In a chapter 7 bankruptcy, the person who files their bankruptcy case, also referred to as the “debtor,” receives a discharge, which legally wipes out most types of debts. While the debtor is not required to make payments towards their debts, as they are required to do in a chapter 13 case, they sometimes must turn over money and/or property to a bankruptcy trustee, who “liquidates” the property by selling it, and converting it into cash, to be distributed amongst the debtor’s creditors. While some people must turn over their money or property to the trustee, some do not. Whether or not a person is legally required to give up money and/or property to the trustee, depends on the amount and type of property they have, and whether they choose Minnesota State or Federal bankruptcy “exemptions” to protect their property from creditors.
Minnesota allows debtors to elect either State or Federal exemptions to protect their property from creditors. Exemptions are basically laws that protect property or money from being taken to satisfy debts. Debtors who have a large amount of equity in their home are often better off choosing State exemptions while debtors who have little, or no, equity in their home (for example if they rent and do not own a home) are more often better protected by the Federal exemptions provided in the Bankruptcy Code. This is because Minnesota State exemptions provide protection of up to $450,000, in equity in the debtor’s primary residence (aka their “homestead”) against creditors, while Federal exemptions protect home equity only up to $27,900. So, for example, a debtor’s home worth $200,000, with a remaining mortgage balance against the home of $160,000 (equity of $40,000), would be fully protected under State exemptions, but not under Federal exemptions.
Debtors with substantial equity in their home, who must elect State exemptions to protect their home, often must give up some money and/or property to the trustee to pay their creditors, while debtors who choose Federal exemptions typically do not. Why is this? The primary reason for this is the “wildcard” exemption under the Federal exemptions. A debtor who uses Federal exemptions to protect their property is automatically granted a wildcard exemption of $1,475 to protect any property they choose. On top of that, the debtor may any add to the wildcard exemption, any unused amount of their $27,900 “homestead” exemption, up to a total of $13,950. Basically, the debtor, in some cases (i.e. they don’t own real estate or their home is worth less than their mortgage) can use up to $15,425 of wildcard to protect property that would otherwise be not exempt. For example, a debtor who has $15,000 in home equity, may use a wildcard of $14,375 ($27,900 minus $15,000 equity plus $1,475).
For this reason, a debtor utilizing Federal exemptions is usually able to use their wildcard exemption to protect otherwise nonexempt property such as tax refunds, excessive money in their bank accounts, modestly valued recreational vehicles, boats, and etc. Debtors who need to use State exemptions to protect their property do not have this wildcard exemptions and may need to turn over their nonexempt property to the trustee to either be paid directly to creditors or sold at an auction and converted into cash to pay creditors. In many cases, debtors using State exemptions are able to pay the trustee so that they can actually keep the property, and often, are allowed by the trustee to do so with a payment plan. Even in cases where the debtor has to give up some money or property to the trustee, this amount is often very small in comparison to the amount of debt the debtor is getting rid of with their discharge, so it is almost always a very worthwhile trade off.
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Bankruptcy is a great option for many Minnesotans struggling to pay their debts. However, to best ensure that one’s bankruptcy case is filed correctly, and with as few issues as possible, it is always advisable for a person to first consult with an experienced bankruptcy attorney before actually filing their bankruptcy case. LifeBack Law Firm PA now has a new office located at 370 Selby, Suite 224, Saint Paul Minnesota 55102, in Saint Paul’s historic Cathedral Hill neighborhood. Come visit us there, or online, at lifebacklaw.com!