Everything You Need To Know About Bankruptcy Exemptions - PART 3

Posted by William Kain on October 13, 2016 at 10:35 AM
William Kain

bankrutpcy_exemptions.pngLast week I wrote a second installment about Exemptions Available To Bankruptcy Debtors, under both the Federal Bankruptcy Code or state law. Last week, I looked at a number of exemptions available to debtors to protect tools of the trade, life insurance policies and the several exemptions that exist to protect the right of a debtor to receive government benefits, child support and maintenance. This week we’ll look at a few more Bankruptcy Exemptions. We’ll also try to draw a clear distinction between the exemption provisions of the Bankruptcy Code and Minnesota Statutes - and what do the differences say about the policies of the United States Congress (Bankruptcy Code) and Minnesota State Legislature (Minnesota Statutes).

Your Right to Restitution

11 USC section 522(d)(11)(A) allows a debtor using Bankruptcy Code exemptions to exempt any amount due to him or her as an award under a crime victim’s reparation law. This exemption is most commonly used when a bankruptcy debtor is the beneficiary of a criminal court restitution order. But 555(d)(11)(A) is drawn broadly enough that the exemption could also apply to either state or federal legislation to compensate victims of a mass crime.
There is no similar provision in Minnesota Statutes.

Payment on Account of Wrongful Death

11 USC section 522(d)(11)(B) protects a debtor’s “right to receive” payment or “property that is traceable to” the debtor on account of the wrongful death of an individual of whom the bankruptcy debtor was a dependent. There are two qualifiers to this exemption: first, the debtor must be a dependent of the deceased person. Second, the amount that is exempt is limited to the amount reasonably necessary for the support of the debtor or a dependent of the debtor. There is no dollar limit for the exemption, but the person using the Bankruptcy Code to exempt this asset must show first that he or she was a dependent, and second that the amount claimed as exempt is necessary for the debtor’s support, and/or the support of a dependent of the debtor. 

Minnesota Statutes contains a similar, but broader provision. Minnesota Statutes section 550.37 subd. 22 provides a bankruptcy debtor with the right to exempt “rights of action for injuries to the person of the debtor or of a relative whether or not resulting in death.” This broad provision is fraught with complications of which a bankruptcy debtor needs to be well aware. There is no dollar limit contained in this subdivision. So if the statute is read literally, a debtor, under certain circumstances, could collect millions of dollars for wrongful death and file a bankruptcy case, seeking to discharge debt that amounts to a fraction of the wrongful death award. There is no dollar limit, plus there is no qualifying language similar to 11 USC 522(d)(11)(B) that limits the amount exempted to the amount that is reasonably necessary to support the debtor, or a bankruptcy debtor’s dependents.

The Minnesota Statute doesn’t require the debtor to be a dependent of the deceased individual. Rather, the statute protects the right to collect for the wrongful death of a “relative,” although the term “relative” is not defined in the statute. For these reasons, bankruptcy judges in Minnesota have been troubled by this provision as it relates to wrongful death and at least one bankruptcy judge ruled 550.37 subd. 22 unconstitutional as it applied to these issues.

It is very important to note that this exemption applies only to “rights of action.” That is, the only thing protected in Minnesota is the right to bring the lawsuit, not the money traceable to any award that the debtor actually receives. So the issue of timing is crucial if the bankruptcy debtor wants relief from debt collection while still protecting the entire wrongful death award. This results in individuals who may have a wrongful death claim as the survivor of a relative, of whom the bankruptcy debtor was not a dependent, using non-bankruptcy law exemptions and filing the case prior to any resolution of the wrongful death action, and using a Chapter 7 Bankruptcy, not Chapter 13 Bankruptcy as the preferred chapter. The bankruptcy court has held several times that for non-bankruptcy law purposes, there is no protection for wrongful death proceeds after the case has been settled or the verdict entered.

In chapter 7 cases, the filing of the case creates a bankruptcy estate. The chapter 7 bankruptcy trustee administers this estate. If a wrongful death case is pending at the time a case is filed, then the debtor, using Minnesota Statutes, can protect his or her interest in the payment following settlement or a trial. The debtor that waits to file after the award has been received will receive no protection from Minnesota Statutes, so will instead have to use the Bankruptcy Code, with its limitations, to protect the wrongful death award.

Your Right to Receive a Life Insurance Beneficiary Payment

Section 522(d)(11)C allows debtors who elect to use the Bankruptcy Code to protect property to exempt the right to receive, or property that is traceable to a payment on account of a life insurance policy of an individual of whom the debtor was a dependent, on the date of the individual’s death, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.

Minnesota Statute section 550.37 subd. 10 allows debtors who elects to use non-bankruptcy law to protect property to exempt up to $46,000 of money received by, or payable to, a surviving spouse or child, from insurance payable at the death of a spouse or parent.

While the provisions in the bankruptcy code and Minnesota state law are similar, there are a number of distinctions to draw between the two statutes. First, note that the Bankruptcy Code exemption requires that the bankruptcy debtor must have been a dependent of the individual who died, and the debtor must have been a dependent at the time of the individual’s death. So while this provision should cover almost all spouses, there is a very small percentage of children/grandchildren that this would apply to in a “normal” bankruptcy case. Most bankruptcy debtors are not anyone else’s dependent, save for the debtor’s spouse.

