A Practical Guide to the Massachusetts Homestead Act and How to Use it.

In 2012, the State of Massachusetts changed and clarified the rights of its homeowners to protect their financial interests in their homes from the reach of common unsecured creditors. What follows is a basic guide for understanding your legal rights in your home if you living in Massachusetts.

What is a “Homestead Exemption” anyway?

A “Homestead Exemption” is best thought of a statutory “set aside” for the benefit of a homeowner. In some states, like Texas, the “size” of the homestead exemption is measured in acres or square feet. In Massachusetts, the homestead exemption is measured in dollars of “equity”. “Equity” in this case is the dollar amount remaining after all mortgages and municipal charges (like real estate taxes and water and sewer liens) are deducted from the fair market value of the real estate. For example, If a home’s fair market value is $300,000 with a mortgage balance of $150,000 and outstanding municipal charges of $25,000, the homeowner’s “equity” in the home would amount to $125,000 (i.e. $300,000 less $150,000 less $25,000 equals $125,000). In that event the homeowner would have $125,000 of equity that he would seek to protect from the reach of his creditors should he or she become delinquent on his or her otherwise unsecured debts, like credit card companies and banks and finance companies that make unsecured personal loans.

Although no one likes to think about it, when you become delinquent on a personal loan or credit card debt, creditors will ordinarily seek to secure repayment by obtaining an attachment or other judicial lien against a person’s home as part of their attempt to collect on the debt in a court of law. Only a court can grant a judicial lien or attachment prior to the entry of a judgment. However, once an Execution of Judgment is issued by a Court, the creditor can have a deputy sheriff record a levy (that also creates a judicial lien) against a debtor’s home.

The Massachusetts homestead exemption under Mass. General Laws Chapter 188, Section 1, et al. allows a Massachusetts homeowner to defend their equity in their home either in a Massachusetts State Court or (more effectively) in a U.S. Bankruptcy Court

What Kinds of Homestead Exemptions are there in Massachusetts?

There are really three (3) types of homestead exemptions available to homeowners in Massachusetts and they are as follows:

1. The “Automatic Homestead”. Under Mass. Gen. Laws Ch. 188, Section 4, there is an “automatic” exemption of $125,000. There is no need to file anything to lay claim to this exemption.

2. The “Declared Homestead Exemption”. Under Mass. Gen. Laws Ch. 188, Section 3, a homeowner (or group of homeowners) may claim up to $500,000 of equity in their home as exempt. However, to claim this exemption the homeowner must file a “Declaration of Homestead” with the County Register of Deeds in the county where the home is located. The declaration must be signed before a Notary Public and the present cost filing of the declaration is $35.

3. The “Elderly or Disabled Person’s Homestead”. Like the “Declared Homestead”, under Mass. Gen. Laws Chapter 188, Section 2, a homeowner (or group of homeowners) may *each* claim up to $500,000 of equity in their home as exempt. This type of homestead exemption also requires the filing of a “Declaration of Homestead” with the County Register of Deeds in the county where the home is located, plus proof of disability or a certification that the homeowner(s) are at least 62 years old. The most important benefit of the Elderly of Disabled Persons’ Homestead Exemption is the ability to “stack” the exemption so that an elderly (over 62) married couple that owns their home jointly may claim an aggregate homestead of *two (2) times* the basic $500,000 homestead amount, PLUS another $250,000 in equity, for a total aggregate exemption of $1,250,000.

For whose benefit may a homestead exemption be claimed?

The homestead exemption may be “declared” by one homeowner, but its protection is intended for the benefit of AND covers the legal interests of the Declarant homeowner’s family members living with him or her at the time of the filing of the Declaration of Homestead with the Registry of Deeds. The homeowner “declaring” the homestead must actually reside at the home as their principal place of residence or intend to reside at the the home as their principal place of residence in order for the Declaration of Homestead to be effective.

Geographically, what comprises my “home” for homestead purposes?

