in NH's red-hot housing market, court ruling sets off alarms
Jul. 10—New Hampshire bankruptcy attorneys are raising alarms about a recent court order that they say radically changes how the state's "homestead" law protects homeowners who fall on hard times.
They say the Legislature needs to fix it — and quickly.
Richard Gaudreau, a Salem attorney, said the recent decision by a federal judge "changes the landscape" for the practice of bankruptcy law.
Under RSA 480:1, which establishes a "homestead right" in New Hampshire, "Every person is entitled to $120,000 worth of his or her homestead, or of his or her interest therein, as a homestead."
That right — to equity in the family home — is a crucial protection in bankruptcy cases, often keeping individuals from losing their homes to creditors.
According to lawyers, the protection typically is doubled for married couples, to $240,000 worth of equity. But in June, Judge Bruce Harwood, the chief judge in U.S. Bankruptcy Court in Concord, ruled that the homestead exemption applies only to a spouse whose name is on the deed.
That, says Gaudreau, upends a protection upon which New Hampshire residents have relied for decades.
"I think people will lose their homes because of this," he said.
William Gillen, a Manchester attorney, said in case law going back to the 1850s, the homestead exemption "was designed to be liberally construed in favor of the homeowner."
"If you look back at the nature of New Hampshire, and the way we've been set up as a state ... the home is paramount," Gillen said. "The New Hampshire citizenry should be protected in your home."
The recent decision, he said, "erodes the rights of New Hampshire homeowners if they find themselves in trouble where they need to file bankruptcy."
In his June 3 order, Judge Harwood ruled that the husband of a Merrimack homeowner was not entitled to a homestead exemption because he was not listed as an owner of the family's home.
The homeowner, Katherine Brady, filed in late 2021 for Chapter 7 bankruptcy protection, which allows someone to walk away from most debts, and claimed a $120,000 homestead exemption. After the assessed value of the home 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 double homestead exemption and the case went before the judge in May.
In his order, Harwood wrote that if only one spouse owns the home, the non-owner cannot assert a homestead exemption. The non-owner spouse's homestead exemption arises "only upon the death of the owner," under RSA 480:3-a, he said.
"Until then, while the non-owner spouse may have a homestead right that can be protected by an exemption under RSA 480:3-a, the value of that exemption is $0," the judge wrote. "The couple is not allowed to 'double-dip ... ,'" he said.
Bankruptcy attorneys say there are real-world consequences to the decision.
Suppose a couple marries and moves into a home owned by only one spouse. Under previous interpretations of the homestead law, both individuals were allowed the $120,000 homestead exemption, which protects $240,000 of equity in the home.
But now, Gillen said, "The person who owns the property files a bankruptcy on his own thinking that, well, my wife can assert the homestead exemption. If she's not on the deed, under the Brady decision, she cannot do so."
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 be on a deed. The judge's decision, he said, is "an interpretation of the law regarding exemptions that has never been recognized or followed."
"This is going to significantly change the homestead law in the state of New Hampshire," Deming said.
Lawrence Sumski, the Chapter 13 trustee for New Hampshire, filed the objection in the Brady case. "The court decided that ownership is an essential component of the homestead exemption," he said. "So if you're just married but not an owner, you're not entitled to it."
"I don't know if it's a sea change, but it's certainly a clarification," he said.
Deming has filed a motion asking the judge to reconsider his decision. He also is asking Harwood to "consider certifying the issues herein to the New Hampshire Supreme Court for an advisory opinion."
A hearing is set for Aug. 3 in U.S. Bankruptcy Court in Concord.
The language of the state law assigns the homestead exemption to "each person." But in his order, Judge Harwood pointed to a later addition to the statute that clarified how the law should apply to manufactured housing, which often sits on land owned by someone else.
"The homestead right created by this chapter shall exist in manufactured housing ... which is owned and occupied as a dwelling by the same person but shall not exist in the land upon which the manufactured housing is situated if that land is not also owned by the owner of the manufactured housing," the law states.
In his opinion, Harwood cited that "owned and occupied" language, stating it would be "nonsensical for the homestead exemption to be more restrictive for manufactured housing than it is for all other housing."
However, Stephen Martin, a Concord attorney who specializes in foreclosure defense, contends that the Brady decision "undermines the purpose and the intent behind the statute, which is to not only protect the debtor as far as ensuring that the debtor has shelter, but the purpose and intent of protecting the debtor's family."
Martin previously litigated 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, that basically that principle is being overturned and these non-titled spouses basically have no rights to enforce their homestead rights," he said.
Martin said the change could also affect people in foreclosure cases. And if the there's an economic downturn, that could matter a great deal to New Hampshire homeowners, he said.
"People should care, because if this rule is enforced outside of the context of bankruptcy, people could realistically lose their homes because of it," Martin said. "That's what it comes down to, as far as I'm concerned."
Hot housing market
Martin said he thinks the statute is clear, that a spouse is entitled to the homestead exemption. But he said, "The simplest way to fix this would be some sort of amendment to the statute that makes clear that the spouse is entitled to that right."
Manchester attorney Gillen said the court order is even more problematic with home prices skyrocketing in the state.
If a home's value has increased dramatically — say a home is worth $300,000 — and the homestead exemption is now only $120,000 instead of $240,000, the bankruptcy trustee can recommend selling the home to pay off creditors, Gillen said.
Salem attorney Gaudreau said the order also could have an impact in creditor collection lawsuits. The homestead exemption typically protects homeowners from having to sell their house to pay off creditors, he said.
But if that exemption now only protects $120,000 in equity for some couples, and a house 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 down their mortgages are most at risk right now, he said, since they have a lot of equity in their homes.
"If you can't double (the exemption) in this market, with how inflated the prices are, I just think it's a real problem," Gaudreau said.
Bankruptcy trustee Sumski agreed that the current inflated value of homes in New Hampshire makes the homestead exemption more of an issue in bankruptcy cases.
"Most people who file bankruptcy don't have $120,000 equity in their home, let alone $240,000 equity in their home," Sumski said. If they did, they could refinance or get an equity loan to get them out of financial trouble, he said.
But the skyrocketing real estate values have changed the equation, he said.
"Usually in bankruptcy we have the opposite issue, which is that you owe more than the house is worth. That's what it's like in normal times," Sumski said. "It's only with this crazy appreciating market that this has raised its ugly head."
If home values return to previous levels, the Brady decision may not be as consequential, Sumski said.
A legislative solution
When Gaudreau began practicing bankruptcy law, the homestead exemption in New Hampshire was only $5,000, he said. Over the years, he said, "The Legislature really has tried to safeguard New Hampshire homeowners by increasing the homestead exemption as the value of homes increased."
He said it's time for the Legislature to step in again. "Pass a statute (saying) that ownership is not necessary for a married spouse to have a homestead exemption in RSA 481. It would be that simple," Gaudreau said.
Manchester attorney Gillen said most homeowners won't have to worry about the Brady decision.
"But if you find yourself in the very unfortunate situation where you have to file bankruptcy, it's just a land mine 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 unknowing," he said. "It's a trap for the unwary."
Trustee Sumski said it's a "tactical choice" whether to put both spouses' names on a deed. Sometimes married couples choose to leave one spouse off to protect the family from creditors or legal action, for instance.
"Those choices have consequences," he said.
