One of the most common questions that we are asked is, “If I file bankruptcy, will I lose all of my property.” A common misconception is that if someone files bankruptcy they will lose his or her property. Unfortunately, the fear of losing property keeps many people from seeking the debt relief that bankruptcy provides.
The fact is that most people who file a bankruptcy case keep all of their property while eliminating most, if not all, of their debts. This allows the person filing a bankruptcy to effectively recover from a financial crisis and begin to rebuild his or her financial well-being.
What are Bankruptcy Exemptions?
When a person files bankruptcy, all of his or her property becomes part of the bankruptcy estate. In other words, the debtor’s property is subject to being sold by the bankruptcy trustee to repay the debtor’s creditors. However, federal bankruptcy law allows debtors to exempt the equity in certain assets to protect those assets from the trustee and creditors. Bankruptcy is designed to give a person a second chance and federal bankruptcy exemptions allow the debtor to keep most, if not all, of his property as he rebuilds his finances.
Thirty-five states “opted out” of the federal exemptions by requiring debtors to use state exemptions rather than federal bankruptcy exemptions. Minnesota is one of 15 states that permit debtors to choose whether to use federal bankruptcy exemptions or state exemptions. A debtor must choose one set of exemptions or the other — a debtor cannot choose to use federal exemptions for some assets while using state exemptions for the other assets. It is important to note that the exemption applies to the net equity of the asset. If the asset is secured by a loan, the exemption applies to the equity after subtracting the amount of debt from the fair market value of the item.
Here is a list of the Minnesota bankruptcy exemptions and the corresponding federal bankruptcy exemptions for the same assets.
The Minnesota bankruptcy exemption for your home is $390,000. Your home is one of the biggest assets you own. Lawmakers believe that a debtor should be able to retain his home for himself and his family even though he has experienced financial problems. (Federal Exemption: $22,975 for one person and $45,950 for two people)
According to Minnesota statute 550.37, a debtor’s “wearing apparel, one watch, utensils, and foodstuffs of the debtor, and the debtor's family” is exempt. Household furniture, household appliances, radio, and televisions of the debtor and the debtor's family are exempt up to a value of $10,350. Wedding rings are exempt up to a value of $2,817.50. Lawmakers never intended to leave debtors without any personal property simply because the debtor needed bankruptcy assistance. (Jewelry Federal Exemption: $1,550 and Personal Property, including wearing apparel, $12,250)
Your vehicle is vital to keeping your job and providing for your family. The Minnesota exemption for a vehicle is $4,600 or up to $46,000 if modified for a disability. (Federal Exemption: $3,675)
Earnings and Wages
Your future income is fully protected by Minnesota exemptions. This makes it possible for you to continue paying your living expenses and provide for your future. (Federal Exemption: Unlimited) 75% of the wages you have earned, but have not yet received at the time your bankruptcy case is filed are protected by Minnesota exemptions.
Public Assistance or Benefits
All government assistance is exempt under Minnesota exemptions. Debtors who require government assistance to pay for their living expenses should not be penalized because they need the assistance of the bankruptcy court to resolve debt problems. (Federal Exemption: Unlimited)
The Minnesota exemption statute provides that “The debtor's aggregate interest not to exceed in value $9,200 in any accrued dividend or interest under or loan value of any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent” is exempt. This protects your loved ones in the event of your death. (Federal Exemption: $12,250)
Pension and Retirement Benefits
Your IRA is exempt under Minnesota exemptions “up to a present value of $69,000 and additional amounts under all the plans and contracts to the extent reasonably necessary for the support of the debtor and any spouse or dependent of the debtor.” Just because you have experienced a financial crisis that prevents you from paying your debts at this time, it should not jeopardize your future and your family’s future by wiping out your investment in your retirement accounts. (Federal Exemption: $1,245,475.
401(k) plans, 403(b) plans and defined-benefit pensions which are qualified accounts under ERISA law are not considered to be property of the bankruptcy estate and thus are completely protected whether you use Minnesota exemptions or federal bankruptcy exemptions.
Choosing Between Minnesota Bankruptcy Exemptions and Federal Bankruptcy Exemptions
As you can see, the Minnesota bankruptcy exemptions are higher for some assets compared to the federal exemptions; however, that is not always the case. Because each bankruptcy case is different, our attorneys analyze the debtor’s assets to determine whether to use the state or federal exemptions to provide the most protection for the debtor’s assets.
If you are struggling with bills you cannot pay, sign up for a free bankruptcy consultation to determine if filing bankruptcy is the best way to resolve your debt problems. We will discuss all available consumer debt solutions to help you reach a decision that is in your best interest. For more information about what to expect during your bankruptcy consultation, download a copy of our free Bankruptcy Consultation eBook.