Even if your “home” is situated on more than one lot of land (say, in a subdivision), the entire undivided (or unsubdivided) property will be covered by the exemption, even if some adjacent lots consist of vacant land, SO LONG AS the lots are actually “used” as part of the homestead property even for such things as recreation, storage, gardening, etc. So long as there is proof of “use” as part of your home, it will be covered by the Massachusetts homestead exemption.

Are their any exceptions to the kind of debts that can “pierce through” a homestead exemption?

Yes. Under Mass.General Laws Chapter 188, ? 3(b), certain types of debts can “pierce” a homestead exemption claim. These include:

(1) debts for federal, state and local taxes;

(2) debts for a judicial lien on the home recorded BEFORE to the creation of the estate of homestead;

(3) debts secured by a mortgage on the home;

(4) debts for non-payment of an order by a court for the support of a spouse, former spouse or minor children;

(5) where buildings owned by the homeowner is situated on land NOT owned by the homeowner; and

(6) upon an execution of judgment issued from a court of competent jurisdiction to enforce its judgment based upon fraud, mistake, duress, undue influence or lack of capacity.

These “exception” to the Massachusetts homestead exemption apply only in the case where the homeowner has NOT sought protection under Chapter 7, 11 or 13 of the Bankruptcy Code. The protections provide by the Bankruptcy Code “amplify” and expand the protections already provided under Massachusetts State law.

How does a Bankruptcy filing add additional protections to a Mass. Homestead Exemption claim?

Under Section 522(c) of the U.S. Bankruptcy Code, “Unless the case is dismissed, property exempted under this section is not liable DURING OR AFTER THE CASE for any debt of the debtor that arose . . . before the commencement of the case, except–”

1. debts for State or Federal taxes or a debt for child support, alimony or the like;
2.debts secured by a lien that is not “avoidable” (i.e. capable of being extinguished) under the Bankruptcy Code;
3. debts secured by a tax lien;
4. debts owed by a debtor that is an “affiliated” (i.e. president, officer or director) with an “insured depositary institution” (i.e. a Bank, Savings and Loan, or an insured Credit Union) on account of fraud or willful and malicious injury and that is owed to the federal Receiver of the defunct bank;
5. a debt for fraud in the obtaining or providing of any scholarship, grant, loan, tuition, discount, award, or other financial assistance for purposes of financing an education at an institution of higher education.

Because most of the “exceptions” to allowed exemptions under Section 522(c) are MUCH more narrow than the exceptions found in the state exemption statute, only the exceptions found under Section 522(c) will apply to a homeowner that files for bankruptcy protection. Therefore, many of the exceptions found in Mass. Gen. Laws Ch. 188, Section 3(b) (see above) DO NOT APPLY with respect to past creditors included in the bankruptcy case to the extent that they conflict with the narrower exceptions under the Bankruptcy Code under a legal doctrine called “federal supremacy” or federal pre-emption”.

Can I “lose” homestead protection?

A homestead can only be terminated by deeding it to someone else, abandoning the home (except that family members that remain still have homestead protections), establishing a new homestead somewhere else. (Remember: You can only have ONE Principal residence so there can only be one homestead exemption to which it applies!)

What if I sell my house? Are the proceeds of sale protected?

If you sell your house, the net proceeds of sale, so long as they are less than the applicable homestead amount, remain exempt for at least one (1) year after the sale. But some court have held that time restrictions such as this one MAY not apply if the homeowner seeks bankruptcy protection as well because of the protections under Section 522(c) of the Bankruptcy Code.

Additional resources provided by the author

When Should You Consider Filing a Bankruptcy Petition (or Why People File for Bankruptcy)?

Besides practicing bankruptcy law for more than 35 years, I have taught this area of law at 2 different law schools (including my own “alma mater”) for 13 years. Each time I teach the course, the very first question I ask the class is “why do people file for bankruptcy?” Here we go!

