Judge Hillman of the Massachusetts Bankruptcy Court days ago issued an opinion holding that a debtor could not extend his homestead to the surplus proceeds of a foreclosure sale. The court read the language of the statute quite literally:
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.
The key was the word “received.” The debtor in this case had his home foreclosed on, and there was a surplus from the sale. He filed bankruptcy to claim a homestead exemption in the proceeds of the foreclosure (in the amount after the mortgage was paid) as against other creditors who would have a right to this money. The court held that because the debtor never “received” the proceeds, so the statute, read literally, prevented a claim of homestead in the proceeds. The court further stated:
If I were to guess, and assuming that the legislature considered the problem at all, I would opine that it was not a literal meaning intended, but rather something like “the proceeds to which the person benefitted by the homestead is entitled on account of such sale”, but I do not think that I have the authority to revise the language to accomplish that end.
If other courts follow this decision, it will create a situation in which debtors with home equity facing foreclosure must make absolutely sure they file bankruptcy before a foreclosure sale so that they can receive and control the proceeds of sale themselves.