New Hampshire bankruptcy attorneys are sounding the alarm about a recent court order they say dramatically changes how the state’s homestead law protects homeowners going through tough times.
They say the legislature must fix it — and quickly.
Richard Gaudreau, a Salem attorney, said a federal judge’s recent ruling “changes the landscape” for the practice of bankruptcy law.
Under RSA 480:1, which establishes a “right to farm” in New Hampshire, “Every person is entitled to $120,000 of his homestead, or interest therein, as homestead “.
This right – to the equity in the family home – is a crucial protection in bankruptcy cases, often preventing individuals from losing their homes to creditors.
According to lawyers, protection is usually doubled for married couples, to $240,000 in equity. But in June, Judge Bruce Harwood, the chief judge of the US bankruptcy court in Concord, ruled that the homestead exemption only applies to the spouse whose name appears on the deed.
This, Gaudreau says, upsets a protection New Hampshire residents have relied on for decades.
“I think people are going to lose their homes because of this,” he said.
William Gillen, a Manchester barrister, said in case law dating back to the 1850s, that the property exemption “was designed to be construed liberally in favor of the owner”.
“If you look back at the nature of New Hampshire and how we were created as a state…home is paramount,” Gillen said. “The citizens of New Hampshire should be protected in your home.”
The recent decision, he said, “erodes the rights of New Hampshire homeowners if they find themselves in trouble and must file for bankruptcy.”
In his June 3 order, Judge Harwood ruled that the husband of a Merrimack landlord was not entitled to a homestead exemption because he was not listed as the owner of the family home.
Owner Katherine Brady filed for Chapter 7 bankruptcy protection in late 2021, which allows someone to get out of most debts, and claimed a homestead exemption of $120,000. After the home’s assessed value rose dramatically earlier this year, she sought to add a homestead exemption for her husband in the case.
The case was later converted to a Chapter 13 bankruptcy, in which a repayment plan is approved by the court. The Chapter 13 trustee objected to the dual homeownership exemption and the case went to court in May.
In her order, Harwood wrote that if only one spouse owns the home, the non-owner cannot claim a homestead exemption. The non-owning spouse’s homestead exemption only comes “on the death of the owner”, under RSA 480:3-a, he said.
“Until then, although the non-owning spouse may have an interest in property which may be protected by an exemption under RSA 480:3-a, the value of that exemption is $0,” the judge wrote. . “The couple are not allowed to ‘double…’,” he said.
Bankruptcy lawyers say there are real consequences to the decision.
Suppose a couple gets married and moves into a house owned by one spouse. Under previous interpretations of the homesteads law, both people were entitled to the $120,000 homestead exemption, which protects $240,000 of home equity.
But now Gillen said: ‘The person who owns the property is filing for bankruptcy on their own thinking that, well, my wife can claim the homestead exemption. If she’s not on the deed, under the Brady decision, she can’t do it.
That could be even more problematic in today’s over-inflated real estate market, lawyers say.
A new interpretation
Leonard Deming, a Nashua attorney who represents Brady, said it’s not unusual in New Hampshire for only one spouse’s name to appear on a deed. The judge’s decision, he said, is “an interpretation of exemptions law that has never been recognized or followed.”
“This will significantly change homestead law in the state of New Hampshire,” Deming said.
Lawrence Sumski, the Chapter 13 administrator for New Hampshire, filed the objection in the Brady case. “The court decided that property is an essential element of the homestead exemption,” he said. “So if you just got married but you don’t own it, you don’t qualify.”
“I don’t know if it’s a drastic change, but it’s definitely a clarification,” he said.
Deming filed a motion asking the judge to reconsider his decision. It also asks Harwood to “consider certifying the questions here to the New Hampshire Supreme Court for an advisory opinion.”
A hearing is scheduled for August 3 in US bankruptcy court in Concord.
The language of state law assigns the homestead exemption to “every person.” But in his order, Judge Harwood pointed to a later addition to the law that clarified how the law should apply to manufactured homes, which are often on land owned by someone else.