     1. The Financial Dimension

Many of my law students give the answer that, “well, people file for bankruptcy when the amount of their debts exceed the value of their assets”. While this answer is rational, it is actually a very simplistic notion. In our current “consumer economy”, where consumer debt both secured (for example, home mortgages and car loans) and unsecured debts (credit cards, personal loans, student loans, overdraft and unsecured lines of credit, et al.) is available to virtually every one and where banks and credit card issuers literally compete for business on the basis of such, funds and blandishments as (a) where people went to college, (b) free airline tickets, and (c) “cash back” incentives, consumer debt has become in the United States as common as clouds in the sky. It is not uncommon that financially stable people can maintain substantial credit balances equal to more than 30% (or MUCH more) of their annual income, without placing them at immediate financial risk of default.

So it is not simply a matter of one’s “debt to asset ratio” that determines whether a person ought to file a bankruptcy case. The more immediate question rather is the ability of the borrower to be able to successfully “service” or “manage” their total debt load at any given point in time based upon the availability of liquid assets (for example, cash in the bank, savings, securities, and the like). In the world of accounting, this might be referred to as a business’ “current ratio”; that is, the ratio of “current assets” (cash current accounts receivables and liquid securities [stocks and bonds]) to “current liabilities” (the amount of any expenses do on debts that ***must*** be paid immediately). The lower this “current ratio” is in any given point in time, the greater the likelihood that external “financial pressure” will force a person to consider filing a bankruptcy case.

     2. Events of External Financial Distress

By “events of external financial distress”, I’m referring to events, either foreseen (and previously ignored) or wholly unforeseen, that because the borrower to suffer a sense of such great concern that they no longer “feel” financially secure. The longer this “external financial distress” exists or increases, the greater the likelihood that bankruptcy becomes a substantial option. What form can these “events of external financial distress” take? They include, but are not limited to:

(a) “collections activities” such as default notices, demands for payment from collection agencies and collection attorneys , the initiation of one or more lawsuits in the local courts;

(b) loss of “overtime” pay or the loss of employment;

(c) the death or long-term illness of a family member that previously provided substantial financial support for the household;

(d) the Notice of Tax Assessment by the IRS or state taxing authority; and

(e) the break-up, separation or divorce of the family unit which previously provided financial support of the borrower.

     3.   The Psychological Dimension of Debt

Even if one is facing one or more of the “events of external financial distress” and has a low or faces a decreasing financial “current ratio”, this does not necessarily mean that a person would be prepared to file a bankruptcy petition to eliminate their debts and get a “fresh start”. In my experience, what drives most borrowers to seriously consider the bankruptcy filing as more to do with their own sense of “psychological resilience” to financial distress that almost anything else.

We live in a country that treats as a “moral virtue” the ability to manage their financial affairs regardless of external circumstances and stigmatizes those people that, for one reason or another, seek to take positive action to finally eliminate their financial distress. In the United States, it is altogether too common to view “credit scores”, “creditworthiness” or the aggregate of the their credit cards’ “credit limits” as a standard by which to evaluate a person’s “self-worth”. We lionize those that many times by circumstance or by birth, have given them great wealth while diminishing those persons not so blessed.

The reality is that, for most of us, the extent of a person’s “emotional support system” and “emotional endurance” or the lack thereof, is a substantial determining factor towards the likelihood of a bankruptcy filing in the face of financial distress. It is essentially a dynamic tension between the ever-present anxiety generated by financial distress against the speculative perception of one’s self-worth based of how others might view them.

If this sounds squishy and irrational to you, that’s okay. Because it is. In short, there are rational reasons to file for bankruptcy protection that people will refuse to even consider because of great emotional resilience in the face of events of external financial distress. Concomitantly, there are irrational reasons that a person may choose to file a bankruptcy petition based upon their misperception of their financial status because of their lack of “emotional resilience” in the face of events of external financial distress.

