The Homestead Exemption

When a person files bankruptcy, you are entitled to keep certain types of property up to a certain value. The property you get to keep is known as “exempt.” An example of exempt property is your residence, known as a “homestead.” In Massachusetts, if you own a home, you are entitled to an exemption in your homestead. As of March 2011, Massachusetts residents are entitled to an automatic homestead for $125,000. This means that if you have less than $125,000 in equity in your home, it is automatically exempt and you can keep your home in a bankruptcy. If you have more than $125,000 in equity, then you need to actually file a document at the registry of deeds in the county that your home is located known as a “declaration of homestead.” Filing this document will increase your homestead and protect the equity in your home up to $500,000.00.

However, if you have more equity in your home than $500,000, then your home could be soled in the bankruptcy to repay your debt. For example, if you have $600,000 in equity in your home, then $100,000 is not exempt and your home can be sold to satisfy your creditors. After the sale you will get $500,000, but the other $100,000 would be used to repay your creditors. In bankruptcy there are certain debts that a homestead will not protect you from, and your homestead is limited if you have not owned you home for at least 40 months. For more information on the limitations of a homestead in bankruptcy, you should consult with a qualified Massachusetts bankruptcy attorney.

The Trustee’s Power to Sell

What happens if you jointly own property with someone else and the property is not exempt? In Bankruptcy, the Trustee who is overseeing your case has the authority to force a sale of the entire asset, including the co-owner’s interest; even when the co-owner is not filing bankruptcy. See 11 U.S.C. 363(h).

However, the Trustee does not have the power to act independently and cannot simply sell the property. The Trustee must seek the Bankruptcy Court’s approval by filing a lawsuit in the Bankruptcy Court, known as an “adversary proceeding.” In this adversary proceeding, the co-owner will have the ability to present evidence to the court that the detriment that they will suffer is greater than the benefit to the creditors. Many times, the co-owner will be given the opportunity to purchase the debtor’s interest in the property at a discounted rate. If the property is sold, then the co-owner will be paid back their fraction of the ownership interest in the property after the Trustee’s expenses are paid.

Real Estate Ownership Scenarios

In bankruptcy, we typically see three situations where a debtor owns real estate jointly with someone else: home ownership with a spouse, co-ownership of a parents home, and co-ownership of investment property.

Home Ownership With a Souse

If you own your home with your spouse, chances are, you either own it as Joint Tenants with Rights of Survivorship (“JTROS”) or as Tenants by the Entirety. This means that both you and your spouse each own the whole home, as compared to you having ½ ownership and your spouse having ½ ownership. Then if you or your spouse dies, the other spouse automatically owns the whole.

There are clear advantages to owning your home with your spouse as Tenants by the Entirety, because it prevents once spouse’s creditors from interfering with the other spouse’s right of possession. This is also beneficial in bankruptcy in Massachusetts, because any interest that the debtor has as a tenant by the entirety is exempt “to the extent that such interest … is exempt from process under applicable non-bankruptcy law.” 11 U.S.C. § 522(b)(2). This means that in Massachusetts the debtor’s interest in their home that is owned with a spouse as tenancy-by-the-entirety is subject to attachment but not subject to levy or execution at this time and, so, the debtor’s right to possession cannot be interfered with unless and until the property is sold, or debtor and their spouse are divorced, or the debtor survives her spouse, in which event the trustee will be free to enforce his interest in the debtor’s real estate.

However, as I stated earlier, filing a declaration of homestead on your residence will protect up to $500,000 of the equity in your home, regardless of how you hold title with your spouse; therefore, it is always a good idea to go to your local registry of deeds and have one recorded. The declaration of homestead may be in either spouses name and will protect all the family members. It is also important to remember that a homestead is not available for investment property and can only protect property that you either live in, or you intend to make your home and permanent residence. You should contact a qualified bankruptcy attorney for more information on how a homestead can protect your home.

