In Minnesota, debtors get to choose whether they use the Federal Bankruptcy Code to protect their property or Minnesota State law. Property that is protected under either law is considered to be “exempt.” The Bankruptcy Code only protects up to $25,150 worth of equity (the difference between the home’s value minus the remaining mortgage balance) in a debtor’s home. However, Minnesota State law protects up to $450,000 of equity in a debtor’s home.
Debtors with little, or no, equity in their home frequently choose the Bankruptcy Code to protect their home because it is typically better at protecting other personal property than the State law. To be exempt, the debtor’s home must be their “homestead,” meaning it must be the primary residence in which they live. If the debtor has other real estate properties (i.e. a cabin), those properties are not considered their homestead, and will likely not be exempt, and therefore, not protected.
If the property is exempt, that means that the bankruptcy trustee will not be able to sell the property to pay creditors in the event that the debtor files a chapter 7 bankruptcy. It also means that the home will not have an effect upon the debtor’s payments in a chapter 13 bankruptcy, as the amount of the debtor’s unprotected (aka “nonexempt”) property affects the amount they will pay each month.
Practically speaking, the exempt home is protected, and therefore, not an issue in either type of bankruptcy case. However, whether the home is exempt is a separate issue from whether the mortgage company will be able to foreclose upon the home.
Bankruptcy gets rid of debt but does not get rid of creditors’ security interests in property. Therefore, the debtor must continue to make payments on the home in accordance with the terms of the mortgage agreement in order to keep the home.
Technically, the bankruptcy discharge eliminates the debtor’s obligation on the remaining mortgage debt. The mortgage company has the right to foreclose on the property if payments are not made but cannot take any further action against the debtor for the remaining amount owed after the foreclosure sale due to the debtor’s discharge.
Sometimes, the mortgage company will insist that the debtor sign and file a reaffirmation agreement to keep the house. By signing this document, the debtor acknowledges that they owe the debt and promise to repay it, which has the legal effect of making the debt not dischargeable. It is almost never advisable to sign this agreement as the debtor is afforded a great deal of legal protection that allows them to keep the house so long as they continue making payments.
The reaffirmation agreement almost always only benefits the mortgage company, as it gives them the right to legally pursue any remaining debt owed by the debtor after the foreclosure sale.
To ensure that your home will protected after filing bankruptcy, you should always consult an experienced bankruptcy attorney. See us anytime at www.kainscott.com!