     4. How then SHOULD One Go About Deciding Whether to Consider a Bankruptcy Filing?

In my experience this is really a “factor-based” analysis that includes both financial and psychological aspects. These factors include, in no particular order, the following:

(a) the level of debt presently being carried versus the available net income (that is, after expenses) to service that debt;

(b) both the number of and the severity of the events of external financial distress the borrower is facing and the likelihood that those events will persist for the foreseeable future;

(c) whether the events of external financial distress are “acute” in nature (for example, the immediate threat of a garnishment of wages or foreclosure or repossession of an important asset) or “chronic” (for example, using credit cards to pay daily expenses of living);

(d) the nature of the “debt structure” of the borrower (that is, the composition by type of the debts carried) and the likelihood of being able to eliminate those debts without having to resort to the “legal tools” available under the Bankruptcy Code (simply stated, there are some things that you can do under the bankruptcy code that you could ***never*** be able, as a practical matter, to accomplish in any state court);

(e) the extent to which the borrower’s assets would be protected from the reach of creditors, both outside the bankruptcy process as compared to within the bankruptcy process;

(f) the extent of the borrower’s personal sense of financial distress and whether it is causing or is likely to cause future physical or mental illness (for example, anxiety, depression, insomnia, upset stomach or gastritis, etc.); and

(g) the extent of the borrower’s emotional and financial “support structure” to assist the borrower in confronting and combating the source or sources of his or her financial distress.

     5. The Need For Specialized Legal Knowledge

If you are suffering from a stomach ailment, you would not go to an eye doctor. Similarly, if you knew that you were suffering from a specific type of eye illness, you would likely seek out the help of that very same eye doctor, as opposed to a general practitioner. The very same logic applies with respect to business and consumer bankruptcy law. A lawyer that knows how to do a divorce or defend a criminal action or prosecute a personal injury case, does not make him well-qualified necessarily to be a bankruptcy attorney. Bankruptcy law, perhaps like few other areas of legal practice, is a defined legal specialty that requires literally years of practice to do effectively and well. The reason for this is that most lawyers are taught to deal with mostly “bilateral” legal processes in matters such as contract law, civil litigation, real estate practice and the like. Bankruptcy law by comparison is a “multilateral” process involving multiple stakeholders, each of which with their own particular (and sometimes peculiar) points of view. Moreover, bankruptcy law can oftentimes be an area that combines different aspects of legal practice requiring disparate skills involved in civil litigation, administrative proceedings, and even ono-on-one negotiation, all being used together within one, single unified process. bankruptcy cases necessarily involve aspects of state law, federal law, and administrative law, all of which must be executed according to rules that have short and rigid timelines. In short, bankruptcy is no place for a layperson or a general practitioner to “dabble” in. He would know or try and do your own bankruptcy filing than you would try to do your own prefrontal lobotomy: the outcomes necessarily will be bad!

It is therefore important when evaluating whether bankruptcy is a good alternative to speak with a knowledgeable and competent bankruptcy attorney in your particular jurisdiction. How then to evaluate the competence and expertise of a bankruptcy lawyer:

(a) how many years of specialized bankruptcy practice has the lawyer had;

(b) how many cases as the bankruptcy attorney handled in the last 5 years;

(c) what notable cases as the bankruptcy attorney been involved in an what were the outcomes;

(d) what reviews has the bankruptcy lawyer received and how apparently “organic” are those reviews;

(e) has the bankruptcy lawyer represented clients with the same kinds of problems that you are currently facing;

(f) what is the bankruptcy attorney’s personality like, how “approachable” is he or she, and is the bankruptcy lawyer willing to take the time to explain the bankruptcy process to you?

These are just some of the qualities that you should use in evaluating the advice being given by a specialized business or consumer bankruptcy lawyer. Naturally, other factors will necessarily come into play.

     6. Final Thoughts

As with much in life, timing is everything. The biggest problem that I have faced in my many years as a bankruptcy lawyer is that people wait to long before coming to me with their problems. In many cases, having come to see me sooner, I would have been able to have avoided much of the distress that they were forced to endure and prevent some of the negative legal consequences that came to pass only because they waited so long.