Joint Ownership of a Parent’s Home: The “Poor-Man’s” Will

It is not uncommon for elderly parents to decide to add their children to the deed of their homes for estate planning purposes. Typically, in order to save on the expense of paying an attorney to properly prepare a will, parents transfer title of their property to themselves and their children, as joint tenants. While this is an effective method of transferring property and avoiding probate upon the parents’ death, it can have undesired consequences because the parents’ property can be attached and seized by their children’s creditors. Moreover, as I discussed earlier in this article, if one of the children files bankruptcy, the bankruptcy trustee can sell the parents’ home to repay creditors.

If your parents have added you to the deed of their home, it is important to inform your bankruptcy attorney before your case is filed. A qualified attorney should be able to ensure that your parents’ property is properly protected.

Co-Ownership of Investment Property

There are very few exemptions that are available for investment/vacation property. Therefore, co-ownership of both investment and vacation property is nearly impossible to protect in bankruptcy unless there is no equity in the property. (the value of the property is equal or less than the amount owed on the mortgage.) If you file bankruptcy and you co-own investment or vacation property that has equity; you can be assured that the bankruptcy trustee will take the steps to sell the property.

Conclusion

Co-ownership of real estate presents numerous complex issues if one of the co-owners decides to file bankruptcy. If you co-own property with a spouse, parent or partner and you are facing financial difficulties, you should seek a qualified bankruptcy attorney for advice. A good attorney will be able to advise you of any potential issues that may arise, and take steps to ensure that you and your loved ones can keep your homes. Under no circumstances should you decide to try to transfer property out of your name, without advice from an attorney, because such a transfer could be seen as a fraudulent and would make it easier for a Bankruptcy Trustee to seize the property.

In fact, Massachusetts’ exemptions were so outdated that other than the homestead, you were only afforded $700 for a car, $125 in the bank, 2 cows, 12 sheep and 2 pigs.

Now, on April 7, 2011, Massachusetts moves into the 21st Century. On that date, Massachusetts residents who file bankruptcy will have the benefit of choosing to keep their house, car, and some money to pay bills. While the federal exemptions will still be available and will be the best choice for many debtors considering bankruptcy, the increase in the new state exemptions will help a lot of people. Here is a review of the new exemptions available to debtors and chose the state exemptions:

Homestead: if you own your home, you are entitled to protect up to $500,000 in equity so long as you have lived there for 3.3 years; otherwise you are only entitled to $250,000. (investment, or vacation property is not eligible) The Massachusetts Homestead statute has recently been updated…but that is a topic of another post.

Automobile: In one of the most significant changes…you can now exempt $7,500 in an automobile. If you are handicapped or over 60, then you are entitled to $15,000. This exemption represents the “equity” in the vehicle. (if the Auto is worth $20,000 and you owe $15,000, then your exemption would be $5,000 which I allowable since it is less than the $7,500 exemption). Under the old statute, you were only entitled to $700.

Jewelry: You may now exempt up to $1,225 in personal jewelry.

Clothing, beds, appliances: The New Rule – All necessary wearing apparel, beds, bedding, 1 heating unit, 1 stove, 1 refrigerator, 1 freezer, and 1 hot water heater.

Furniture: Residents can now exempt $15,000 in home furniture. Under the old statute, you could only exempt $3,000.

Computer, TV, Sewing Machine: One sewing machine, one computer and one television, in actual use, not exceeding $300 each in resale value. The old statute did not exempt a computer or TV.

Cash for Rent: if you are a renter, then you are entitled up to $2,500 of cash in the bank (not to exceed your actual rent) to pay the rent for the dwelling unit you actually occupy.

Cash for utilities: you are now entitled to have up to $500 on hand to pay utilities. This is up from $75.

Checking & Savings: Cash or savings not exceeding $2,500. (up from $125).

