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Minnesota Bankruptcy Exemptions and Law
Filing for bankruptcy is often seen as a last resort for those who are in true financial trouble. But the reality is that bankruptcy offers a means for those who are having trouble managing their debt to stop harassing phone calls and collection notices. The pause in collection activity will let you either reorganize your debt to make it more manageable or, if you have no hope of ever paying it off, eliminating it entirely.
Minnesota has put special bankruptcy rules in place that will help you protect your property from your creditors during bankruptcy.
Minnesota Bankruptcy Law
The U.S. Bankruptcy Courts are federal courts, and bankruptcy cases are conducted under the U.S. Bankruptcy Code. For this reason, most of your bankruptcy case will follow U.S. laws. Minnesota, however, has enacted its own set of laws regarding the property you can protect in bankruptcy,
Minnesota is one of several states that allow you to choose between the federal exempt property rules offered in the U.S. Bankruptcy Code and state law rules. This lets you select the exemption system that best suits your financial situation. However, you must use a single exemption system for all of your exemptions, so you cannot pick and choose between federal and state exemptions on an item-by-item basis.
We talk more about the Minnesota exemptions below. To understand how the exemptions work, however, it's important to have a general understanding of how bankruptcy works.
Bankruptcy is often thrown around as a generic term, but several different types of bankruptcy are used for individuals, businesses, and even cities. Nearly all personal bankruptcies are conducted under either Chapter 7 or Chapter 13. Since each treats your debt and property differently, it is important to understand the distinction between the two chapters.
Chapter 7 bankruptcy is available to those who can prove their income is below a certain level. It allows you to shed nearly all of your debt. Chapter 7 is often referred to as a “liquidation bankruptcy" because you may be required to turn over all of your property that is not covered by an exemption to a bankruptcy trustee who will then sell it to repay your creditors. In return for giving up your property, almost all of your debt will be discharged by the court.
If you have a regular income you may be eligible to file under Chapter 13, which will allow you to reorganize most of your debts so they are paid off over three to five years. The court must approve the plan, but it can force creditors to restructure your debt and even forgive some of what you owe.
The Automatic Stay Protects You From Creditors
One of the major reasons people file for bankruptcy is to stop the endless stream of phone calls from collection agencies and threats of legal action. That is because when you file for bankruptcy, the court will issue an automatic stay to stop all collection actions, including phone calls, foreclosure, and litigation.
The stay both buys you time to work out your debt problems and forces creditors to work within the bankruptcy process.
Secured vs. Unsecured Debt
Bankruptcy does not treat all of your debt the same way. When you file, your debts will be labeled as secured and unsecured. This designation is important because it plays a major role in how much you will be required to pay off during bankruptcy.
Unsecured debt is the most common type of debt in individual bankruptcies. The term describes those situations where your creditors have no security interest in your property. In other words, they have no right to seize or repossess your property if you fail to pay them. The most common types of unsecured debt are unpaid credit card bills, medical bills, and court judgments.
When you have debt that has been secured, your creditors have the right to seize your property if you fail to pay them. Secured debt is often created by loan contracts where you put up some of your property as collateral for the loan, usually the item that you are using the loan to purchase. The most common types of secured loans are mortgages and car loans.
How Are Secured and Unsecured Debt Treated Under Chapter 7?
Filing for Chapter 7 bankruptcy will often allow you to discharge nearly all of your unsecured debt. However, some unsecured debt may be labeled “priority" and cannot be discharged for bankruptcy. This priority debt includes such things as unpaid child and spousal support obligations.
Secured creditors receive better treatment under Chapter 7 because the bankruptcy filing does not affect their right to seize your property for nonpayment. The automatic stay may postpone their repossession actions, but, eventually, the judge will allow them to move forward. This leaves you with three options:
- Return the collateral to the creditor. This is the simplest option and, while you will lose the property, you are usually free from additional payments.
- Keep the property and continue making payments. If a Minnesota exemption covers your equity in the property, you may be able to work out a payment agreement with the creditor.
- Purchase the property by paying the loan balance. This is rare in Chapter 7 because most people filing under that chapter lack the assets to make the purchase.
Secured Debt Under Chapter 13
If you file under Chapter 13, you can often keep the property you put up as collateral for secured debts because you can work out a payment plan to repay those debts over three to five years. The plan will usually force creditors to restructure your debt and can force them to forgive some of the amount owed. Homeowners who want to keep their home need to keep making payments outside of bankruptcy.
While unsecured creditors almost always fare better in Chapter 13 than they do under Chapter 7, they are rarely repaid in full. That is because unsecured creditors are paid with whatever discretionary income is left over after you have paid your secured creditors. Whatever unsecured debt remains after you have completed your Chapter 13 repayment plan will be discharged by the court.
To file for Chapter 7 bankruptcy in Minnesota, you will need to show that you lack the disposable income to repay your debts by passing one of two means tests.
The first means test simply requires that you show your household income is lower than that of the median Minnesota household of the same size. For example, U.S. Census data showed the median household income for three-person households in the state was $100,430 in November 2020. If you live in a three-person household and have less than $100,430 in household income, you qualify for Chapter 7 in Minnesota.
