Real Estate Law, Estate Planning & Bankruptcy Law- January 2011

New Homestead Law Provides Greater Creditor Protection and Much Needed Clarity

After several failed attempts, the Massachusetts Legislature has finally revised the state’s out-of-date Homestead law.  The new Homestead law, which goes into effect on March 16, 2011, automatically protects up to $125,000 of a family’s home equity from many creditors while allowing homeowners to protect much more equity if they take the extra step of filing a Declaration of Homestead in their Registry of Deeds.  Responding to critics who considered the previous law hopelessly vague, the Legislature has also clarified several important and previously unresolved questions by specifically giving trusts the ability to file Declarations of Homestead, extending Homestead protection to home sale proceeds and insurance settlements, and describing the procedure for filing multiple Declarations of Homestead on the same piece of property.

Massachusetts and many other states put Homestead laws in place to protect homeowners from losing their primary residences if they have no other assets available to pay their debts.  Under the previous Homestead law, which dates back to the 1800’s, homeowners and their families could protect up to $500,000 of home equity from many types of creditors if they filed a simple “Declaration of Homestead” in their Registry of Deeds.  So long as a homeowner recorded the Declaration before a creditor filed a lien against his property, the creditor could not recover the debt by forcing the homeowner or his family to sell their home as long as the amount of the debt or debts was under $500,000.  However, the Homestead law contained many inconsistencies and points of contention.  For example, the old Homestead law protected home equity from the debts of the homeowner, the homeowner’s spouse, and their minor children, but only one owner could sign the Declaration of Homestead.  The old law also failed to set out what happened when the homeowner who signed the Declaration died, leaving lawyers to question whether a surviving spouse would have to file a new Declaration of Homestead in order to continue to receive Homestead protection.

 Automatic Homestead Now Available, But Benefits Are Much Better If You File A Declaration of Homestead

The new Homestead law greatly improves the Homestead protection for all Massachusetts homeowners, not just those who file the Declaration of Homestead.  Under the new Homestead law, all homeowners automatically receive $125,000 in creditor protection without having to file a Declaration of Homestead at all.  (The $125,000 figure is the total amount of protection per property, not per owner, which means that a husband and wife who own their home together automatically receive $125,000 in protection, not $250,000).  If homeowners want additional protection, they can file a Declaration of Homestead and protect up to $500,000 of equity per family, much like they could under the previous version of the law.  However, under the new law, if both spouses own property together they must both sign the Declaration of Homestead.  Co-property owners who are not in the same husband/wife/child family unit will either receive $500,000 of undivided protection (if they own the property as joint tenants) or $500,000 of total protection divided between the property owners in proportion to their individual interests (if they own the property as tenants in common) so long as each owner signs his or her own Declaration of Homestead.  Furthermore, the new law keeps the “elderly” Homestead exemption in place.  This important exemption allows each homeowner over age 62 to file a Declaration of Homestead and receive the full $500,000 of protection, giving married senior couples the ability to protect up to $1 million of equity, instead of the $500,000 of equity that younger families are allowed to protect. 

 Trusts, New Spouses Now Clearly Protected By Homestead, As Are Some Proceeds From A Home Sale

Many families create revocable living trusts and other legal instruments in order to avoid probate or to manage property in case of incapacity.  Before the Legislature passed the new Homestead law, attorneys were unable to guarantee that a Declaration of Homestead would protect a home transferred into a trust, but now, for the first time, it is clear that trusts can file Declarations of Homestead that will protect a primary residence held in trust from many of a trust beneficiary’s debts.  The new Homestead law also explicitly states that a Declaration of Homestead executed by one member of a married couple prior to marriage will automatically protect the property for his or her spouse after the marriage takes place, and the protection will stay in place if the spouse who executed the Declaration dies before his or her spouse.  On top of all of these protections, the new Homestead law also allows homeowners who sell their residence to protect up to $500,000 of the sale proceeds from creditor claims for up to one year following the sale or until they purchase a new primary residence, whichever comes first, and funds received from an insurance claim for fire or loss are likewise protected for two years or until the home is repaired, again, whichever comes first.

 A Homestead Still Offers No Protection From Mortgage Foreclosure And Some Other Debts

 A Declaration of Homestead does not provide blanket protection from all types of creditors and it only applies to a primary residence.  Any claims recorded prior to the filing of the Declaration are not invalidated by the Homestead law, and taxes, alimony, child support, and some court judgments that result from claims of fraud and undue influence can always be recovered from home equity despite a Declaration of Homestead.  Most importantly for homeowners in these troubling economic times, a Declaration of Homestead does nothing to protect a home when it comes to a mortgage – in the event of a default, no home equity is exempt under the Homestead law and the mortgage holder can still foreclose on the property.  However, the law does clear up a previously murky question about the effect of refinancing a property that is protected by a Declaration of Homestead.  Prior to the enactment of the new law, many attorneys worried that a refinance or second mortgage would completely terminate the previous Homestead protection.  The new Homestead law clearly states that a refinance or subsequent mortgage will supersede a Homestead but it will not terminate the Homestead’s protection from other creditors.

The new Homestead law can be a little confusing, but the benefits for homeowners are clear.  While the $125,000 of automatic protection may seem like a lot, it may not be nearly enough if you or a family member are involved in an accident or if your debts quickly spiral out of control through no fault of your own.  The best solution in almost any case is to speak with one of our qualified attorneys and begin the process of filing a Declaration of Homestead to protect as much of your home equity as possible before problems arise.   

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