Massachusetts debtor nearly loses house in “simple” bankruptcy
An Andover woman nearly lost her $600,000 home when she filed a routine consumer bankruptcy case recently — and her hair-raising adventure highlights one of the biggest traps out there for Massachusetts bankruptcy attorneys.
The debtor in the Welch case owned a house worth $608K with a mortgage of $314K on it. She had filed a homestead exemption on it, which under normal circumstances would protect up to $500K of home equity.
However, prior to the bankruptcy the debtor had put the house in a trust where she was the beneficiary of 99% and her son was the beneficiary of 1%. Later, this was switched so that the debtor was the beneficiary of 100% of the trust.
It was this latter move that caused the problems. Chapter 13 trustee Denise Pappalardo argued that this transfer triggered the provisions of section 522 (p) of the bankruptcy code.
The section in question puts an absolute cap (presently $146K) on the homestead exemption, regardless of what state law allows, if a property has been transferred within 1215 days prior to the date the bankruptcy case was filed.
Limiting the debtor’s homestead exemption to $146K would have meant there was about $148K in unprotected equity available for creditors — and probably forced the sale of the house. However bankruptcy judge Melvin Hoffman ruled — narrowly — that the late switch in trust ownership was not the kind of “transfer” covered by 522 (p).
The judge also pointed out the inherent problems with this part of the bankruptcy code: “The legislative history of § 522(p) makes clear that it was intended to plug the ‘mansion loophole’ whereby an individual owning a high-priced residence in a lowdollar homestead state could sell that home and reinvest the proceeds in a high-priced residence in a state with unlimited homestead protection like Florida or Texas, then file bankruptcy and exempt from creditors the entire homestead.” In re Gentile, 483 B.R. 50, 53 (Bankr. D. Mass. 2012) (internal citations omitted). Regrettably, the statute which ultimately emerged from the legislative sausage-making process covers a far wider spectrum of transactions than the one Congress set its sights on. This has resulted in a brisk business for the bankruptcy court as trustees and creditors seek to capture within the boundaries of the statute an ever-expanding array of real estate related transfers.”
Massachusetts has never had a reputation as a low-dollar homestead state (if anything, it’s the opposite), and this debtor obviously didn’t even move anywhere. Nevertheless, she came close to being snared by section 522 (p) anyway. The case is a good warning to lawyers in Massachusetts to take a careful look at any real estate title issues before filing cases claiming the Massachusetts homestead exemption.