If your household income is too high, you still may be able to qualify for Chapter 7 if you can prove that you have little to no disposable income each month after you have paid your bills.
You only need a steady income that is high enough to support a repayment plan to file under Chapter 13. However, you cannot file under Chapter 13 if you have more than $419,275 in unsecured debt and more than $1.26 million in secured debt.
You are not required to use the Minnesota exemption system if you file for bankruptcy in the state, but most of those filing for bankruptcy do so because they tend to be more generous than the federal exemptions.
While Minnesota law often allows both spouses to claim an exemption when a married couple files jointly, that “doubling" does not apply to the homestead exemption.
Minnesota's homestead exemption is among the most generous in the country. You are allowed to exempt up to $450,000 of the equity you have in your home. That amount jumps to just over $1.1 million for farms of up to 160 acres. As noted above, the homestead exemption is not doubled for married couples.
You can also protect up to $450,000 of proceeds from the sale of your home for up to one year after it is sold. Finally, if you live in a manufactured home, you will receive an exemption for its full value.
Motor Vehicle Exemption
You are allowed to exempt up to $5,000 of the value of your motor vehicle. If you spent at least $3,750 modifying the vehicle to accommodate someone who is disabled, that amount rises to $48,000.
Minnesota will let you keep up to 75% of your weekly earnings or 40-times the federal minimum wage, whichever is larger.
Personal Property Exemptions
Some personal property items are completely exempt, including:
- Necessary clothing
- One watch
- Health aids
- A family Bible
- Musical instruments
- A burial plot
- A seat or pew in a house of worship
The following are exempt up to a total value of $11,250:
- Household furniture
- Household appliances
- TVs and radios
- Phonograph records
Additionally, wedding rings and other items exchanged at the time of marriage are exempt up to $3,062.50.
No Wildcard Exemption
Many states have what is known as a “wildcard" exemption that allows someone filing for personal bankruptcy to apply a specified exemption amount to any of their property. Minnesota does not have a wildcard exemption.
Tools of the Trade Exemption
The tools, machines, implements, books, office furniture, or stock-in-trade that is reasonably necessary for you to pursue your trade or profession are exempt up to $12,500.
Farm machines and implements are exempt up to $13,000 in value. The total value of all of the tools of the trade exemptions together cannot total more than $13,000 in value.
Insurance Benefits Exemption
Minnesota offers the following insurance exemptions:
- Proceeds of a life insurance policy benefitting a surviving spouse or child up to $50,000 plus another $12,500 for each additional dependent
- Insurance proceeds resulting from the loss of or damage to exempt property
- Benefits of a police or fire association
- Benefits of a fraternal benefit association
- The cash value of an unmatured life insurance policy up to $10,000 if the debtor owns the policy
Pension and Retirement Exemptions
Up to $75,000 in present or future payments from a stock bonus, pension, profit-sharing, annuity, IRA, or similar plan are exempt. The judge may also choose to exempt additional amounts that are reasonably necessary for support. Additionally, any tax-exempt or ERISA-qualified plans are exempt.
Public Benefit Exemptions
Minnesota exempts most public benefits, including:
- Social Security
- Unemployment benefits
- Disability benefits
- Veterans' benefits
- Need-based public assistance
- Personal injury or wrongful death recoveries
- Health savings accounts (HSAs) up to $25,000
- Child support or alimony
How Do I Start Bankruptcy in Minnesota?
Everyone who files for personal bankruptcy in the U.S. must first take a credit counseling course. The course will help you establish whether you can pay your debts without filing for bankruptcy and help you create a repayment plan if you are filing under Chapter 13. Your bankruptcy filing must include a course completion certificate showing that you completed the course within 180 days of filing.
If you are filing for bankruptcy with an attorney, he or she will help guide you through the filing process. However, if you are filing on your own (known as filing “pro se"), you will begin the bankruptcy process by downloading the correct forms for Minnesota's Bankruptcy Court. The instructions on the form will let you know what additional documents must accompany your filing based on your financial situation.
What Will Bankruptcy Cost in Minnesota?
It will cost you $338 to file for Chapter 7 bankruptcy in Minnesota and $313 to file under Chapter 13. Those fees will be the same regardless of whether or not you have an attorney. If you cannot afford to pay the full filing fee, you can ask to pay in installments over 120 days. The fee may be waived if you earn less than 150% of the poverty line.
Most of the people filing for personal bankruptcy choose to be represented by an attorney. The fees charged by Minnesota bankruptcy attorneys can vary dramatically depending on where you live and the complexity of your financial situation. However, a straightforward Chapter 7 case will usually run between $1,200 and $1,800. Since they are usually more complex, attorneys will charge much more to file under Chapter 13.
Need Help Filing for Bankruptcy in Minnesota?
Filing for personal bankruptcy is a complex and often intimidating process. While you may be tempted to go it alone and file without an attorney, it is recommended that you seek a local bankruptcy lawyer's assistance before filing. Most attorneys do not charge for an initial consultation and can tell you whether filing for bankruptcy really is your best option.
After guiding you through the filing process, an experienced attorney will represent your interests throughout the bankruptcy case. This will ensure that you exit bankruptcy with as many of your assets as the law allows.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.