Wages due and payable: the greater of 85% of the your gross wages or 50 times the greater of the federal or the Massachusetts hourly minimum wage for each week or portion thereof.

Tools for Trade or Business: if you have tools that you use in your trade or business you can now protect up to $5000, up from $500.

Materials and Stock Used in Trade or Business: a debtor can now exempt up to $5,000 in materials that you use in your trade or business. (up from $500).

Fishing equipment: Boats, fishing tackle and nets of fishermen actually used in their business, up to $1,500. This is an increase from $500 under the old statute.

Wild Card: You can now use up to $5,000 of your unused tool, auto, or furniture exemption to protect any other property; so long as the value of any single item does not exceed $1,000.

This list provides a brief summary of the new changes in Massachusetts’ exemption laws as they apply to bankruptcy. However it is not an exclusive list, nor should you rely on this list to try to file your own bankruptcy. Bankruptcy is an extremely complicated area of practice and a mistake could lead to the loss of your home or car or could result in your case being dismissed.

After an  Application by a Judgment Creditor has been made to a District Court, you will be issued a summons by the Court, which commands your attendance a  hearing on a specific date and time.  The goal of the application and summons is to compel you to be physically present at a courthouse. This will allow the attorney for the Judgment Creditor to investigate your financial affairs and examine your ability to pay the outstanding judgment. Many collection attorneys send a financial worksheet to Judgment Debtors to fill out prior to the hearing date.  Otherwise, you will likely be handed this worksheet by the collection attorney on the day of supplementary process hearing.  In most cases, the Creditor’s attorney will insist that you enter into a monthly payment plan, or make a lump sum payment, if there are assets available to satisfy the judgment. In other words, your Creditors are placing you on a court supervised payment plan and schedule, and can use the District Court as an enforcement mechanism.

If you fail to appear at the scheduled Supplementary Process hearing, you will be defaulted by the Clerk, and a Capias will issue against you.  The court will also continue (reschedule) the hearing for a later date.  A Capias is a civil warrant, also called a “bench warrant,” for your arrest.  This warrant was issued because you have failed to obey the summons issued to you, and failed to be physically present at the Supplementary Process hearing.  Once the Capias is issued to the Creditor’s attorney, you will likely be contacted by a Deputy Sheriff from the Sheriff’s Department, who will provide you with instructions on where you must meet him/her prior to the continued hearing date. If you fail to cooperate with the Deputy Sheriff, you can be placed in custody by the Sheriff’s Department, and will be physically transported to the courthouse for examination, and will be required to explain to the Court your reasons for non-compliance with the summons.  In other words, there are great risks associated with being uncooperative during a Supplementary Process proceeding, and you should make every effort to comply with a Court issued summons or the Deputy Sheriff, until you decide to file for bankruptcy.

How can one avoid Supplementary Process and its perils?

The most certain method of stopping a supplementary process proceeding; collection attorney investigation of your financial affairs; court ordered payment plans; court summonses; oversight by the Sheriff’s Department; and arrest, is to file a Chapter 7 or Chapter 13 bankruptcy petition. The automatic stay, 11 U.S.C. s. 362, prohibits your creditors from engaging in collection activity against you after you have file a petition for relief under the bankruptcy code.  If you are subject to a supplementary process proceeding, a copy of your Notice of Bankruptcy Case filing can be provided to the Deputy Sheriff and/or the District Court, which will suspend that proceeding until you receive your bankruptcy discharge.  A bankruptcy petition has many benefits, and it is extremely effective in terminating the pains and perils associated with supplementary process.  Even if you have an inability to pay the judgment on the first hearing date, the Supplementary process action will remain ongoing and you may be required to go to the courthouse every 3-6 months, depending on the court’s schedule.  If you are currently subject to this proceeding, please contact one of our bankruptcy attorneys for more information on how to obtain a fresh start and stop collection activity against you.

