Whether 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. The bankruptcy court plays a crucial role in these proceedings, allowing individuals to keep certain necessities while managing their debts.
In a Chapter 7 case, the debtor (the legal term for a person who files a bankruptcy case) is not required to pay 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 most cases, most, if not all, of the debtor’s property is exempt, meaning it is legally protected from being taken to pay debts.
The process and implications of a bankruptcy filing include a thorough review of the debtor's assets and the treatment of secured and unsecured debt. This ensures that the debtor's financial situation is fairly assessed and managed.
Homeowners may be understandably concerned about losing their homes if they file for 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 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 a home is the difference between its value and the secured debt against it (e.g., 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 cannot 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 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. 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 (e.g., recreational vehicles, large tax refunds, multiple cars, etc.). This wildcard exemption is unavailable under Minnesota law.
Therefore, whether the debtor chooses Minnesota exemptions or Federal bankruptcy exemptions, in most cases, their home will be protected from being taken to pay their debts. So long as the debtor makes their mortgage payments, they can keep their home!
In rare circumstances, the debtor’s homestead may not be exempt and protected because the home's equity 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 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. 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 protected from being taken to pay creditors.
PROTECTING YOUR MINNESOTA HOMESTEAD: A DEEPER DIVE INTO MINNESOTA'S BANKRUPTCY EXEMPTIONS
Understanding the nuances of bankruptcy exemptions is crucial for homeowners considering this financial fresh start. Let’s delve deeper into how Minnesota’s unique bankruptcy laws and federal bankruptcy provisions interact to safeguard your most valuable asset.
A bankruptcy trustee plays a vital role in overseeing the bankruptcy process, protecting assets, enforcing exemptions, and selling non-exempt property to repay creditors.
THE POWER OF THE MINNESOTA HOMESTEAD EXEMPTION
Minnesota takes pride in its robust homestead exemption, a legal shield that shelters a significant portion of your home’s value from creditors. Under Minnesota bankruptcy law, the $450,000 limit is considerably higher than many other states, providing Minnesotans with exceptional peace of mind. However, it’s important to remember that this exemption applies to the equity in your home, not its total value.
Minnesota's bankruptcy exemptions protect property and assets during bankruptcy. You can choose between federal and state exemption systems, each with its own advantages and eligibility requirements.
Calculating Your Equity: If your home is appraised at $400,000 and you have a remaining mortgage balance of $250,000, your equity is $150,000. In this scenario, your equity would be protected under the Minnesota homestead exemption.
Beyond the Numbers: While the financial aspect is vital, the homestead exemption also embodies a philosophy of protecting families and their sense of stability. Your home is more than just an investment; it’s where memories are made and lives are built.
FEDERAL EXEMPTIONS: A STRATEGIC CHOICE
Opting for a federal exemption in bankruptcy filings can be advantageous in certain situations, particularly when your home equity is below the federal limit of $27,900. The federal exemption includes a wildcard exemption that allows you to shield additional assets like vehicles, personal belongings, or financial accounts, providing flexibility tailored to your unique circumstances.
The Wildcard Advantage: Imagine you have a boat worth $10,000 and $5,000 in a savings account. Under federal exemptions, you could use the wildcard to protect these assets alongside your home equity. This strategy can be invaluable for those with diverse holdings.
BEYOND THE HOMESTEAD: PROTECTING OTHER ASSETS
While your home is often the primary concern, bankruptcy exemptions also extend to other forms of property. Vehicles, personal belongings, and various types of personal property such as household goods, tools of trade, wedding rings, farm machinery, motor vehicles, burial plots, furniture, and jewelry can all be protected up to certain limits.
Retirement Security: Minnesota and federal law offer strong protections for retirement accounts, ensuring your financial future remains intact even in challenging times.
THE IMPORTANCE OF PROFESSIONAL GUIDANCE
Understanding and maximizing bankruptcy exemptions requires careful consideration and expert guidance. An experienced bankruptcy attorney can be invaluable, helping you assess your financial situation, identify the most beneficial exemptions, and create a tailored strategy to protect your assets effectively.
