Am I Going To Lose My House? - Part 2

Posted by William Kain on October 16, 2017 at 10:15 AM
William Kain

What happens to your house when filing for bankruptcy.jpegLast week, I wrote about the issue of home protection in bankruptcy. And it’s a fairly complicated issue. But the bottom line is that if you are a homeowner that lives in Minnesota, and you need to file a bankruptcy case to resolve your financial issues, the equity in your home is almost certain to be exempt - that is, your home can’t be taken from you by a bankruptcy trustee if you want to protect it.

Minnesota is one of fifteen states that allow a bankruptcy debtor to use either the federal Bankruptcy Code, or state law to protect property. There’s a difference between the state and federal law in the amount of equity that can be exempted, and there’s a difference in how a homestead is defined. Today, I’ll take a look, first, at some additional dimensions with Minnesota state law. When we look at state law, it’s important to remember that in a bankruptcy case, the bankruptcy trustee steps into the shoes of creditors with respect to the homestead exemption, so everywhere where I mention exemption from creditors, that means the bankruptcy trustee in a bankruptcy case.

You Don’t Have to Own the House

One interesting feature in Minnesota’s homestead exemption law is that it is not required that you be the homeowner to qualify for the homestead exemption. The exception is this: Section 510.04 of Minnesota Statutes says that if a debtor is married, the homestead may be vested in either spouse, and the exemption extends to both. The statute further provides that any interest in land, whether legal or equitable, shall constitute ownership within the meaning of the statute.

While the fact in which section 510.04 would probably not come into play in a typical case, this statute furthers the policy of the Minnesota legislature of doing everything possible to preserve homeownership. The legislature makes this preference clearer, still, in the provisions of section 510.06 of Minnesota Statutes.

The Exemption Can Exist Even if the Owner Dies

Dovetailing with the provisions of section 510.04 are the specific provisions of Minnesota Statutes section 501.06. That statute specifically provides that if the owner of the home dies, leaving a spouse or minor children constituting the owner’s family surviving, the homestead exemption is not affected by the death.

And if the owner of the home should leave the home (the statute uses the antique language of “abscond, or otherwise desert the family”), the spouse and minor children comprising the family may retain the homestead, with all the rights of owners. However, the legislature does restrict the rights of the non-owning, home-occupying spouse: the non-owner does not have the ability to sell or mortgage the property, even though the home may be claimed as an exempt homestead.

Sales Proceeds are Exempt for One Year

Section 510.07 of Minnesota Statutes gives homeowners the right to sell the home and exempt the proceeds of the sale of a home for one year. The statute provides that an owner may convey the homestead without subjecting it, or the proceeds of such sale for a period of one year, to any judgment or debt from which it was exempt in the “owner’s hands.”

This is important for two separate issues. When individuals have judgments taken against them, the judgment creditor will typically docket the judgment with the district court. When a judgment is docketed, title to the real estate owned by the debtor is “clouded.” That means that the homeowner cannot give good title to the property to a buyer without paying the judgment. But while this is true, Section 510.07 allows a homeowner who is a judgment debtor an out: if the debtor applies to the court, the judge, upon finding that the property to be sold is indeed the debtor’s exempt homestead, can allow the sale of the home without the requirement of paying the judgment debt.

And in a situation where the homeowner sold her house prior to having a judgment taken against her, but subsequent to the sale has had a judgment entered, the proceeds of the sale are exempt from creditors for a period of one year after the date of sale. People in this situation need to be aware of one major qualification to the exemption for sales proceeds: the debtor must be able to trace the money in any account, or the amount of cash on hand, to the sales proceeds. If the sales proceeds have been deposited in a “general” account, with paychecks and other cash proceeds deposited, it might be impossible for the money to be traced. So if anyone is in some financial distress and has received money from the sale of his home, the potential debtor is well-advised to open a separate account and deposit the sales proceeds, and only the sales proceeds, in that account.

Exceptions to the Rule

This exemption does not apply to debtors who owe back child support or who are behind on spousal maintenance payments. If these types of debt exist, the person to whom the child support or alimony is owed can collect the arrears out of the sales proceeds, or can successfully demand payment at the time the home is sold.

And in order to be exempt, the debtor must have owned the homestead at the time the judgment against him was taken. Having a judgment entered, then buying the home, will not allow the owner to subsequently sell the home and have the sales proceeds be exempt from a judgment creditor - or, in the case of a bankruptcy, from the bankruptcy trustee. That’s what the statute is referring to when it says the exemption must be for property “in the owner’s hands.”

Insurance and Removal

Just as the proceeds from the sale of the home are exempt for one year following the sale, any insurance payment the owner receives from the damage or destruction of the property are exempt for one year after payment. Again, segregating the insurance proceeds from other sources of income is advised.  

Section 510.07 also gives a homeowner who moves out of the property the ability to exempt the equity in the home. There’s a six-month grace period after moving out of the home in which the owner can still claim the home equity as exempt. If the owner is going to be out of the home for more than six consecutive months, the equity in the property can still be exempted provided that the homeowner files a notice with the county recorder that the property continues to be the owner’s homestead.

The ability to retain the homestead exemption, even if the owner isn’t living there, is an important tool for people who are subject to job-related transfers or who are called to active-duty military service. The statute does put a time limit of five years on this part of the homestead exemption, however.

That’s how the state of Minnesota protects homesteads. Next week, I’ll write about the protection for homesteads found in the Bankruptcy Code.

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