Promissory Notes and Mortgages

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What You Should Know About The Homestead Act

The Massachusetts Homestead Protection Act protects up to $500,000.00 of the homeowner’s equity from creditors. The Homestead Act excludes from its protective umbrella debts incurred before the filing of a homestead declaration. This allowed you to assess whether a prospective customer and/or guarantor has sufficient assets available to pay for the credit sought.

However, the Federal First Circuit Court of Appeals held that the Bankruptcy Code preempts the preexisting debt exclusion. So now a debtor can file a homestead after buying from you and then file bankruptcy and claim and receive the benefit of the homestead protection. If the debtor has less than $500,000.00 in equity in the property, you may be out of luck.

So what can you do? You have at least four options:

  1. Request a Mortgage on a property before selling a substantial amount of materials;
  2. Use notices of contract which are statutory in addition to judicial liens, which may have better standing on “avoidance” but which also may be subject to a later filed declaration of homestead;
  3. Use UCC filings to secure payment of the debt owed; and/or
  4. Contact the State Representatives or Trade Association to attempt to tighten the homestead statute to be available only if the exclusions are applicable no matter if the debtor files bankruptcy.

As case law is still evolving, no one knows which approach, if any, is fool proof. Before accepting a person as a guarantor on an account, do your homework. The best approach is to be prepared.

Armed with the knowledge of this major pitfall, you can make an intelligent risk-benefit analysis. If you plan to extend significant credit, you may want to get a security interest and/or mortgage in your customer’s assets.

Although hindsight is always 20/20, a bit of planning may help to reduce your liability. If you would like to discuss this further, please feel free to contact Attorney Cohen. Call (508) 620-6900, email alanmcohen@collections-law.com or use the form to the right.

The Massachusetts commercial debt collection Law Offices of Alan M. Cohen LLC represents clients and sues debtors throughout Massachusetts including in Cambridge, Framingham, Lowell, Woburn, Middlesex County, Boston, Suffolk County, Fall River, Easton, Taunton, New Bedford, Bristol County, Springfield, Hampden County, Brookline, Dedham, Wellesley, Norfolk County, Brockton, Plymouth County, Worcester, Worcester County, Barnstable County and throughout Massachusetts.

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