Beyond the Legal: Bankruptcy can be emotionally taxing. A compassionate attorney can provide reassurance, guidance, and support throughout the process, empowering you to rebuild your financial life confidently.
SPECIAL CONSIDERATIONS FOR MINNESOTA HOMEOWNERS
Minnesota's laws also provide additional safeguards for homeowners facing unique circumstances:
Recent Home Purchases: If you purchased your home within 1215 days (roughly 3 years and 4 months) of filing for bankruptcy, there's a higher equity limit ($189,050) to qualify for full exemption. This recognizes the financial commitment of a recent home purchase and aims to protect that investment.
Agricultural Homesteads: Minnesota extends a particularly generous homestead exemption for those who live on and work agricultural land. Up to $1,050,000 in equity can be protected for agricultural homesteads up to 160 acres. This recognizes these properties' unique nature and value for families and the local economy.
Mobile Homes and Manufactured Housing: To qualify for the homestead exemption, your primary residence must not be a traditional house. If your mobile home or manufactured housing is your primary residence and affixed to the land you own, it's eligible for the same protections as a traditional home.
CHAPTER 13 BANKRUPTCY: A DIFFERENT PATH
While Chapter 7 bankruptcy involves liquidating assets to pay off debts, Chapter 13 offers an alternative: restructuring your debts into a manageable repayment plan. This option can be attractive for homeowners with substantial equity exceeding exemption limits.
In a Chapter 7 bankruptcy, keeping a car and being behind on payments for a car loan may not be the right choice, as the bankruptcy does not eliminate the right of car loan creditors to take the car to cover the debt.
Protecting Your Home Through Repayment: In a Chapter 13 plan, you’ll typically pay back a portion of your unsecured debts (credit cards, medical bills, etc.) over a 3 to 5-year period. This can allow you to keep your home, even if its equity exceeds the exemption amount, as long as you can demonstrate the ability to make the required payments.
Strategic Decision-Making: Choosing between Chapter 7 and Chapter 13 requires careful analysis of your assets, debts, income, and financial goals. An experienced attorney can guide you through this decision, ensuring you choose the path that best protects your home and sets you up for long-term financial success.
YOUR HOME: A FOUNDATION FOR THE FUTURE
Owning a home is a significant achievement, and the prospect of losing it can be overwhelming. Understanding your rights under Minnesota’s homestead exemption and federal bankruptcy provisions empowers you to make informed decisions about your financial future. Exemptions and bankruptcy laws can be used to protect assets from unsecured creditors.
Remember, bankruptcy isn’t about failure but finding a path to a fresh start. With the right guidance and a clear understanding of your options, you can protect your home and emerge from bankruptcy with renewed hope and financial stability.
UNDERSTANDING THE TIMELINE: WHEN CAN YOU FILE AGAIN?
While bankruptcy offers a fresh start, it's important to understand that it doesn't erase your financial history entirely. There are waiting periods before you can file for bankruptcy again. This timeline varies depending on the type of bankruptcy you previously filed and whether you received a discharge of your debts. An experienced bankruptcy attorney can help you understand these timelines and plan for future financial challenges.
LIFE AFTER BANKRUPTCY: A FRESH START
Filing for bankruptcy isn’t the end of the road; it’s a new beginning. By discharging your debts and protecting your assets, you can gain financial freedom, rebuild your credit, and create a brighter future for yourself and your family. In Minnesota, individuals filing for bankruptcy can keep up to 75% of their gross weekly earnings or 40 times the federal minimum wage, whichever is greater, as part of the wage exemption.
Your Financial Well-Being Matters: Don’t hesitate to seek help if you face overwhelming debt. The sooner you take action, the sooner you can start your journey toward financial stability and peace of mind.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
When considering filing for bankruptcy, it is wise to consult with an experienced bankruptcy attorney. LifeBack Law Firm now has a new office at 370 Selby Ave, Suite 224, Saint Paul, Minnesota 55102. Come visit us there and check us out on our website at Lifebacklw.com!
