Black and Buono Blog

...by Anthony Buono

At Black and Buono, we are often getting the same question. We have clients who are having trouble paying their bills and they want to know if homesteading their property will protect them from creditors in a lawsuit.  We’ve decided to address this in our blog this week.

Massachusetts homestead laws are concerned with protecting a certain portion of the head of household’s property from being confiscated and sold to satisfy debts.

In March of this year, the Homestead Act was changed to allow an automatic homestead of $125,000 without the homeowner doing anything at all, this is an improvement over the past, when no protection was provided automatically. A declaration of Homestead provides for up to $500,000 of protection.

Many homeowners misunderstand the law and think that it provides much more protection than it actually does.  For example, under the Homestead law, $125,000 of the equity in your home is protected. Meaning no forced sale can happen to satisfy "unsecured" creditors.

Notice, we said unsecured creditors. The homestead exemption does NOT protect you from secured creditors such as your mortgage holder.

If you stop making your mortgage payments, the bank can foreclose and sell your house. This can happen regardless of a homestead exemption because the mortgage is a voluntary secured lien, which means that you put up your home as collateral when you took out the loan.

However, the homestead law does protect you from unsecured creditors. Therefore, if your only financial asset was $125,000 equity in your home and you owed were sued for a $100,000 judgment the party suing you could not foreclose on your home to collect.  Remember, the first $125,000 worth of equity in your home is protected by the Homestead law. The same works for Declaration of Homestead of$500,000 worth of protection.

However, in the above scenario, $125,000 of your home’s equity is protected, and you have $225,000 worth of equity in your home, the party suing you actually could force the sale of your home. In this case, you would receive $125,000 of the sale (which is protected) and they would keep the other $100,000 as payment.
 
Through these examples you can see the benefit of a Declaration of Homestead, which protects $500,000 of your homes equity.

Unfortunately, mortgage lenders are not the only secured creditors who are exempt from the homestead protection. Child support debts, condominium association dues, certain debts in bankruptcy filed by your spouse, and a few others.

The most important place that the homestead law has an effect is in bankruptcies. When homeowners are over their head in debt, many homeowners opt to stop paying other bills in order to continue with their mortgage payments.  In other words, they stop paying unsecured debt, which they are protected from, to continue paying their secured debt, i.e mortgage, which they are not protected from.

Bankruptcy judges tend to be fairly lenient with the homestead exemption limit. In a bankruptcy court, the judge will let the homeowner keep their house if their mortgage payments are not delinquent and the equity in their home is $125,000 or less.

If your only asset is the equity in your home of $125,000 or less, the homestead law would most likely discourage someone from suing you.  It may allow you to keep your home if you wind up in bankruptcy court. Declaration of Homestead would give you much more security.However, it will not protect you from all of your creditors.

If you are facing increasing debt, buying a new home, or have more questions regarding the Homestead Act, please contact Black and Buono in Framingham, MA.