When Bankruptcy Hits Home: Will A Homestead Declaration Protect You?

A Massachusetts Homestead Declaration protects up to $500,000.00 of equity in your home, protecting the home from being taken by creditors. A Declaration of Homestead must be filed with the Registry of Deeds, and can be done at any point when one owns and occupies a home as a primary residence, not just at the time of purchase.

While still a good idea, the protection a Homestead Declaration offers has been limited by relatively recent changes in the Bankruptcy Law. Bankruptcy Code Section 522(p) was introduced in 2005, and states that a debtor may not declare as exempt any amount of interest acquired during the 1215-day period preceding the date of filing a Petition for Bankruptcy that exceeds in the aggregate $125,000.00 in value in real or personal property used as a residence or claimed as a Homestead. 11 U.S.C. § 522(p).

What does this mean in plain English? In short, Section 522(p) limits the amount that a debtor may claim under a Homestead exemption to $136,875.00 (the figure has been updated since the drafting in 2005) if the property was purchased or acquired within approximately three years and four months of filing for Bankruptcy. The Bankruptcy Code essentially cuts the protection offered by a Homestead Declaration by 3/4 for people owning their homes for less than this amount of time. However, the change has no effect on the protection afforded by a Homestead Declaration to individuals who have owned their home for more than 1215 days, even if the Declaration of Homestead was filed within the 1215-day period. These changes in the law should be taken into consideration when thinking about transferring property and/or declaring Bankruptcy. For example, one should keep this limitation in mind when determining whether or not to transfer property to a family member or trustee. Should the person acquiring the property or an interest in the property declare bankruptcy within 1215 days of the acquisition, he or she will have limited Homestead protection.

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