The Massachusetts Homestead Act and Bankruptcy
I. The Homestead - A Product of State Law
The Massachusetts Homestead Act allows a homeowner to acquire an estate of Homestead to the extent of $500,000 with respect to a homeowner's primary residence. This allows the owner to claim the first $500,000 of equity in his or her home above the mortgages that the owner has placed on the property. Homestead Declarations are for primary residences only and do not apply to vacation homes or investment property.
The following are exempt from the Homestead Law:
1. federal, state and local taxes, assessments, claims, and liens;
2. mortgages used to purchase the residence, and in the case of the Elderly Homestead, first and second mortgages held by financial institutions or others;
3. an execution issued from the Probate Court to enforce its judgment that a spouse pay for the support of a spouse or minor children;
4. upon an execution issued from a court of competent jurisdiction to enforce its judgment based upon fraud, mistake, duress, undue influence or lack of capacity;
5. debts contracted prior to the acquisition of the Homestead
There is also no protection for recovery of expenses for nursing home care paid for by the government.
Therefore, if you have a Homestead and you're in an automobile accident and your insurance is insufficient your home won't be exposed to the extent of $500,000. The same is true of dog bites, drowning in pools, slip and falls and professional liability claims. It is important to note, that Homestead protection is not a substitute for home insurance or any other type of liability insurance. These are separate and distinct types of protection. The Homestead protection will be effective after any liability insurance is used to pay for any judgments that are related to liability incurred under that particular insurance policy (e.g., home, automobile, etc.).
There are actually two sections of the Homestead Act. Under Section 1 all individuals may obtain a Homestead. Section 1A applies only to the elderly (more than 62) and disabled. A key difference between the sections is that Section 1A mentions obtaining a Homestead in manufactured mobile homes, while Section 1 does not. State courts have not yet interpreted whether the right to claim a Homestead in a mobile home is limited to the elderly and disabled. Also, Section 1 extends protection to the declarant's spouse and children, while Section 1A protects only the declarant's interest in the home. Where a Declaration is filed under Section 1, only one owner may file. Under Section 1A, all owners more than 62 should file a Declaration to protect their interests.
All Homesteads must be filed in the county in which the residence is located. To acquire a claim of Homestead for a mobile home under Section 1A, you must file at the city or town clerk's office in the city or town in which the mobile home is located. Massachusetts Homesteads are not automatic. A Declaration must be recorded to obtain Homestead rights.
In a MA Chapter 7 bankruptcy, which is an asset liquidation proceeding, a homeowner is allowed to claim certain exemptions which function as asset protection allowances. If a Homestead Declaration is in place, and the state exemptions are claimed, a homeowner would be allowed to retain a much greater portion of the proceeds from a liquidation sale of the home ($500,000) than she or he would be allowed to keep under federal bankruptcy law exemptions ($20,200). This factor in turn decreases or eliminates the possibility that the homeowner would be required to sell his/her home as part of MA Chapter 7 bankruptcy proceedings. The state exemptions in other categories are low compared to the federal exemptions. For example, the state automobile exemption is $700 and the federal $3,225.
The goal of a MA Chapter 7 bankruptcy is to wipe out ("discharge") your debts. In exchange for having your debts erased, you must give up all your nonexempt property to your creditors. You need only give up your nonexempt property. For most people, once the proper exemptions are applied, this amounts to nothing. In many cases, much or all of your property may be exempt. The debtor and their attorney elect to use state or federal exemptions prior to the MA bankruptcy filing.
If an individual has more property than can be protected by available exemptions, or their income is too high to qualify for a Chapter 7 case, or if they are delinquent in a debt secured by property they wish to retain, a Chapter 13 case can be filed. In MA Chapter 13 bankruptcy proceedings, the court will require a homeowner to repay some or all of the unsecured debt over a three to five-year period pursuant to a plan. The debtor is required to repay a percentage of that debt at least equal to that which the unsecured creditors would receive were a homeowner required to proceed under Chapter 7 liquidation regulations. By increasing the amount of the home's exemption, the Homestead Declaration decreases the proceeds which would become available for repaying unsecured creditors through the Chapter 7 alternative. This may decrease the percentage of the unsecured debt the homeowner would be required to repay through a Chapter 13 plan.
A MA Chapter 13 bankruptcy is much less attractive than a MA Chapter 7 filing since a Chapter 13 requires you to pay into a plan, whereas a Chapter 7 just wipes out your dischargeable debts without any payment. In most cases a Chapter 7 filing will be more advantageous. However, Chapter 13 does have many benefits. It can save your home from foreclosure, allowing you to satisfy unpaid mortgage or tax bills over time while your lender is demanding that you pay in one lump sum in order to stop foreclosure. Additionally, under the new bankruptcy law, Chapter 13 bankruptcy also stays on your credit report for three fewer years (7) than Chapter 7 does (10).