It is better to swallow one’s pride, and seek out legal advice before a “crisis” becomes a genuine catastrophe. However this requires perhaps the hardest thing that one can ask of oneself, namely, the capacity to see things as they actually and really are rather than as we would like them to be. This is very very hard for most people because it is all but impossible to be “objective” about oneself and the reality of one’s actual circumstances. This is the real reason (and it is a very good one) why people retain lawyers in the first place: lawyers are trained to engage in “critical” thinking and to view a client circumstances in the most objective way possible, and then based upon that objective reality provide clear and cogent advice as to how the client ought to proceed.

But in order to be able to do this, the client must first engage in an exercise of self-awareness and confront himself or herself and be honest with himself or herself about their legal and financial circumstances. Until that event comes to pass, the borrower will not pick up the phone and reach for the assistance that he or she likely needs.

Additional resources provided by the author

There are literally thousands of of answers to questions posed by people facing financial distress on the “Q and A” section of Avvo.com. But in most cases, unless you can provide substantial detailed information, it will be very hard for any of the attorneys that provide answers to give you a cogent answer to your particular question. The best thing that you can do is to seek out the advice and assistance of a competent bankruptcy attorney in ***your*** state to answer the questions that you have in a one-on-one session.

First Circuit Holds that Native American Indian Tribe, and its Online “Payday Lender” Arm Cannot Ignore the Automatic Stay of the Federal Bankruptcy Code.

In a matter of first impression, the US Court of Appeals for the First Circuit has held that the provisions of the Bankruptcy Code that abrogate and set aside the doctrine of “sovereign immunity” apply to Native American Tribes and their “payday lender” subsidiaries, so that such creditors can no longer ignore the fact a borrower has filed for federal bankruptcy protection. In the case of In re Coughlin sub nom Coughlin v. Lac Du Flambeau Band of Lake Superior Chippewa Indians, et al., _____ F.4th _____, Case No. 21-1153 (May 6, 2022), in a 2-1 decision, the First Circuit found that the abrogation provisions of Section 106(a) of the Bankruptcy Code, which eliminates the defense of “sovereign immunity” for “governmental units” as defined by Section 101(27) of the Code, encompasses and explicitly applies to Native American Indian Tribes and the “arms of the tribe” that conduct online “payday lending” operations.

In Coughlin, the borrower had taken out and $1,100 “payday loan” from Lendgreen in 2019, a wholly-owned online “payday lending” subsidiary of the Appellee Indian Tribe, charging more than 500% interest per annum on each loan made. Later that year, the debtor filed a Chapter 13 bankruptcy case in Massachusetts. Lendgreen was listed in the debtor’s bankruptcy filing and mailing matrix. By the time of the debtor’s bankruptcy filing his debt to Lendgreen had grown to nearly $1600 with the accrual of interest. Mr. Coughlin submitted a Chapter 13 Plan provided that all creditors would receive a 100% “dividend”, paying all creditors that filed proofs of claim 100% in full. The debtor, by his attorney, Richard N Gottlieb, Esq. of Boston, served a copy of the debtor’s Chapter 13 Plan on Lendgreen. Notwithstanding the fact that the bankruptcy code imposed an “automatic stay” barring all creditors from taking any further debt-collection activity without first obtaining bankruptcy court approval for the same,  Lendgreen nonetheless repeatedly “dunned” Mr. Coughlin seeking repayment of its debt through numerous and repetitive debt collection letters, emails and voicemail messages to the debtor. 2 months after he filed his Chapter 13 bankruptcy case, Coughlin attempted to take his own life, based upon his belief that, notwithstanding his bankruptcy filing, his “mental and financial agony would never end” and blamed such agony on Lendgreen’s “ regular and incessant telephone calls, emails and voicemails.”

