Bankruptcy Court Rules on Right to Use Massachusetts Homestead Law for Out of State Property

November 15, 2016

When an individual files for bankruptcy, the law generally allows that individual (the “debtor”) to keep, or exempt, certain assets, with the remaining assets being sold to pay claims of creditors.  Exemption rights are designed to help the debtor achieve a “fresh start” after bankruptcy.  In Massachusetts, state law allows a debtor to exempt up to $500,000 in equity in real property that serves as the debtor’s residence.   A recent Massachusetts Bankruptcy Court decision has held that the right to exempt equity in one’s residence (the “homestead exemption”) can be applied to property located in another state.

The debtor, Paul St. James, lived in Massachusetts at the time he filed his bankruptcy petition, but owned property in Florida.  St. James had spent some time living in the Florida property pre-bankruptcy and stated his intention to reside there permanently.  St. James sought to use a Massachusetts homestead exemption to protect his equity in the Florida property.  Because of the length of time the debtor had lived in Massachusetts prior to the filing, the Court determined that Massachusetts law governed in determining available exemption rights.  The debtor did not, and could not, declare a homestead under Massachusetts law on his Florida condo, so he could not avail himself of the $500,000 exemption but he still sought to use the $125,000 “automatic homestead exemption” available under Massachusetts law.

The Bankruptcy Court was forced to rule on the relatively novel issue of whether a debtor may apply homestead laws in a forum state (in this case, Massachusetts) to a debtor’s residence located in another state.  Judge Bailey first found as a general principle that the homestead exemption could be applied to out of state property if Massachusetts law did not prohibit it.  Because Massachusetts law was silent as to whether it applied “extraterritorially” and because Massachusetts law favored the debtor in interpreting homestead rights, the Court went on to find that Massachusetts homestead exemption rights could be used to protect equity in the Florida property.  The Court left open for later determination whether the debtor could prove that he “occupied or intended to occupy” the Florida home as his principal residence, which was a precondition to the use of the exemption.

The case, In re Paul Reynold St. James, case no. 15-13341-FJB, provides further clarity to the rights of a debtor to protect certain assets from creditors in the event a bankruptcy filing becomes necessary.