One of the most important consumer rights in Massachusetts is the homestead act. The value of a home is often a consumer’s most valuable asset, so protecting it from creditors can particularly important.
Under the homestead act, the owner of a primary residence might have a protection of up to $500,000 in equity in their property. There is an automatic protection of $125,000 for most people, which can be increased by recording a simple form at the correct Registry of Deeds.
The homestead protection can be very helpful in a bankruptcy case, but it is not actually a bankruptcy law. Rather, it is a state law passed by the Massachusetts state legislature, which is supposed to have a much larger impact.
Section 11 of The Homestead Act
Section 11 of the homestead act confirms that the proceeds from a sale are protected from creditors until the owner acquires a new homestead property, or for up to one full year from the sale, whichever occurs first.
In other words, if you have a declared homestead at the correct registry of deeds and receive less than $500,000 in proceeds from the sale of your homestead, then that amount should be fully protected from creditors until you obtain a new homestead, or it has been one full year since the date of the sale.
In order to ensure this protection from creditors, the homestead act also states that a homestead property “shall be exempt from the laws of conveyance, decent, devise, attachment, seizure, execution of judgment, levy and sale for the payment of debts or legacies.” There are a few exceptions to this language, including for debts relating to taxes and mortgages. Of particular note, though, Section 3(b)(6) provides an exception for executions issued from a court “based upon fraud, mistake, duress, undue influence or lack of capacity.”
In plain English, this means that a creditor should not be able to place a lien on a homestead property – even if it has obtained a judgment against the homeowner – unless that judgment is based upon fraud, mistake, duress, undue influence, or lack of capacity. A judgment for merely a breach of contract does not fall under this exception.
Accordingly, unless a creditor sues for one of these very specific reasons, the homestead act appears to state that no judgment lien should be placed against a homestead property.
Unfortunately, though, it appears the Massachusetts Appeals Court disagrees with this interpretation of the law.
In the recent case of Hartog, Baer & Hand, A.P.C. v. Thomas H. Clarke, Jr., the Appeals Court held that judgment creditors are allowed to place liens on homestead properties regardless of the basis of the underlying lawsuit.
In the case, a homeowner challenged the validity of a judgment lien placed on his homestead property because the basis of the underlying lawsuit was not for fraud, mistake, duress, undue influence or lack of capacity, as required by Section 3(b)(6). The homeowner argued that the mere existence of a lien on his property created a cloud on the title to it. He argued that the lien would impact his ability to sell the property or refinance his mortgage, as he would be dependent upon cooperation from the judgment creditor to do so.
Although the Appeals Court acknowledged that the lien at issue did not fall under any exception in Section 3(b), it nevertheless rejected the homeowner’s arguments.
Because the creditor had not taken any action to foreclose or otherwise enforce the lien, the Appeals Court held that the homeowner was protected. It further held that the creditor had done nothing more than fix its priority relative to other creditors in the event that the home equity exceeds $500,000 or the homestead is terminated.
While this is a disappointing outcome for consumers, what appears more concerning is the question of what rights a lien creditor like this has in the event that a fully protected homestead property is sold.
For example, suppose a homeowner wished to sell a homestead property that would result in $100,000 in proceeds to them. If that homeowner wanted to use those proceeds to purchase a new homestead, then Section 11 of the homestead act would appear to allow that. But what if there is a judgment lien creditor attached to that homestead property? Could that creditor refuse to discharge its lien unless it was fully paid at closing? What if the proposed purchase price was insufficient to pay the lien in full? Could a judgment lien creditor in this position stop a sale of property altogether?
Without acknowledging that the homestead act explicitly protects the proceeds of any sale up to $500,000, the Appeals Court stated that “the purpose of the act, and the reason for construing such laws liberally, is to protect family from creditors’ demands so that, notwithstanding outstanding debt, family can remain in their homes.” Accordingly, it is unclear whether the Appeals Court also believes judgment creditors should be paid from the proceeds of any sale notwithstanding the language of Section 11 noted above.
It is currently unclear whether this case will be appealed further to the Supreme Judicial Court.
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