HOMESTEAD - DON’T OWN A HOME WITHOUT ONE

With home prices continuing to soar in the Bay State, the Massachusetts legislature increased the Homestead Exemption from $300,000 to $500,000 effective as of October 26, 2004. This means filing a Homestead exemption should become an even more essential step in every homeowner's asset protection strategy.

The Homestead Act of Massachusetts now allows a homeowner to acquire an estate of Homestead to the extent of $500,000 with respect to a homeowner's primary residence. That means that the owner can claim the first $500,000 of equity in his or her home above the mortgages that the owner has placed on the property. The exemption generally is important in those instances where an involuntary lien has been placed on the home by a creditor and in a bankruptcy context. The Homestead generally comes into play where a homeowner gets into a car accident or otherwise injures someone and the injured party seeks an attachment against the homeowner to secure a pre-judgment lein. It also comes into play where a homeowner is a business owner or a professional person such as a medical doctor or a lawyer where a professional liability suit may arise. An owner must file a Declaration of Homestead and have it recorded at the Registry of Deeds or the Registry District of the Land Court as applicable before an exemption can be claimed. Under the Homestead Act, the exemption will apply against debts contracted after it has been filed of record so it is important to file it as early as possible.

There is little case law construing the Homestead statute 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. So, it is not necessarily binding, but, for all practical purposes, those decisions are the only guideposts available and will be followed by other bankruptcy courts until the Massachusetts Supreme Judicial Court takes a contrary position.

One of the early bankruptcy court cases concerning Homestead held that under bankruptcy law the Homestead did apply to pre-existing creditors because the bankruptcy law was intended to give an individual a ”fresh start” to rebuild a financial life unencumbered by debts which existed prior to filing bankruptcy.

The Bankruptcy Court has also held that a filing under Section 1 of the Act applies to the person who files and every other family owner so that if a husband filed a Homestead and the wife filed bankruptcy, she would be entitled to rely on the husband's declaration of Homestead in her bankruptcy case for the full amount of the $500,000 exemption. Section 1A of the statute gives a disabled or elderly person (62 or older) an equal exemption. However, the courts have held that the exemption under Section 1A only covers the person who files it and does not protect the other family owners of the property. The courts have also held that a “new” Homestead which is filed would revoke a prior Homestead. Care must be given in assessing which Homestead would give the best protection.

If, for instance, an elderly person filed a Homestead exemption under Section 1A and felt it would be more beneficial to file for the exemption under Section 1, that person should file a revocation of the prior Homestead which specifically indicates that it is the intention of the homeowner to revoke it rather than relying on the filing of the second Homestead and hope that the court construes the homeowner's intention in the way that the homeowner would want the court to.

The bankruptcy cases usually 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 petition filed by the debtor after an evidentiary finding by the bankruptcy court judge. 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 awarded (released) by the Bankruptcy Court Order.

The Bankruptcy Court has also held that where the property is owned as tenants by the entirety, which now is also applicable to same-sex married couples, the value of the entire property would be credited in determining the value. For example, if the property were valued at $1,200,000 and there were mortgages of $300,000, the equity available to the creditor would be $400,000 i.e. $1,200,000 minus $300,000 in mortgages equals $900,000, less the Homestead exemption of $500,000 equals $400,000 available to creditors.

If the couple owned the property as tenants in common, then the amount available to creditors would be $0: $1,200,000.00 divided by 2 equals $600,000, less one-half of the mortgages of $150,000 equals $450,000, less the $500,000 exemption leaves nothing for the creditor. A bankruptcy court would avoid a judicial lien in any amount. The benefits of ownership as tenants by the entirety, such as title automatically passing to the spouse on the death of the other spouse by operation of law and the fact that a creditor cannot cause the property to be sold to satisfy the debt owed by just one spouse would normally recommend ownership by a married couple as tenants by the entirety. However, if there were a judicial lien and bankruptcy was contemplated, the couple might be better off conveying it to themselves as tenants in common for the foregoing reason.

The U.S. Court of Appeals Court recently decided a case where the debtor tried to “stack” the exceptions under Sections 1 and 1A so that the couple could claim exemption of $600,000 (the then-applicable exemption was $300,000 under each of Section 1 and Section 1A). The wife claimed an exemption under Section 1 and the disabled husband filed an exemption under Section 1A of the Act. The court ruled that the filing of the second claim of exemption by the husband terminated the earlier declaration of Homestead pursuant to Section 2 of the Act which provides that a Homestead is terminated on the ”acquisition of a new estate or claim of Homestead”. The court found that the filing of the declaration by the husband terminated the declaration filed by the wife. One wonders what the result might have been if the husband had claimed an exemption under both Section 1 and Section 1A of the Act in a single document recorded at the Registry of Deeds.

It is clear from both the state and bankruptcy court cases that a Homestead is certainly a valuable asset and that everyone who owns a home should file one. It is less clear as to what the best decision might be in the event that a homeowner is forced to resort to bankruptcy. Meanwhile, legislation has been filed to make the Homestead exemption automatic without the necessity of recording a Declaration of Homestead.

Thomas V. Bennett, Esq. (tvb@barronstad.com)
& Joseph G. Butler, Esq. (jgb@barronstad.com)

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