Protecting Proceeds Home Sale in Bankruptcy
Among the changes include an automatic protection of up to $125,000 for non-declared homesteads —without even having to record a declaration of homestead in the county registry of deeds. It also increased the protection of up to $500,000 in equity for declared homesteads, and protections for homes held in trust.
Additionally, the law (codified as Mass. Gen. Laws ch. 188), provides an explicit protection for the proceeds from a sale of homestead. Specifically, § 11(a)(1) states that, when a home with a homestead is sold, the proceeds “received on account of any such sale” are entitled to protection until either (1) a new homestead is acquired, or (2) one year after the date of the sale, whichever occurs first. There was no similarly explicit protection under the prior law.
Recently, though, Judge Hillman of the U.S. Bankruptcy Court in Boston held that the proceeds exemption is limited, and specifically requires that a homeowner first “receive” the surplus before it can be protected. In a case he decided, a foreclosure on the home of a homeowner in bankruptcy resulted in a surplus and the bank brought an action in state court to determine how the proceeds should be distributed between the homeowner and one of his creditors. The homeowner filed for bankruptcy before the case was decided and therefore no proceeds from the sale of the home had yet been disbursed.
Judge Hillman interpreted the homestead statute to require that a homeowner must first “come into possession of” the homestead proceeds before they can be protected under the statute, and he therefore denied the homeowner’s claim that the proceeds were protected, and that the homeowner could keep them.
The homeowner’s attorney has already started an appeal of the decision, though, so it remains to be seen whether this decision will be upheld.
The lesson from this case is that if you intend to sell your home, and if you want to keep the sale proceeds safe from your creditors, the best practice is to make sure that you have the money in your possession before filing for bankruptcy.