Remember that the Homestead Declaration protects a homeowner only from unsecured creditors. It will not offer protection from first or second mortgage lenders and/or equity lenders who possess a security interest in a home. If payments are not current on these types of secured credit, a homeowner runs the risk of losing the home to foreclosure proceedings. When delinquent in these debts, a Chapter 7 filing is not available unless the real estate will be surrendered. A Chapter 13 filing will stop foreclosure proceedings and implement a plan for the debtor to come current, thereby saving the property.
Given the high values of real estate in Massachusetts, the Homestead is of great value to bankruptcy attorneys as a tool to protect debtors. Debtors must choose between the federal bankruptcy exemptions and the exemptions arising under Massachusetts and federal non bankruptcy laws. This is a key decision that is made in consideration of the nature and value of the debtor's property and when it was acquired. There are provisions in the 2005 Bankruptcy Act limiting the state Homestead to $136,875 if the property was bought or otherwise acquired within 1215 days of the petition date. An addition might be considered an acquisition. There is an exception to the 1215 day rule in circumstances in which you buy a home in the same state and roll your equity into your new home. The trigger for reduction of the Homestead amount allowed in Bankruptcy is the date of acquisition of the property and not the date the Homestead is recorded. In re Lyons, 355 BR 387 (Bkrtcy. D. Mass., 2006).
III. Interpreting the MA Homestead
There is little state court case law construing the Homestead Act in Massachusetts. However, there have been a number of cases that have been decided by the Bankruptcy Court which makes rulings based upon what it presumes the Massachusetts Supreme Judicial Court would say if it were presented with the case. These federal court decisions are not binding on our state courts. These cases are the only guides available in the absence of state cases and they will be followed by other bankruptcy courts until the Massachusetts Supreme Judicial Court takes a contrary position. The Massachusetts Homestead Statute is poorly drafted and contains many ambiguities leaving many questions unanswered.
Bankruptcy Judge Henry J. Boroff recently expressed his frustration when he included dicta in an opinion that addressed a Homestead issue. He wrote: " This Court feels compelled to express at the onset it's growing frustration with the application of the Massachusetts Homestead Statute. While it is well settled that the statute's purpose is to protect the family home . . . the Statute's ambiguities have proven to be legion and its benefits 1) appear to be available only for those with the legal training or resources necessary to locate a registry of deeds and record what is, for a layperson, a relatively complex document, and 2) may be easily and inadvertently lost by statutory language and conditions that are hyper-technical and often counterintuitive." In re: Edward R. Szwyd, ----BR----- (Bkrtcy. D. Mass., 2007).
A. Pre-existing debts
The language of the Massachusetts Homestead statute says that it does not apply to debts existing before recording the Homestead. Therefore, one would believe it is important to file it as early as possible. However, one of the early bankruptcy court cases concerning Homesteads held that under federal bankruptcy law the Homestead did apply to pre-existing creditors. Federal law pre-empted state law. In fact, debts can be incurred over a period of years and a Homestead successfully utilized which is filed minutes before the bankruptcy petition. In Re Whalen-Griffin, 206 BR. 277 (Bkrtcy. D. Mass., 1997). (Court ruled that the federal bankruptcy laws preempted Massachusetts Homestead exemptions. Effect is to protect Homesteads from liens, even where debts are incurred prior to Homestead recording.) In Re Weinstein, 217 B.R. 5 (Bkrtcy. D. Mass., 1998) supports the decision in Whalen-Griffin and goes on to include both unsecured and secured pre homestead debt under bankruptcy protection.
Bankruptcy cases often involve a debtor who has a judgment lien against their real estate. The bankruptcy law provides that if the mortgages on the property and the exemption exceeds the value of the home, then the judicial lien can be "avoided" in whole or in part on a motion filed by the debtor. For example, if a home were valued at $790,000 and the home owner had mortgages on the property of $300,000, the court would avoid a judicial lien because the mortgage of $300,000 plus the Homestead of $500,000 totals $800,000 and, therefore, would be in excess of the value of the home. Any judicial lien on the property would be released by the Bankruptcy Court Order recorded in the registry of deeds. NOTE: I've found some bankruptcy attorneys believe the mere filing of the bankruptcy petition is sufficient to dissolve the lien. It is not. A conveyancer will require more. The motion must be filed, allowed and recorded.
Certainly, a different result would be reached by the Massachusetts appellate courts considering the order of recording the Homestead and a lien. A recent state trial court case, Walsh v. Yarossi, Mass. Land Court, December 5, 2006, held that a prejudgment attachment filed before a Homestead Declaration is a valid preexisting lien, negating the Homestead protection, even when the judgment is obtained after the Homestead.
