Whether a person files a person files a chapter 13 or chapter 7 bankruptcy case they are afforded a great deal of relief from their debts. When a person files a chapter 13 case, they agree to pay as much as they can towards their debts in a 3 to 5 year repayment plan, before getting their discharge.
In a chapter 7 case, the debtor (the legal term for a person who files a bankruptcy case) is not required to make payments to the trustee. Rather, in exchange for being granted a discharge of their debts, the debtor is required to either turn over certain property to the trustee to be sold and converted into cash, or pay the trustee to keep the property, the proceeds of which go to the creditors. However, in the majority of cases, most, if not all, of the debtor’s property is exempt, meaning it is legally protected from being taken to pay debts.
Homeowners may be understandably concerned about the possibility of losing their home if they file bankruptcy. The good news is that the law is very generous about allowing people to protect their homes in bankruptcy, especially for Minnesotans. Minnesota law exempts up to $450,000 in equity in a debtor’s homestead. To be considered the debtor’s “homestead” the home, and land upon which the home sits, must be the actual primary residence where the debtor lives. A second home or summer cabin does not count as a person’s homestead. The amount of equity in the home is the difference between the value of the home and the secured debt against the home (e.g. the Mortgage debt). For example a home worth $300,000, with a mortgage balance of $200,000 against the property, has $100,000 in equity. If the homeowner who files a chapter 7 bankruptcy case in Minnesota uses this home as their primary residence, they may claim the equity in the home as exempt. This means the trustee will not be able to take the home, and sell it, to pay creditors.
Debtors who file for bankruptcy in Minnesota may choose Minnesota law to exempt their property or may choose to use the “bankruptcy exemptions” provided by the US Bankruptcy Code. Federal bankruptcy exemptions allow the debtor to protect up to $27,900 in equity in their homestead. A debtor is often better off electing to use the Federal bankruptcy exemptions when they have less than $27,900 in equity in their home, as those exemptions provide a special “wildcard” exemption that enables the debtor to exempt up to $15,425 in other property that is not specifically protected under other exemptions (i.e. recreational vehicles, large tax refunds, multiple cars, and etc.). This wildcard exemption is unavailable under Minnesota law.
Therefore, whether the debtor chooses Minnesota exemptions or Federal bankruptcy exemptions, in the vast majority of cases, their home will be protected from being taken to pay their debts. So long as the debtor continues to make their mortgage payments, they can keep their home! In rare circumstances, the debtor’s homestead may not be exempt and protect due to the fact that the equity in the home exceeds the $450,000 limit. Also, the home may not be exempt if the debtor purchased the home within 1215 days before filing for bankruptcy and the equity exceeds $189,050. In these types of cases, the debtor should consider filing a chapter 13 case, as the trustee can only take property to pay debts in a chapter 7 case. However, this may still be an issue in a chapter 13 case, as the creditors must receive, at minimum, as much as they would have received had the debtor hypothetically filed a chapter 7 case and the trustee took the home to pay creditors.
So, whether the debtor files a chapter 7 or chapter 13 case, and regardless of whether they choose Minnesota law or Federal bankruptcy law to protect their property, their home is almost always completely protected from being taken to pay creditors.
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When considering filing for bankruptcy, a person is wise to first consult with an experienced bankruptcy attorney. LifeBack Law Firm now has a new office location at 370 Selby Ave, Suite 224, Saint Paul, Minnesota 55102. Come visit us there and check us out on our website at Lifebacklw.com!
