What is a Homestead Protection, and What is the Homestead Protection Act?
Massachusetts has a Homestead Protection Law that dates back some time. A Homestead Protection protects a homeowner from creditors. By creditors I mean people to whom you owe money, usually serious money. Now don't get to excited - a homestead filed on your home doesn't make your debt disappear. What it does mean is that if your creditors decide to come after you legally for the money, they can't come after any equity in your house, and can't (generally) grab your house and sell it out from under you (more on this below). These are good things! The Homestead Protection Act is the law that allows this protection.
The Homestead Protection Act in Layman's Terms
The Homestead Protection Act, is probably best explained with an example. Again, the act is designed to protect you from creditors, and we're usually not talking about $500 either. This fictional example is designed to illustrate how it works.
Let's say you're driving along a quiet country road, when you get that important text from the office. Now we all KNOW that Texting and Driving in Massachusetts is ILLEGAL, but, against your better judgement, you figure you'll text a quick reply back. Well, we know what happens. You take your eyes off the road and drive right off of it, lose control of the car, and crash into someone's else's garage where - just your luck - you wreck their Ferrari. And the rare Bentley beside it. Fortunately, no one, including yourself, is hurt, but OH BOY, have you done some damage. Your insurance company uncovers the evidence that you were texting when you were driving, and your registration had expired the day before, and promptly denies your claim (and yeah, they can do that....). That now means you are personally responsible for the over 300,000 dollars in damage to the garage and the two specialty cars. And you don't have 300,000. The owner of the two cars does have insurance, and his insurance company (who is now a creditor) decides to go after you in court for the damages.
In this example, we'll assume that your 500,000 home is paid off. (Good for you!). So you own the home free and clear, and it's this asset of your that the insurance companies have their eye on. Fortunately, you have Homestead Protection. With the homestead protection, a judge can not seize and give the insurance company (the creditor) your home. That means even if you lose in court, you get to keep your house. Now if (and when...) you lose in court, you'll still owe the money, but at least you won't be homeless. They might garnish your wages, take your car, and grab your trading account, but you get to keep your home while you pay everything back, or declare bankruptcy.
Homestead Protection Act Details
OK, now we understand that the Homestead acts in our defense against liabilities that we may incur, and protects our home from seizure. But there are details. First of all, the protection is only up to $500,000. So if you have more equity than that in your home, it is not protected. Second, the homestead only protects your primary residence. No double dipping! Third, your Homestead application must be filed with the state. If you have not filed, you are only entitled to $125,000 of automatic protection (this is a new provision of the updated homestead law). As of this writing, a homestead can be filed for under $40, and requires very little paperwork - so there's absolute no reason you shouldn't do this, if you haven't already.
Other Notes about the Homestead Protection
- You only have to file once for each primary residence. It doesn't expire or wear out.
- You should discuss with a licensed MA real estate attorney your homestead and your coverage as it applies to your situation. Although straightforward, there's no substitute for actual legal advice for a homestead filing. Don't consider this post to be legal advice, as it is not.
- Trusts are now eligible for homestead protection. Trusts are often used for tax advantages in real estate, but had to forego the protection until recently.
- There are creditors that can avoid the homestead protection. For example, the banks that hold the mortgage, for instance, are unaffected by the homestead act. Also, the federal government (IRS) and state government are not affected by the act, should they choose to seize your home.
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*All information is posted in good faith and is assumed to be reliable, but may rely on third party information sources.