Homestead Protection of Sale Proceeds

A lawyer called last week to discuss how provision of the Massachusetts homestead law might be interpreted by the bankruptcy court. She was referring to the following section which was created by chapter 395 of the Acts of 2010. That’s the major homestead revision from 2011 that created the automatic homestead, clarified the applicability of the law to property held in trust, and settled a number of other ambiguities about prior homestead law.

The new provision that caught me by surprise was this one:

Section 8. (a) If a home that is subject to an estate of homestead is sold, whether voluntarily or involuntarily, taken or damaged by fire or other casualty, then the proceeds received on account of any such sale, taking or damage shall be entitled to the protection of this chapter during the following periods:

(1) in the event of a sale, whether voluntary or involuntary, or a taking, for a period ending on the date on which the person benefited by the homestead either acquires another home the person intends to occupy as a principal residence or 1 year after the date on which the sale or taking occurred, whichever first occurs; and

(2) in the event of a fire or other casualty, for a period ending on: ( i ) the date upon which the reconstruction or repair to the home is completed or the date on which the person benefited by the homestead acquires another home the person intends to occupy as a principal residence; or (ii) 2 years after the date of the fire or other casualty, whichever first occurs. 

In other words, if you sell a house that is protected by a homestead, the cash you receive from the sale is protected from creditors by the same homestead for up to a year. The provisions for protecting the proceeds from an involuntary sale, a taking or a loss that’s compensated by insurance make sense to me – why should you be dispossessed by circumstances beyond your control? – extending the same protection to a voluntary sale is something I find harder to accept. Still, the language of the statute is fairly specific so its intent seems clear. Thus far, I have not heard of a case that has taken advantage of this provision.