Judge Hillman ruled that a Debtor’s income that was dedicated to paying expenses for a vacation property (such as a mortgage) are not permitted and should be used to pay unsecured creditors; thus allowing the Chapter 13 trustee’s objection to a Debtor’s Chapter 13 plan.

In a Chapter 13 bankruptcy, a Debtor is permitted to deduct certain expenses from his income (such as food, clothing, utilities, etc.). The amount of money left over after all allowed expenses are paid is known as disposable monthly income. The disposable monthly income is paid to the Chapter 13 trustee who pays the money to the Debtor’s unsecured creditors. (for a more detailed explanation, visit our chapter 13 information page).

This ruling means that if a Chapter 13 debtor owns a vacation home; he/she is not permitted to include any of the expenses associated with associated with that property (such as utilities, taxes and mortgage) because the expenses are not reasonable and necessary. This ruling likely will apply to all types of vacation property, including time shares.

A vacation property is viewed as a luxury, and cannot be retained by a debtor in a Chapter 13 proceeding. The property must be liquidated and proceeds must be turned over to creditors, or surrendered in the bankruptcy proceeding. In other words, Chapter 13 debtors in Massachusetts will not be able to keep their vacation homes unless their creditors receive a 100% dividend/payout.

When you file bankruptcy, an “automatic stay” goes into effect, immediately halting nearly all collection attempts against the person filing the petition.  One of the things that is “stayed” are evictions.  Once your bankruptcy petition is filed, either Chapter 7 or Chapter 13, your landlord may not proceed with eviction attempts except under certain circumstances.

However, you must be cautioned against filing bankruptcy for no other reason than to stop an eviction.  Some bankruptcy courts consider this to be an abuse of Chapter 7 bankruptcy. If the bankruptcy court finds that this is true, the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.

If you are not filing for the sole purpose of stopping eviction, then you should consider the following:

If You File Bankruptcy Before Your Landlord Wins Possession

If you have fallen behind on your rent, or you have violated your lease and your landlord is seeking eviction and has not won a judgment for eviction; then bankruptcy automatic stay will stop the eviction proceedings. However, in most cases, this stay will be lifted shortly after you file.

Removing automatic stay. Most likely, your landlord will file a motion in the bankruptcy court that will allow him to “lift” the automatic stay and allow him to proceed with eviction.  In most cases, the stay will be lifted within a matter of days and your landlord will proceed with eviction.

Drugs and Damage exception: If your landlord has initiated the eviction process because of the use of illegal drugs and/or causing damage to the property, then your landlord may serve a certification with the bankruptcy court which will cause the automatic stay to be lifted.  You have fourteen days to contest this certification; however, you must prove your case in a series of hearings and other proceedings.

If You File Bankruptcy After Your Landlord Wins Possession

If your landlord initiated eviction and has already obtained a judgment for possession then the automatic stay does not stop eviction.  Your landlord may proceed with removing you from the property.  Although there is a very limited exception to this rule, it does not apply to tenants in Massachusetts.

Back Rent

While bankruptcy cannot prevent eviction in either of the two situations listed above, it will prevent your landlord from collecting back rent.  Back rent is an unsecured debt that will be discharged upon the completion of the bankruptcy proceeding.

Conclusion

If you are being evicted from your home, the automatic stay may buy you a few days or a few weeks. However, if your landlord asks the bankruptcy court to lift the stay and let the eviction precede, most likely, the court will agree. It is seldom a good idea to file for bankruptcy solely because you’re being evicted. You’ll be better off looking for a new place to live or fighting the eviction in state court.

1. Under the new Bankruptcy Laws Everyone has to repay their creditors. False: In 2005, the bankruptcy laws were changed to provide a test to see who can qualify for a Chapter 7 Bankruptcy. Essentially, if someone has sufficient income, and the ability to repay a portion of their debt, then they will have to file a chapter 13 which will require them to enter into a court supervised repayment plan with their creditors. The new law does not prevent people from filing and in most situations people are still able to get the same relief now as before the law changed.