B. Termination of the Massachusetts Homestead
A major cause of concern is the accidental termination of Homestead protection. The terms of the Homestead statute make clear the estate or claim of Homestead will be terminated upon the sale or transfer of the real property or mobile home during the declarant's lifetime, upon the death of the declarant and the remarriage of the declarant's surviving spouse and upon each child reaching the age of majority or by a release of the Homestead estate duly signed, sealed, and acknowledged by the owner and the owner's spouse, if any, and recorded at the Registry of Deeds, or when the property ceases to be the principal residence. In addition, the Bankruptcy Court has ruled that the filing of a subsequent Declaration of Homestead acts to discharge a prior Declaration.
It is unclear how other transfers might be treated under the state statute.
In the recent case of In Re Hildebrandt, 313 B.R. 535 (2004), an unmarried couple purchased a home and one of the two filed a Homestead Declaration. Thereafter, the person who did not file the Homestead transferred her interest in the property to the Homestead declarant. The Bankruptcy Court ruled that the transfer deed terminated the pre-existing Homestead. In this case there was an acquisition of an interest that caused the termination of the Homestead.
Existing state law on the effect of refinancing a mortgage on an existing Homestead is unclear. On August 31, 2004, Judge Henry J. Boroff, of the United States Bankruptcy Court for the District of Massachusetts ruled that the Homestead Exemption is subordinate to a mortgage. Real estate practioners always assumed that the exemption was subordinate to a pre-existing mortgage, but believed the Homestead otherwise remained valid when a new refinance mortgage was recorded after the Homestead. Judge Boroff clarified the law in this area by ruling that, in case of refinancing of a mortgage, the exemption will be rendered null and void. Essentially, as a homeowner, a Homestead Exemption is not valid after a refinancing unless you re-file it after the time of the refinancing, or otherwise reserve it at the time of refinance. In Re Desroches, 314 BR 19 (2004) (Homestead protection was denied where the mortgage was filed after an earlier Homestead Declaration and mortgage did not specifically reserve the debtor's Homestead rights).
Homesteads are often inadvertently terminated during estate planning changes. The estate planner must be careful in implementing a plan to not terminate the Homestead. Situations to consider include:
Selling or transferring of the property;
Selling or transferring the declarant's interest in the property;
Acquiring a new interest in the property, as was done in the Hildebrandt case;
Deeding the property including to reserve a life estate without reserving the Homestead exemption;
Filing a new Homestead Declaration;
Refinanced debt on the home.
C. Proceeds from Sale
In Re Cunningham, Not reported in BR, 2005 Bankr. LEXIS 2419, 2005 WL 3348861 (2005). Land subject to debtor's Homestead exemption was sold and the exemption applied to the sale proceeds. The debtor was able to keep the proceeds of sale.
D. Multiple Owner's Recording Homesteads (Stacking)
In Re Garren, 338 F. 3d 1 (2003). Debtor was not allowed to "stack" two Homestead exemptions in order to avoid judicial lien on his property. If fact, where one Homestead is recorded and another recorded immediately after it, only the second is valid, the first having been terminated by the recording of the second. It should be noted, multiple valid Homesteads may be recorded under Section 1A (Elderly/Disabled), but the value is still only $500,000.
E. Children of Declarant
In Re Vasques, 337 BR 255 (Bkrtcy. D. Mass., 2006). Daughter who co-owned residential property was member of same "family" as mother and therefore protected by mother's Declaration of Homestead without either the obligation or ability to file a Declaration of Homestead on her own behalf even though she was not a minor. The Court decided that the provision of the statute relative to minor children meant that Homesteads remain in effect after the death of a declarant-parent only while the children are minors, and that the provision had no other limiting effect.
F. Manufactured Mobile Homes
In Re Kelly, 334 BR 772, 2005 Bankr. LEXIS 2365, 2005 WL 3293309 (2005). Debtor may not claim a Homestead exemption, pursuant to MGL. Ch. 188, sec. 1, in a manufactured mobile home. Although MGL Ch. 188, Sec. 1A provides for such protection, Section 1 does not. The Court noted "The most persuasive argument that subsection 1 does not include a manufactured home, however, is the fact that subsection 1A does provide for such a Homestead." So only the elderly or disabled may have this right. Other Judges have disagreed.
G. Property in Trusts
In re: Edward R. Szwyd, ----BR----- (Bkrtcy. D. Mass., 2007). Property held in trust is not eligible for Homestead protection. Only individuals may claim a Homestead. The Court allowed the Homestead to stand in this case since the debtor was the sole trustee and beneficiary and no trust existed under Massachusetts law.
H. Owner-Occupied Multi-family Homes
As long as the property is the primary residence of the declarant a Homestead will be valid as to the whole.