said.