When Coughlin moved to enforce the Automatic Stay under 11 U.S.C. § 362(k) against Lendgreen and its corporate parents, the  Native American Indian Tribe, seeking an order both prohibiting further collection efforts as well as damages attorney’s fees and expenses, the tribe and its affiliates asserted that they enjoyed “tribal sovereign immunity” and moved to dismiss the enforcement action. U.S. Bankruptcy Judge Frank J. Bailey agreed with the Indian Tribe’s claim of “tribal sovereign immunity”, held that the abrogation provisions of Section 106(a) did not apply to the Indian Tribe because it was not a “Governmental Unit”  under the Bankruptcy Code’s definition of the same term, and then proceeded to grant the Tribe’s  Motion to Dismiss the debtor’s enforcement action. Debtor’s counsel then took the extraordinary step of seeking direct appellate review by the First Circuit Court of Appeals of the bankruptcy court’s decision, thereby bypassing the intermediate appellate courts, the U.S. District Court for the District of Massachusetts and the Bankruptcy Appellate Panel of the First Circuit, under 28 U.S.C. § 158(d)(2). Both the U.S. Bankruptcy Court for the District of Massachusetts and the US Court of Appeals for the First Circuit granted direct appellate review of the bankruptcy court’s original decision below.

In a 2-1 decision written by Judge Sandra Lynch dated May 6, 2022, the majority of the panel held that the bankruptcy court’s decision below (that that the Bankruptcy Code’s “abrogation” provisions did not apply to the Indian Tribe and it’s payday lending operation) was legally erroneous and reversed the decision of the bankruptcy court below and remanded the matter back for proceedings consistent with the First Circuit’s judgment in the matter. The First Circuit found that the Indian Tribe was, indeed , a “government” because they acted as the governing authority of its membership, and that, as a government, it was “domestic” in nature because it existed within the United States. The First Circuit found that the definition of a “governmental unit” as expressed in section 101(27) of the Bankruptcy Code was defined as broadly as humanly possible, namely:

United States; State; Commonwealth; District; Territory; municipality; foreign state;
department, agency, or instrumentality of the United States (but not a United States
Trustee while serving as a trustee in a case under this title), a State, a Common-
wealth, a District, a Territory, a municipality, or a foreign state;
or other foreign or domestic government.

It was this last “catch-all” definition that the First Circuit held explicitly covered Indian Tribes, finding that not only did the text of the definition clearly encompass Indian Tribes, but the conclusion was also supported by the historical context so that when Congress abrogated sovereign immunity in 1994, it did so “against the pre-existing backdrop of § 101(27).”  The court adopted the debtor’s reasoning, stating “[a]s Coughlin argues, Congress was aware of the existing definition of “governmental unit“ when it incorporated it into § 106.” The majority of the panel rejected the Indian tribes attempt to argue that, notwithstanding both the broad original definition of “governmental unit” and the historical context underlying the enactment of that definition and the later-enacted § 106, that Congress did not “unequivocally express” its intent to abrogate “tribal sovereign immunity”. The tribe contended that, because neither the bankruptcy code nor the legislative history of the same used the phrase “Indian Tribe“, Congress did not mean to abrogate the tribe’s rights of sovereign immunity unequivocally and expressly. The First Circuit rejected this approach as a requirement to use of “magic words” in order to expressed congressional intent. The court had no difficulty in finding recent Supreme Court precedent that explicitly rejected such an approach in the case of Cooper v. FAA, 566 U.S. 291 (2012) when Congress seeks to affect an abrogation of sovereign immunity in a federal statute. The Tribe was similarly unsuccessful in persuading the First Circuit that they were entitled to “special” treatment because of the fact that they were an Indian tribe.

It is not clear, at this point in time, whether or not the Tribe will be seeking further appellate review from the First Circuit or seek a further appeal to the United States Supreme Court. However, the First Circuit’s decision makes it absolutely clear that no entity, even an Indian Tribe asserting its “tribal sovereign immunity” from suit, should treat the Bankruptcy Code lightly. The holding of the First Circuit also makes it clear that no one, not even a “governmental unit” with pretensions of somehow being special, entitled or otherwise unconstrained by the same rules that all others must follow, are, in point of fact, not above the rule of law that governs the United States of America, particularly in the area of consumer protections such as those provided under the federal Bankruptcy Code.