When a person files for chapter 7 bankruptcy, they are asking the court to discharge, or completely wipe out, their debts without having to make any payments to their creditors. Usually, all their debts are discharged, except for certain types of debts (i.e. student loan debt, most tax debt, and debt owed as alimony or child support). In order to qualify for a chapter 7 bankruptcy discharge, the debtor must be unable to afford making payments to their creditors, as they would have to do in a chapter 13 repayment plan.
When the debtor’s gross income is lower than the median gross income in the State of Minnesota, based on household size, the court presumes that the debtor is unable to afford making payments to creditors, and therefore, that they qualify to file a chapter 7 case. Only in rare circumstances will this presumption that an under-median income debtor is without the means to afford a chapter 13 repayment plan be challenged.
The potential downside to filing a chapter 7 case is that, in some cases, the debtor may lose some of their property in order to pay their creditors, unlike in a chapter 13 case, where the debtor gets to keep all of their property. In bankruptcy, certain property is “exempt,” meaning legally protected from being taken to pay creditors. Property that “non-exempt” is all other property that is not protected, and therefore, subject to being taken to pay creditors. In most chapter 7 cases there is little, or no, nonexempt property that is available to being taken to pay creditors.
Bankruptcy law, particularly in Minnesota, is very generous about protecting the home in which the debtor lives. Debtors filing in Minnesota have the option of using either Federal exemptions or State exemptions to protect their homes and other property. Federal exemptions include the specific provisions in the Federal Bankruptcy Code exempting, and protecting, property. State exemptions include Minnesota State statutes, and any other applicable Federal laws, protecting property from creditors. Debtors with little, or no, equity in their home are typically best served by using Federal exemptions, as these exemptions will ensure not only that the home in which they live will be exempt, and protected, but are also very generous at protecting the debtor’s other personal property. The Federal exemptions exempt equity in the debtor’s home up to $25,150. Debtors with a lot of equity in their home are typically better served by electing State exemptions to protect their property, as it protects up to $450,000 in equity in the debtor’s home. The downside to choosing State exemptions is they do not provide as much protection for the debtor’s other personal property. Certain assets such as extra cash in the bank, tax refunds, and recreational “toys” (i.e. boats, ATVs, and Jet Skis) are more likely to be subject to being taken to pay creditors under State exemptions than they would be under Federal exemptions. The difference between State and Federal exemptions is a bit complex and better elaborated upon in other blogs. However, the bottom line is that regardless of whether the debtor elects State or Federal exemptions, their home is very likely going to be considered exempt, and fully protected in their chapter 7 bankruptcy case.
However, a debtor’s real estate is not always absolutely protected. To qualify for this “homestead” exemption the debtor must actually legally own the home, meaning they must actually be on the deed to the property. Furthermore, the home, and property upon which it sits, must be their primary residence in which they actually live. Therefore, a second home or cabin would not qualify as the debtor’s homestead if they actually primarily live somewhere else. It is not required that the debtor constantly live at the home in which they are claiming as exempt homestead. Rather, it is legally sufficient that they actually frequently occupy the home, as their primary residence.
Even if the home in which the debtor lives constitutes their actual primary residence, the court may deny the property protection under the homestead exemption in some other cases. One such reason would be if the debtor fraudulently transferred nonexempt funds into their homestead property. For example, if the debtor had $20,000 of nonexempt funds in a savings account and decided to just use it to pay down a mortgage on the property in one lump sum, the court may consider the equity created by the transfer to be unprotected by the homestead exemption. Under the Federal Bankruptcy Code, if the debtor makes such a transfer within 10 years prior to filing their bankruptcy case, with the actual intent to defraud their creditors (i.e. intentionally transferring money to avoid paying creditors), the court can reduce the debtor’s homestead exemption by that amount. As applied to the above example, this would mean the court could reduce the debtor’s claimed homestead exemption amount by the amount of the “fraudulent” transfer ($20,000). Practically, this would mean the trustee could seize the home to sell to pay creditors, with the $20,000 going to the creditors, unless the debtor is able to work out an agreement to pay the trustee to keep the home instead.
Another limitation to the homestead exemption is that the debtor cannot exempt more than $170,350 in equity in a homestead in which they have acquired an interest within 1215 days prior to filing their bankruptcy case. The Federal Bankruptcy Code created this provision to avoid people intentionally moving to a State with a generous homestead exemption (like Minnesota) simply for the purpose of buying a home in that State and using the homestead exemption to protect their home. Therefore, this 1215 day rule does not apply to situations in which the debtor moves from one home in Minnesota to another.
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This is designed to be a general overview of the topic of protecting one’s homestead in a chapter 7 bankruptcy case. For more detailed information how a chapter 7 bankruptcy case will impact your home, you should talk to an experienced bankruptcy attorney before filing your case. See us at LifeBackLaw.com!
