What is the Homestead Exemption?

How does the homestead exemption protect people’s assets? Say you own a home which is your primary residence which is worth $500,000.00, and has a first mortgage of $250,000.00 with no other liens. That means you have $250,000.00 of equity in your home, and if you sell your home you will receive $250,000.00 (less closing costs, brokers’ fees, etc.).

What happens if you also have card credit card debts, student loans, and other debts with a combined balance of say $100,000.00?  If for whatever reason you become unable to repay those loans, and you are sued by the creditors who get judgments against you totaling $100,000.00, can they force a sale of your home and recover $100,000.00 from the proceeds? Not if you declared a homestead on your property.

The homestead declaration is a document which is recorded in the public land records which puts the public on notice that the property is your primary residence. The benefit for you in doing this is huge: In Massachusetts it means that you become entitled to $500,000.00 worth of equity in your home which can’t be touched to pay back things like credit card debts and student loan debts. See Mass. General Laws Chapter 188 and related sections. So, in the example where your home is worth $500,000.00, and has a $250,000.00 mortgage on it, you would be entitled to the entire $250,000.00 in equity in the home. Because you are entitled to the first $500,000.00 in equity, and the first mortgage is already $250,000.00, your home would have to appreciate to a value of over $750,000.00 before other creditors can begin satisfy their claims from it. In this case, they would only be entitled to any amounts by which your home exceeds $750,000.00. So, if a creditor got a judgment and forced a sale of your home for $800,000.00, there would be $50,000.00 available to satisfy that creditor’s claim, you would receive $500,000.00, and the bank holding the first mortgage would receive $250,000.00.

Let’s say that instead of owning a home, you have kept $250,000.00 in a bank account. One day your try and use your debit card linked to that account and it gets declined. You find out that one of your creditors got a judgment against you and has levied on your account.  The reason this could happen is that money sitting in a bank account is not protected from creditors (except for the first $2,500.00 in a personal account in Massachusetts). Since colonial times the law has valued home ownership as a way of providing financial stability to individuals and families.
           
If you own a home but want to sell it, in Massachusetts you are entitled to sell it and keep the proceeds (up to the allowed amount of $500,000.00) for up to one year or until you buy a new home, whichever comes first, and during that time the proceeds will be exempt from creditor seizure. See Mass General Laws Chapter 188, Section 11. When you buy a new home, you can then declare a homestead on it to continue receiving protection.   
What the homestead exemption does not protect against: The homestead does not protect against foreclosure of the bank holding your first mortgage or from foreclosure by any other individual or entity who you voluntarily gave a mortgage to such as a second mortgage, home equity loan, etc. Mass General Laws Chapter 188, section 3, gives a list of other exceptions to the homestead protection: https://malegislature.gov/Laws/GeneralLaws/PartII/TitleI/Chapter188/Section3. For example, the homestead exemption does not protect against tax debts, child support debts, etc. The homestead exemption also only applies to your primary residence, not, for example, to a second investment property that you are leasing to tenants.

The take home is that the homestead exemption is a major plus of owning a home, and one factor to consider in making the decision to purchase a home.
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DISCLAIMER- This article was meant solely to give a general idea about what the homestead exemption involves, and should not be exclusively relied on in making decisions such as whether to purchase a home or in determining your rights a debtor or creditor with respect to homesteaded property.