2. Once I file Bankruptcy my credit is ruined for life. Not Quite…while bankruptcy is a blow to your credit rating; it is not permanent. Because most people have numerous charge offs and sometimes even a collections lawsuit on their credit report before they decide to file, most people will actually seen an increase in their credit score within 1-2 years. Moreover, most of our clients report that they are able purchase cars and homes within 2 – 3 years.

3. Only deadbeats and losers file for bankruptcy. False…Most people file for bankruptcy after a life-changing experience, such as a divorce, unemployment or a serious illness. They’ve struggled to pay their bills for months and just keep falling further behind.
Moreover, some famous people who have filed bankruptcy who were (or are) successful include: Walt Disney, three US Presidents, Larry King, Donald Trump, and Henry Ford.

4. All debts can be discharged in a bankruptcy filing. False…certain debts cannot be discharged through bankruptcy. For example, child support, student loans and most taxes, and debts incurred by fraud (to name a few) cannot not discharged. This list has exceptions and is not exhaustive. If you have questions, contact a bankruptcy lawyer.

5. You can’t get rid of back taxes through bankruptcy. Generally speaking, this is true. However, under some circumstances income taxes are dischargeable. The rules concerning discharging taxes are complicated; so if you owe income taxes, an experienced bankruptcy lawyer can tell you if you can discharge the taxes.

6. Filing bankruptcy could cost you your job. No. The current bankruptcy code prohibits discrimination against an individual who is in bankruptcy or who has bankruptcy in the past.

7. You will never be able to own property again. Not True. Once you receive your bankruptcy discharge, you bankruptcy if finished. You can continue to live your life and can purchase and sell property like everyone else. Creditors will eventually lend to you again to help you with large purchases and you are able to purchase whatever you can afford.

8. Everyone will know I filed for bankruptcy. False. Bankruptcies, like all court records are public; however, in order to see the records, one has to actually go to the court and look for them. Bankruptcy is not published generally the only people who are going to know are those who you tell. Some people think that newspapers carry bankruptcy filing information, this is simply not true.

9. I will lose everything I own. Again this is false. Once you file bankruptcy, you will be able to keep certain property up to a certain value; this property is known as exempt. Most bankruptcies are known as “no asset” bankruptcies, meaning that you get to keep all of your property and all of your unsecured debts are discharged. Exemptions vary from state to state, so it is important to speak with an experienced bankruptcy attorney in your area.

10. Creditors can still harass me if I file for bankruptcy. Not Legally. When the bankruptcy is filed, automatic protection is put onto you and all of your property instantly. Creditors are not allowed to contact you for any reason, which includes calling or even billing you. If they persist in harassing you, you do have remedies available through the Federal Bankruptcy laws.

11. I can be turned down for filing bankruptcy. Mostly False. So long as you are honest on your petition, don’t try to conceal assets and don’t lie about your income an experienced bankruptcy will be able to file you in the proper chapter bankruptcy and your debts will be discharged. The bankruptcy statute is designed to help ALL honest debtors who need help. If you lie on your petition, or try to conceal assets, then the justice department will seize your assets to repay your creditors and you will not have your debts discharged. Moreover, you could end up in jail.

12. Bankruptcy is easy; I don’t need an attorney. False. The bankruptcy code is extremely complex; so complex that a lot of attorneys choose not to practice in the field. If you fail to take all the proper steps leading up to filing bankruptcy, then you risk losing your home, and/or all of your assets. We have represented several clients who wanted to save money and who filed bankruptcy without an attorney and messed up on their petition and/or filed under the wrong chapter. They ended up paying us three or four times more in legal fees to fix the mess that they made than they would have paid us to file their bankruptcy in the first place.

By no means is this an exhaustive list and there are many more misconceptions out there. If you have any questions, then you should contact us and schedule a free appointment. You have nothing to lose and we can provide you with the facts you need to make an informed decision.

