What Are Bankruptcy Exemptions?
Exemptions are laws that protect a person’s property in bankruptcy. Bankruptcy laws require that a person filing bankruptcy list all their assets in the bankruptcy petition. Bankruptcy laws also provide that a person can protect, or claim as exempt, certain property that they get to keep during and after their bankruptcy case. When claiming an asset exempt, a person is protecting that asset from unsecured creditors and the Bankruptcy Trustee.
WHAT PROPERTY CAN I KEEP IF I FILE BANKRUPTCY?
In Minnesota, a person or couple who is filing bankruptcy can choose to exempt property using one of two different sets of laws: Federal exemptions or Minnesota state exemptions. Each set of laws protects slightly different property, and which one you choose will be determined largely by what property you have and which set of laws will protect your property the best.
A couple of important notes about exemptions laws:
- The exemption applies to the equity in an asset, which is the value of the asset less any debt secured by the asset. For example, if a person owns a vehicle worth $20,000.00, and owes the lender $16,000.00 on the loan taken out to purchase the vehicle, the person has equity of $4,000.00 in the vehicle. The amount the person could or would exempt is $4,000.00.
- If a married couple files a joint bankruptcy, each spouse can use the full value of each exemption with the exception of the Minnesota homestead exemption.
- A married couple filing a joint bankruptcy must choose the same set of exemption laws in their case.
- A person can only claim an exemption for property they own or have an equitable interest in. In Minnesota, the general rule is that ownership follows title; thus, if a motor vehicle is titled solely in one spouse’s name, that asset belongs solely to that spouse, and can only be claimed exempt by that spouse.
Federal exemptions are usually chosen by someone who files bankruptcy who does not own a home or whose home has less than $27,900.00 in equity ($55,800.00 for a couple). This is because although the Federal exemptions do not protect much equity in the home, Federal exemptions are more generous in protecting other property by making available a “wildcard” or “spillover” exemption that can be used to protect property such as cash on hand, money in the bank account, firearms, wages owed, tax refunds and other miscellaneous property not covered by other exemptions. Clients using the federal exemption typically do not lose any assets.
The Federal exemptions most commonly used by our clients filing bankruptcy protect the following specific property:
- Equity in residential property (this includes both real estate and mobile homes) – $27,900.00
- Personal effects and household goods (this includes wearing apparel, appliances, books, musical instruments and similar items) – $14,875.00 limited to $700.00 per item.
- Equity in one motor vehicle – $4,450.00
- Equity in jewelry – $1,875.00
- Tools of the trade – $2,800.00
- Pensions, retirement accounts and IRAs – usually to their full value
- Life insurance cash values – $14,875.00
- A claim against another for personal injury – $27,900.00
- The right to receive future payments or benefits such as social security, disability, unemployment, veteran’s benefits, and certain compensation for the loss of another person upon whom the debtor was a dependent.
In addition, Federal exemptions provide a “wildcard” or “spillover” exemption that a person can use to exempt any other property not (or partially) exempted by the specific exemptions listed above. This “wildcard” or “spillover” exemption is up to $15,425.00 of the unused portion of the homestead exemption. These exemption amounts are updated every three years.
MINNESOTA STATE EXEMPTIONS:
Minnesota’s State exemptions are usually chosen by someone who files bankruptcy who owns a home that has more than $27,900.00 in equity ($55,800.00 for a couple). Occasionally, Minnesota’s exemptions are chosen to protect a large potential claim for personal injury, as the Federal exemption is limited to $27,900.00, while Minnesota’s exemption does not contain a specific dollar limitation.
The Minnesota State exemptions most commonly used by our clients filing bankruptcy protect the following specific property:
- Equity in the Homestead – $450,000.00, up to 160 acres ($1,125,000.00 if agricultural use)
- Personal effects and household goods – $11,250.00
- Equity in one motor vehicle – $5,000.00 (up to $50,000.00 if modified to accommodate a person with a disability)
- Wedding rings or other symbols of marriage exchanged by spouses at time of marriage – $3,062.50
- Tools of the trade – $12,500.00
- Pensions, retirement accounts and IRAs – usually to their full value
- Life insurance cash values – $10,000.00
- A personal injury claim (this is not protected if the claim has been settled or a verdict reached before the bankruptcy is filed, and this does not exempt special or punitive damages or wage loss or medical bills incurred prior to the bankruptcy filing)
PROPERTY THAT IS NOT PROPERTY OF THE ESTATE:
Certain types of property are simply not considered to be property that needs to be exempted. This property includes:
- Social security income (no matter when received)
- VA Disability income (no matter when received)
- Most pension funds
- Interest in trusts (not created or funded by the person filing)
CAN I PROTECT MY PROPERTY FROM LIENS?
Although Exemptions protect your property from the claims of unsecured creditors and the Bankruptcy Estate, they cannot be used to protect an asset from a voluntary lien such as a car loan or mortgage. Bankruptcy exemptions combined with other bankruptcy laws can sometimes protect your property from involuntary liens such as judgment liens.
WHAT IF I HAVE A PROPERTY THAT IS NOT EXEMPT?
Most of our clients, about 95%, do not lose assets in a bankruptcy filing. Prior to filing your case, we will carefully review your case with you to determine if any assets are at risk in the bankruptcy case, and if there are any assets at risk, then this is a cost that you would have to consider in filing bankruptcy. It is very seldom that the loss of assets outweighs the benefits of discharging debts.
WHAT HAPPENS TO NONEXEMPT PROPERTY?
When a bankruptcy case is filed, a bankruptcy estate is created and an attorney called a Trustee is appointed to administer that estate. About 90% of the cases filed in Minnesota are what are called “no asset” cases, meaning that there are no assets for the Trustee to administer, and the case is concluded within a few months. If there are nonexempt assets, the Trustee’s job is to “administer” the assets, meaning reduce the assets to money. Some assets, such as tax refunds, are money that the Trustee can easily administer. Other assets such as computers, vehicles, or firearms, are less easy to administer. The Trustee must sell these assets, and is obligated to sell them to realize the most benefit to the estate. Often, this means selling the asset back to the person who filed bankruptcy. If a person cannot or does not want to pay the Trustee to keep the asset, then the Trustee will sell the asset through auction or other public sale.
The money that the Trustee gets for the assets is then used to pay expenses of administration, Trustee’s fees (the Trustee receives a percentage of the assets the Trustee administers) and the rest is paid out to the creditors.