“The right of ownership created by this chapter shall exist in manufactured homes…which are owned and occupied as a dwelling by the same person, but do not exist on the land on which the manufactured home is situated if such land is not does not also belong to the owner. of prefabricated housing”, specifies the law.
In his view, Harwood cited this “owned and occupied” language, stating that it would be “foolish for the homestead exemption to be more restrictive for manufactured homes than for all other dwellings”.
However, Stephen Martin, a Concord lawyer specializing in foreclosure defense, argues that the Brady decision “undermines the purpose and intent behind the law, which is not only to protect the debtor by ensuring that the debtor has shelter, but the purpose and intention of protecting the debtor’s family.
Martin previously argued a case in federal appeals court that upheld the spouse’s right to the homestead exemption. He said the Brady decision changes that.
“That’s the scariest part is that this principle is being overturned and these untitled spouses basically have no right to enforce their property rights,” he said. .
Martin said the change could also affect people in the event of a foreclosure. And if there’s an economic downturn, that could be very important for New Hampshire homeowners, he said.
“People should care because if this rule is applied outside of the context of bankruptcy, people could realistically lose their homes because of it,” Martin said. “That’s what it’s all about, as far as I’m concerned.”
Booming housing market
Martin said he thinks the law is clear that a spouse is entitled to the homestead exemption. But he said: ‘The easiest way to solve this problem would be some kind of amendment to the law which clarifies that the spouse is entitled to this right.
Manchester barrister Gillen said the court order was even more problematic with soaring house prices in the state.
If the value of a house has increased dramatically – say a house is worth $300,000 – and the homestead exemption is down to $120,000 instead of $240,000, the trustee Bankruptcy may recommend selling the home to pay off creditors, Gillen said.
Salem’s attorney, Gaudreau, said the order could also impact lawsuits against creditors. The homestead exemption generally protects homeowners from having to sell their homes to pay off creditors, he said.
But if that exemption now only protects $120,000 of equity for some couples and a home is worth $400,000 in today’s market, homeowners could be forced to sell to pay off their debts, he said.
In his experience, Gaudreau said, people are one personal or medical crisis away from bankruptcy. And seniors and others who have paid off their mortgages are most at risk right now, he said, because they have a lot of equity in their homes.
“If you can’t double (the exemption) in this market, with the way the prices are inflated, I just think that’s a real problem,” Gaudreau said.
Bankruptcy trustee Sumski agreed that the current inflated home values in New Hampshire make property exemption more problematic in bankruptcy cases.
“Most people who file for bankruptcy don’t have $120,000 of equity in their home, let alone $240,000 of equity in their home,” Sumski said. If they did, they could refinance or get an equity loan to get out of financial trouble, he said.
But soaring real estate values have changed the equation, he said.
“Usually in bankruptcy we have the opposite problem, which is that you owe more than the house is worth. It’s like that in normal times,” Sumski said. “It was only with this crazy market appreciation that it reared its ugly head.”
If home values return to previous levels, the Brady decision might not be as consequential, Sumski said.
A legislative solution
When Gaudreau started practicing bankruptcy law, the homestead exemption in New Hampshire was just $5,000, he said. Over the years, he said, “the legislature has really tried to protect New Hampshire homeowners by increasing the property exemption as home values have gone up.”
He said it was time for the Legislature to step in again. “Pass a law (stating) that property is not necessary for a married spouse to benefit from a homestead exemption in RSA 481. It would be as simple as that,” Gaudreau said.
Manchester lawyer Gillen says most owners won’t have to worry about the Brady decision.
“But if you find yourself in the very unfortunate situation where you have to declare bankruptcy, it’s just a landmine waiting to be stepped on if you’re not careful,” he said.
He said people who file for bankruptcy protection without a lawyer will be particularly vulnerable. “It’s a trap for the unknown,” he said. “It’s a trap for the unwary.”
Trustee Sumski said it was a “tactical choice” to put both spouses’ names on one deed. Sometimes married couples choose to leave one spouse at large to protect the family from creditors or legal action, for example.
“These choices have consequences,” he said.