When deciding to file bankruptcy, it is important to understand that Bankruptcy can remain on your credit report for up to 10 years.  However, when you consider that a collection lawsuit, repossession, or foreclosure will also remain on your credit report for the same period of time; bankruptcy may be the best option since the bankruptcy eliminates your obligation to the underlying debt.  This is an important consideration when you consider that in a repossession, you will be responsible for the remaining outstanding balance.  Moreover, although a bankruptcy may stay on your credit report for 10 years, it will only take a few years after a bankruptcy discharge to rebuild your credit.

Step 1: Filing Bankruptcy

Believe it or not, the bankruptcy discharge itself, which liquidates all, or most of your actual debt, improves your income-to-debt ratio instantly.  This, by itself, will help to increase your credit score.

Step 2: Obtain Credit and Use It

After your discharge, you will receive credit card and other solicitations fairly shortly. Most of these will be high-interest, low limit credit cards.  Normally, I would recommend that you avoid these offers like the plague; however, it is a simple truth that you have to be in debt to establish credit.  Therefore, I recommend that you obtain one of these cards and actually use it, sparingly.

Bankruptcy eliminates your past credit history.  Therefore, you must establish a new credit history to rebuild your credit score.  By using the card and making payments, you will establish a new credit history.  Your use of credit is reported to the credit bureaus and will help accomplish this goal.

Step 3: Stay Current and Lean From Your Bankruptcy Experience

I hope that Bankruptcy was a learning experience.  Follow these rules when using your credit card.

1. Do not use your credit card if you do not have the money to repay it.  A credit card is a tool; not a crutch.
2. Use your credit card only for emergencies or large necessities and don’t use it again until the balance is paid.
3. Never carry a balance on your card more than two months of disposable income.
4. Pay more than your minimum balance.  If you cannot afford to pay more than your minimum balance, then you can’t afford a credit card and should wait to try to rebuild your credit.
5. Never transfer a balance unless you actually intend to close your account with the card you are transferring.  Most people get in trouble by transferring balances and then running up a new balance on their old card.  GET RID OF IT!
6. Do not get a “store card.” The cards you get from Home Depot, Macy’s, and Target have interest rates that usually exceed 30% and cannot be used anywhere else.  Stay away from them!
7. YOU DON’T NEED MORE THAN ONE CREDIT CARD; EVER!

As time goes by, you will begin to rebuild your credit score.  You can eventually replace the high interest credit card with one that has better terms.  However, don’t start overextending yourself. Learn from your bankruptcy experience!

Step 4: Avoid Credit Traps

Credit card companies are sneaky.  They will offer all sorts of “offers” such as “90 days same as cash” or “no interest for six months.”  However, don’t fall for these traps.  Ninety percent of consumers do not repay the principal balance within the “interest free” period and if you have even $1 left owed on the principal, you will be charged interest on the entire balance.  For example, if you purchase a dishwasher for $500 with no interest for six months.  At the end of six months you still owe $5.00; the credit card company will then charge you the full six months interest on the entire $500 purchase.

Step 4: Monitor Your Credit Report

As a Massachusetts resident, you are entitled to 2 free copies of your credit report from each of the credit reporting agencies per year.  Therefore, you should monitor your credit report every six months.  If you find an error on your credit report, or find that a creditor that was discharged in bankruptcy is still reporting, you should report the error with the credit reporting company.  If you still have problems fixing the error, you should contact your bankruptcy lawyer who will probably be able to help you.

This is by no means an exhaustive list; but just a guide.  Credit is a two edged sword and should be used wisely.  If you obtain new credit and do not control your spending, then you will likely be back in the same boat that you were in when you filed bankruptcy in the first place; only you will not have the option of filing again for 8 years.  If you live in Massachusetts and you are considering bankruptcy, please feel free to contact us.  Your consultation is free.