Some Massachusetts homeowners have this peculiar belief that a homestead declaration is the legal equivalent of a real Chinese fire wall (i.e., with flames). That it keeps creditors at bay, allowing you to live in bliss in your home until you die or get sick of it and want to move on to a greener patch of grass. That’s not entirely the case. Not all debts are covered and not all creditors can be kept at bay. If you’re up to your eyeballs in debt, relying on the Homestead Declaration and only on the Homestead Declaration to keep your home from creditors will lead you to an unhappy and mythical place I call the Valley of Disappointment.
I came up with the Valley of Disappointment because I thought it seemed like a humourous metaphor But then, just to be safe, I did a websearch and just want to caution my readers not to confuse my mythical and metaphorical Valley of Disappointment, with Disappointment Valley which is: (1) a real valley located in Colorado; as well as (2) a documentary which according to IMDb “examines the plight of America’s wild horses and the rapidly deteriorating condition of our wild Public Lands.” Any similarity between my imaginary Valley and the real thing or the movie is totally unintentional and accidental…and kind of scary.
I envision the Valley of Disappointment as a place where none of the stores are open when you need them to be, and those that are all have the products you don’t want at prices you can afford, and products you need at prices that shock the conscience. I envision it as a place where the traffic lights stay green for only three seconds before they jump to red, where they stay for 3 minutes. It’s a place where things just don’t go your way, and you feel pretty powerless to do anything about it. It’s generally always cloudy or rainy. The street signs are all confusing, and it can be tough to navigate your way through it or out of it. Sometimes you just don’t know how you got there. Other times you do, and that knowledge can sometimes make it all worse. But enough about what I envision about the Valley of Disappoitment… I was talking about Homestead rights:
First, there is no automatic homestead right in Massachusetts. There’s no good reason for there not to be, but I’m willing to bet someone on Beacon Hill can think of a reason, call it a ‘good’ reason, and people will nod their heads in silent and perhaps even obedient agreement. But my friends, that is for another day.
To benefit from the Massachusetts Homestead protections you must record a Declaration of Homestead with the local Registry of Deeds… where there’s a recording fee. Under c. 188, Section 1 of the Massachusetts General Laws, a Homestead Declaration may be filed by the owner of the home for the benefit of his or her family. Under Section 1A, an elderly or disabled person may declare, but it does not extend to other family members. Under both, the property must be occupied as a principal residence, and the extent of the protection is up to $500,000. And it only protects you from debts that arise after the Homestead is recorded.
Let’s assume this scenario: you have a home worth $750,000. You have a first mortgage of $500,000, and a second mortgage of $300,000. Does the Declaration of Homestead protect you from your lender if you stop making the mortgage payments?
No, not if you got these mortgages to buy the property. And if you refinanced, your, the chances are pretty good that your mortgage documents will have language that tells you why. If you have doubts, speak to your attorney.
Let’s assume this scenario: you have not paid your taxes for several years….and now you owe more than $350,000 in state and federal taxes. You have home worth $500,000 and it has a small mortgage of only $80,000. But the IRS and/or the Massachusetts Department of Revenue are not happy. Since they generally can stay out of the Valley of Disappointment, they record a tax lien against you which includes your home. Will your Homestead Declaration filed years before you got into tax trouble help protect you from your tax lien?
No. The debt is considered exempt from Homestead protection.
Let’s assume this scenario: you have a home worth $275,000, a first mortgage of $280,000 and a second mortgage of $75,000. You are ‘underwater.’ You get sued by a credit card company who gets a judgment against you for $80,000 and they put a lien on your home. You’re struggling with the first mortgage, and you’ve stopped paying the second mortgage. Will your homestead declaration that you filed years before things started to get bad protect you?
No. And yes. First, there is no equity in the property. The homestead declaration does not protect you from the first mortgage – but in this example, the second mortgagee is unsecured and the credit card judgment lien is recorded but is otherwise unsecured. What can you do?
Consider chapter 13. Why? You can strip off the second mortgage and treat it as an unsecured debt (because it is, under these facts, unsecured and it can be stripped away upon plan completion and discharge). You can avoid your judgment lien and pay that debt as an unsecured debt in your chapter 13 plan. That alone may free up more money to pay the first mortgage and get you back on track. Plus, you get the benefits of bankruptcy protection, without the headaches of worrying whether some creditor is going to crawl out of the woodwork with an engraved invitation for you to get on the bus heading to the Valley of Disappointment.
I was prompted to write this after speaking with someone about their particular situation where the house was completely upside down, there was huge tax debt, and there were other claims that likely were not going to be dischargeable. My first suggestion was to let go of the house …not a great suggestion, but not a bad one since (and I believe I may have mentioned this already) the house was upside down, the homeowner had tax debt, and there were other problems. Holding onto the house just seemed – in light of all of those facts - unwise. In response, the person said to me “but I have a homestead declaration.” That statement told me that this person thought far too much of this simple document that offered them only limited protection, if any. And it also told me that there were other reasonably intelligent people who might be thinking along the same lines and might benefit from not only my clarification but my witty repartee.
So if you have a home, have a homestead and aren’t sure of what your rights and protections are, contact us. After all, who really wants to end up in the Valley of Disappointment?
Related posts:
- Mortgage Modification in a Chapter 13 Bankruptcy
- Leaving Home and Keeping the Homestead: A Look at Homestead Termination in Massachusetts
- Homestead Update: Domicile v. Residence
- Leaving Home and Keeping the Homestead: A Look at Homestead Termination in Massachusetts
- Unauthorized Post Petition Transfer Leads to Denial of Discharge
Tags: Discharge of Debts, Homes, homesteads and real estate, Lien Stripping, modification, Modifications and Workouts, Pre Bankruptcy Planning and Strategy, taxes, Valley of Disappointment