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The Homestead Act of Massachusetts and Bankruptcy

The Homestead Act of Massachusetts and Bankruptcy
"""I. The Homestead - An Outcome of State Legislation""

The Massachusetts Homestead Act permits a homeowner to acquire an estate of Homestead up to $500,000 with respect to a home owner'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 do not apply to second homes or investment property.

The following exemptions exist under the Homestead Act:

1. taxes, assessments, claims, and liens at the federal, state, and local levels;

2. first and second mortgages held by financial institutions or others in the case of the Elderly Homestead;

3. an execution issued by the Probate Court to compel a spouse to pay alimony or child support.

4. upon an execution issued by a court of competent jurisdiction to enforce a judgment based on fraud, error, coercion, undue influence, or incapacity;

5. obligations incurred before the acquisition of the Homestead

There is also no protection for the recovery of costs for government-funded nursing home care.

Consequently, if you have a Homestead and your auto insurance is insufficient, your home will not be liable for up to $500,000 in damages. The same is true for dog bites, drowning in pools, slip and fall accidents, and professional liability claims.

Section 1A applies only to the elderly (over 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 determined whether the right to claim a Homestead in a manufactured mobile home is limited to the elderly and disabled.

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 where the mobile home is located. Massachusetts Homesteads are not automatic; a Declaration must be recorded to acquire Homestead rights.

II. Bankruptcy

In an MA Chapter 7 bankruptcy, which is an asset liquidation proceeding, a homeowner may claim exemptions that 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 under federal bankruptcy law exemptions ($20,200).

In exchange for having your debts wiped out (""""discharged""""), you must surrender all of your nonexempt property to your creditors.

A Chapter 13 case can be filed if an individual has more property than can be protected by available exemptions, their income is too high to qualify for a Chapter 7 case, or they are in arrears on a debt secured by property they wish to retain. In MA Chapter 13 bankruptcy proceedings, the court will require a homeowner to repay some or all of the unsecured debt over three to five years according to a plan.

A Chapter 13 bankruptcy requires you to pay into a plan, whereas a Chapter 7 bankruptcy simply wipes out your dischargeable debts without payment. In most cases a Chapter 7 bankruptcy filing will be more advantageous. However, Chapter 13 does have many benefits. It can save your home from foreclosure by allowing you to satisfy unpaid mortgage or tax bills over time while your lender is demanding payment in full.

Remember that the Homestead Declaration only protects a homeowner from unsecured creditors. It does not offer protection from first or second mortgage lenders and/or equity lenders who have a security interest in a home. If payments are not current on these types of secured credit, a homeowner risks losing the home to foreclosure proceedings. When delinquent in these debts, a Chapter 7 filing is not available unless the real estate is surrendered.

Given the high values of real estate in Massachusetts, the Homestead is of great value to bankruptcy attorneys as a tool for protecting debtors. Debtors must choose between the federal bankruptcy exemptions and the exemptions arising under Massachusetts and federal non bankruptcy laws. This is a crucial decision that is based on the nature and value of the debtor's property and when it was acquired.

III. Explanation of the MA Homestead

In Massachusetts, there is little state court case law interpreting the Homestead Act. However, there have been a number of cases decided by the Bankruptcy Court, which bases its rulings on what it believes the Massachusetts Supreme Judicial Court would say if presented with the case. These federal court rulings are not binding on our state courts.

Recently, Bankruptcy Judge Henry J. Boroff expressed his frustration with the application of the Massachusetts Homestead Statute. He wrote: """"This Court feels compelled to express at the outset its growing frustration with the application of the Massachusetts Homestead Statute. While it is well-established that the purpose of the statute is to protect the family home, the Statute's ambiguities have proven to be numerous and its benefits 1) appear to be available only to those who own the home.

A. Existing obligations

The Massachusetts Homestead statute states that it does not apply to debts incurred prior to recording the Homestead. Therefore, it would seem important to file the Homestead as soon as possible. However, one of the earliest bankruptcy court cases involving Homesteads held that under federal bankruptcy law the Homestead did apply to pre-existing creditors. Federal law superseded state law.

The bankruptcy law provides that if the mortgages on the property and the exemption exceed 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 exceeded the exemption of $790,000.

Certainly, if the Massachusetts appellate courts considered the order of recording the Homestead and the lien, they would reach a different conclusion. However, a recent state trial court case, Walsh v. Yarossi, Mass. Land Court, December 12, 2006, held that a prejudgment attachment filed before a Homestead Declaration is a valid preexisting lien, thereby nullifying the Homestead protection, even when the judgment is obtained after the Homestead.

B. Discontinuation of Massachusetts Homestead

The accidental termination of Homestead protection is a major concern. The terms of the Homestead statute make it clear that 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 and 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 affixed with the declarant's signature.

It is unclear how the state statute might approach other transfers.

In the recent case of In Re Hildebrandt, 313 B.R. 535 (2004), an unmarried couple purchased a home, and one of them filed a M Homestead Declaration. The person who did not file the Homestead then transferred her interest in the property to the Homestead declarant. The Bankruptcy Court ruled that the transfer deed terminated the pre-existing 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 practitioners 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 frequently terminated inadvertently during estate planning adjustments, so the estate planner must be cautious when implementing a plan to preserve the Homestead.

Transferring or selling the property;

Offering for sale or transfer the declarant's interest in the property;

Acquiring a new stake in the property, as in the case of Hildebrandt;

Including a life estate reservation in the deed without reserving the Homestead exemption;

Filing a new Declaration of Homestead;

Refinanced mortgage debt.

C. Profits from a Sale

In Re Cunningham, Not Reported in BR, 2005 Bankr. LEXIS 2419, 2005 WL 3348861 (2005), land subject to the debtor's Homestead exemption was sold, and the exemption was applied to the sale proceeds, allowing the debtor to retain the sale proceeds.

D. Recording of Multiple Homeowners (Stacking)

In Re Garren, 338 F. 3d 1 (2003). Debtor was not permitted to """"stack"""" two Homestead exemptions in order to avoid judicial lien on his property. In fact, where one Homestead is recorded and another is recorded immediately after it, only the second is valid, the first having been terminated by the recording of the second.

E. Offspring of the 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 thus 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.

F. Mobile Manufactured 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 convincing argument that subsection 1 does not include a manufactured home is the fact that subsection 1A does

G. Real Estate 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 because the debtor was the sole trustee and beneficiary and there was no trust under Massachusetts law.

Owner-occupied multifamily dwellings

So long as the property is the taxpayer's principal residence, a Homestead will be valid in its entirety.""" - https://www.affordablecebu.com/

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"The Homestead Act of Massachusetts and Bankruptcy" was written by Mary under the Finance / Wealth category. It has been read 174 times and generated 0 comments. The article was created on and updated on 02 June 2023.
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