Last week, I finished writing about the way that Minnesota state law treats home ownership in bankruptcy cases. If you recall, Minnesota is one of 15 states nation-wide that allow people who file bankruptcy to either use the property protections found in the Federal Bankruptcy Code or the property protections found in Minnesota Statutes to protect their interests in property - both real estate and personal property. In bankruptcy cases, when property is protected, the property is termed “exempt.” For many of my clients, the anxiety they feel regarding the decision of whether to file a bankruptcy case has to do with making sure that the property they own and want to retain is exempt.Minnesota state law has a very generous homestead real estate exemption. Minnesota state law allows homeowners to exempt $390,000 of equity in real estate that the debtor uses as a residence. There are several accompanying statutes the expand this protection under Minnesota law. It’s clear from Minnesota law that the Minnesota state legislature places a high value on people with money problems being able to retain the home in which they live.
But as I mentioned, above, Minnesota residents with money problems who are looking at filing a bankruptcy case also have the ability to use the exemptions provided in the Federal Bankruptcy Code. So this week, let’s look at what the bankruptcy law says about protecting homestead real estate.
Before we get started, it’s important to note that Congress, in passing the Bankruptcy Reform Act of 1978 wanted to create some “minimum” exemptions for individuals going through a bankruptcy case, so that if a person was filing bankruptcy, he would be assured that he had sufficient property protected in the bankruptcy that he could continue to live with dignity. So to a certain extent, readers should consider the Bankruptcy Code exemptions to be a “floor” as far as property protection is concerned. So the exemption amounts in cases in which the debtor uses the Bankruptcy Code to protect property are often more modest than the state law provisions of any one state.
As noted above, Congress gave states the ability to “opt out” of allowing people to use the Bankruptcy Code exemptions, and as further noted, 35 states chose to do so. But not Minnesota. And for a lot of reasons, the ability to choose a statute to protect property is an advantage for people in Minnesota thinking about filing a bankruptcy case.
Bankruptcy Code exemptions are found in section 522(d) of the law. And the very first
listed exemption is the homestead exemption. 522(d)(1) provides that the debtor’s aggregate interest, not to exceed $23,675 in value, in real property or personal property that the debtor, or a dependent of the debtor uses as a residence, in a cooperative that owns the property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor, or a dependent of the debtor, is exempt in a bankruptcy case.
The bankruptcy code exemption is fairly broad. Unlike Minnesota state law, there’s no limit on the size of the land a debtor can own on an exempt homestead.
Like Minnesota state law, the exemption applies to both “sticks and bricks” houses as well as modular homes and mobile homes - the statute references real and personal property that the debtor uses as a residence.
And the bankruptcy code exemption also includes cooperatives - that is, condominium apartments that the debtor uses as a residence.
And it’s not required that the debtor reside at the exempt homestead. A bankruptcy debtor can exempt the equity in a home he owns, but does not reside in, provided that a dependent of the debtor lives at the subject property. So the divorced or separated parent filing bankruptcy, who owns a home where her children reside (even on a part-time basis) can exempt her children’s home as her homestead provided that the children are her dependents.
And last, a burial plot owned by a bankruptcy debtor can be exempted under 522(d)(1). But note that you cannot exempt both the equity in the home you live in and a burial plot - it has to be one or the other.
The most obvious limitation with the federal statute is that only one home can be exempted under the bankruptcy code. So the debtor who owns both his residence and a lake home would have to elect which piece of real estate would be exempted. And since it is required under the statute that the real estate be the debtor’s residence, the debtor who owns more than one piece of property will need to be living at the property he intends to claim as exempt at the time the case is filed.
The other limitation - and it is in stark contrast to Minnesota state law - is that the amount of equity exempted is limited to $23,675. Note that this is the exemption for one debtor. If there is a joint bankruptcy filing, and the joint bankruptcy filers are joint owners of homestead real estate, the two filers can combine the homestead exemption - so a married couple can actually exempt up to $47,350 of equity in homestead real estate.
But even with the “doubling” of the exemption - look at the difference between the bankruptcy code and Minnesota law! Under Minnesota law, $390,000 of equity is exempt - more than 10 times the federal exemption, if there is a single person filing the bankruptcy case.
Last week I wrote about the clear legislative policy that Minnesota has in trying to promote and protect home ownership. It’s clear, although a little unfair, to conclude that Congress isn’t quite as interested in keeping individuals with financial problems in their homes. A fairer interpretation is to remember that at the time the bankruptcy code was changed significantly, in 1978, Congress intended the exemptions found in the bankruptcy code to be “minimum” exemptions; Congress thought that individual states would be free to, and in fact would, increase the property protection in state statutes, so that the bankruptcy code would really be the “floor” and not the ceiling, so to speak in homestead protection.So that’s the story with home ownership - the answer to the question “am I going to lose my house?” is, in Minnesota, no.