The Bankruptcy Code provision also contains the now-familiar language that limits the amount of the exemption to the amount “reasonably necessary for the support of the debtor and any dependent of the debtor.” How can a bankruptcy debtor who wishes to use this exemption best position themselves to take advantage of the life insurance payment exemption? It’s usually a matter of taking a good look at the debtor’s budget. In a budget in which the debtor is not able to pay all of his bills based solely on the income the debtor earns, less the debtor’s reasonable and necessary living expenses, the “gap” between a negative budget and a break-even budget can be “filled in” by a pro-rated payment of the life insurance beneficiary payments. So the life insurance check, paid in a one-time, lump-sum manner, can be pro-rated by the debtor to establish that the payment is reasonably necessary for the debtor’s support. If the bankruptcy debtor shows a positive household budget every month, then the life insurance proceeds are not exempt at all, and the bankruptcy trustee will collect the beneficiary payment and pay creditors’s claims, up to 100% of the allowed claim. The trustee will also pay himself the established commission when the claims are paid. If there is money left over, the unpaid amount will be turned over to the debtor.

The state statute is different. Instead of the subjective limitation of “reasonably necessary for support,” the Minnesota Legislature set an amount: the beneficiary can exempt $46,000 of life insurance proceeds. There is a limitation in the statute, though. The deceased individual must have been the debtor’s spouse or the debtor’s parent. In contrast, the Bankruptcy Code provision only requires that the debtor have been a dependent of the deceased individual at the time of death. The state law does not require dependent status to trigger the exemption. So an adult child, living independently of the deceased individual who is not that individual’s dependent at the time of death, can use section 550.37 subd. 10 to protect insurance proceeds, where the bankruptcy debtor who elects to use bankruptcy law in this situation, can not use 522(d)(11)C to protect the insurance payment. Unlike the wrongful death exemption in state law, the insurance payment exemption allows debtors to exempt both the right to receive the payment, and the payment itself.

Your Personal Injury Award

Section 522(d)(11)(D) allows a debtor to exempt the right to receive, or property that is traceable to up to $23,675 on account of personal bodily injury, not including pain and suffering or compensation of actual pecuniary loss, of the debtor, or an individual of whom the debtor is a dependent. Minnesota Statute section 550.37 subd. 22 allows a debtor to exempt the right of action for “injuries to the person” of the debtor or a relative of the debtor. The state statute says no more than that. The distinctions between the two statutes are important. The two statutes deal with the personal injury payment opposite of the treatment of life insurance beneficiary checks: the Bankruptcy Code sets a “hard” dollar amount that can be exempted, the state statute is vague on the dollar limit.

The Bankruptcy Code once again includes individuals who are not the debtor in the exemption scheme. So does the state statute. For the Bankruptcy Code the exemption applies to dependents of the debtor; the state statute extends the exemption to relatives of the debtor. The Bankruptcy Code restricts the exemption to what are called “general damages,” that is, damages that compensate the debtor for loss of use of her body or for the loss of her good health. Any amount in the personal injury award that is set aside for pain and suffering or lost wages (actual pecuniary loss) are not exempt under 522(d)(11)(D). The state statute has no such restriction. But the bankruptcy court in Minnesota decided some time ago that the exemption, while not limited by dollar amount, applies only for general damages, not special damages. So the personal injury plaintiff, who is also a bankruptcy debtor is well advised to speak with both the personal injury and bankruptcy attorney to insure that any personal injury award is based on general damages.

Note also that while the Bankruptcy Code provision exempts the right to receive and property that is traceable to the personal injury claim, the state statute only exempts the cause of action. The state law that exempts personal injury payments is the same as the state law that exempts wrongful death payments, with the same time restriction.

Loss of Future Earnings

The last sub-paragraph of section 522(d)(11) allows a bankruptcy debtor to exempt the right to receive, or property that is traceable to a payment in compensation of a loss of future earnings of the debtor or of an individual of whom the debtor is a dependent to the extent reasonably necessary for the support of the debtor and any dependent of the debtor - that is found in 522(d)(11)(E).

There is no comparable exemption in Minnesota state law. The Bankruptcy Code exemption has no dollar limit - just the now-familiar restriction that the exemption applies only to the extent needed to support the debtor and a dependent of the bankruptcy debtor.

This exemption can be used to protect the claim of a bankruptcy debtor for lost wages due to accident, injury or unjustified job loss. The exemption can be paired with section 522(d)(11)(D) to exempt a personal injury award that compensates the debtor not just for loss of good health or use of the body, but also compensates the loss of wages, both looking backward to the date of the injury/illness/accident, and then to the future for loss of future earnings.
Next week we’ll wrap up some odds and ends exemptions, and also look at the wild card exemption in the bankruptcy code and how that wild card can be used. In the meantime if you would like to know more please feel free to reach out to one of the MN Bankruptcy Lawyers at Kain & Scott and would be happy to answer any questions that you might have. 

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Topics: Chapter 13, Chapter 7, Bankruptcy Exemptions

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