This month, a ruling in a Chapter 13 case, the US Bankruptcy Court struggled with the issue of whether a bankruptcy debtor can retain their homestead rights if they have moved out of the home. Based on these interesting facts, the Bankruptcy Court ruled that the Debtors’ interests were protected.
The Facts
The Debtors were having difficulty making their monthly mortgage payments and opted to avoid foreclosure by placing their home on the market. They bought their home in 1998 and in 2000, they acquired their homestead by recording the required Declaration of Homestead at the local Registry of Deeds. By 2005, the Debtors found a buyer and had signed a purchase and sale agreement.
About a month after signing the purchase and sale agreement, the Debtors moved out of their home to accommodate the buyer. The Debtors moved to an apartment. However, because the buyer could not obtain financing, the sale fell through. While the Debtors continued to try to sell the property, they were not successful, and ultimately filed for bankruptcy protection.
At the creditor’s meeting, the Debtors admitted that even though they owned the property, they did not reside there, and did not intend to return to the home because they had vacated it to accommodate a buyer and to facilitate a sale. A few months after the creditor’s meeting, the Debtor’s tenancy at the apartment unexpectedly ended, and they returned to their home. By the time the court heard the objections, the Debtors were back in the property.
The Objections
The Debtors sought to protect their homestead under Massachusetts law. Barring any exceptions to the rule, the Massachusetts homestead statute protects up to $500,000 in the net equity of their home for its owners who occupy that home, and intend to do so as their principal residence.
A number of parties objected to the Debtors attempt to protect the homestead from creditors. They ultimately maintained that because the Debtors did not live in the residence at the time of filing, and did not intend to return there, that they abandoned their homestead interest.
The Court’s Struggle
In Massachusetts, the homestead protections can only be acquired by the recording of the Declaration. Likewise, under Massachusetts law, the termination of a homestead requires a writing. Whether abandonment constitutes a termination of homestead is not “finally settled in this district.”
Two other Massachusetts bankruptcy judges have offered their conflicting views on the abandonment of the homestead. In a case before the US Supreme Court on a different issue, one bankruptcy judge ruled that a homestead may be terminated by abandonment. However, a different bankruptcy judge “expressed reservations regarding termination by abandonment.” Because the Massachusetts statute provided for three methods of termination of the homestead that all required a writing, it was believed that the “Massachusetts legislature likely meant to preclude termination by simple abandonment.”
Even assuming one could terminate their homestead through abandonment, this Bankruptcy Court found that there must be evidence of the Debtors’ intent to abandon.
The Court’s Analysis
For there to be any abandonment under Massachusetts law, the intent to abandon must be voluntary, informed and unconditional. This was not the case. While the Debtors relocated to an apartment, they did so based on the premise that they were doing so to sell the home and accommodating the prospective buyer. The relocation was “inextricably connected to [and conditioned upon] that act.” Therefore, there was no intent to abandon. The Objectors lost, and the Debtor’s homestead estate was preserved.
What if….?
As foreclosures continue to rise, some homeowners consider selling their property. This case clearly shows that this important area of the law is not set in stone, and may require rulings from appeals courts who may interpret the statute and determine once and for all whether a homestead can be abandoned (and if so, how or under what circumstances). Until that happens, this area of the law must be considered murky. For now, financially distressed homeowners thinking of putting their property on the market, and considering moving out of their homestead should seek and be guided by legal counsel.
