Minnesota Bankruptcy Exemptions and Law

Whether you live in Minneapolis–St. Paul, Duluth, or anywhere else in the state, overwhelming debt can feel like a problem with no solutions. However, several debt relief options may be available. One is bankruptcy, which may cause unwarranted dread. Bankruptcy is widely regarded as a common and responsible way to address debt. In 2024, over half a million Americans filed for bankruptcy. That doesn’t mean it’s right for you, but understanding how it works can help you decide whether to file.

This article explores what it means for a Minnesotan to file bankruptcy. We review how debts are eliminated, which property is protected, and how bankruptcy impacts your current and future finances. We’ll also explain who’s eligible for different types of consumer bankruptcy and answer common questions.

If your debt has become unmanageable, consider speaking with a lawyer before deciding how to proceed. A bankruptcy attorney who’s licensed in Minnesota can review your situation and help you understand appropriate debt relief options, which may or may not include bankruptcy. Either way, you’ll be able to make an informed decision. Most bankruptcy lawyers offer free consultations.

In the meantime, let’s start with some basic bankruptcy rules.

Minnesota Bankruptcy Law

The U.S. Bankruptcy Code is the federal law governing bankruptcies. Federal bankruptcy courts handle these cases under federal and state law. Exempt property rules dictate which assets and property are protected during the bankruptcy process.

Minnesotans filing for bankruptcy can follow either state or federal exemption rules, depending on which exemption system best suits their financial situation. You can only choose one. Picking and choosing between federal and state exemptions on an item-by-item basis is not an option.

Understanding the different types of bankruptcies can help you see how they work and which one may be right for you. Let’s take a closer look.

Types of Bankruptcy

Two main types of consumer bankruptcy exist: Chapter 7 and Chapter 13. Both are addressed in U.S. Bankruptcy Court. Each type treats your debt and property differently.

Chapter 7 Bankruptcy

Chapter 7 is available to those who pass a financial means test based on income and expenses. It allows you to eliminate nearly all your unsecured debt. Chapter 7 is often referred to as a liquidation bankruptcy because a bankruptcy trustee will generally sell your nonexempt property to repay your creditors. Chapter 7 cases usually last three to four months and can stay on your credit report for up to 10 years.

Chapter 13 Bankruptcy

Also known as reorganization, Chapter 13 is often the choice for people with regular income. It lets you enter a court-approved repayment plan that restructures and usually reduces some of your debt. Chapter 13 often allows people with mortgages to keep their homes.

Most Chapter 13 cases take three to five years to complete, after which the court typically discharges any remaining eligible unsecured debt. Chapter 13 bankruptcies can stay on your credit report for up to seven years.

The Automatic Stay

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’s because the court issues an automatic stay when you file your bankruptcy petition. This court order halts most collection action during the bankruptcy process, including wage garnishments, foreclosure, and most litigation.

The stay doesn’t stop criminal prosecutions, divorce proceedings, or most collection of domestic support obligations. It does prevent standard debt collection activity and can buy you some breathing room.

Secured vs. Unsecured Debt

Bankruptcy doesn’t 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’ll be required to pay off during bankruptcy.

Unsecured Debt

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 and can’t seize or repossess it if you fail to pay them. The most common types of unsecured debt are unpaid credit card bills, medical bills, and court judgments.

Secured Debt

When you have debt that’s 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’re using the loan to purchase. The most common types of secured loans are mortgages and car loans.

How Does Chapter 7 Handle Debt?

Filing for Chapter 7 bankruptcy will often allow you to discharge nearly all of your unsecured debt, but there can be some unsecured non-dischargeable debts. They include student loans (unless you file a separate action to prove undue hardship) as well as spousal and child support obligations.

Secured creditors receive better treatment under Chapter 7 because the bankruptcy filing doesn’t affect their right to seize your property for nonpayment. The automatic stay may postpone repossession actions, but the judge will eventually allow them to move forward. This leaves you with three options:

• Return the collateral to the creditor: This is the simplest option. While you’ll lose the property, you’re usually free from additional payments.
• Hold on to the property and continue making payments: Exemptions cover your equity in the property. If you sign a reaffirmation agreement, the creditor must let you keep the property as long as you maintain your monthly payments.
• Purchase the property by buying out the loan: This is rare in Chapter 7. It usually requires an upfront cash payment, and most filers lack the liquid savings.

Understanding how secured debt is handled in Chapter 7 can help you determine whether it’s right for you.

How Does Chapter 13 Handle Debt?

If you file under Chapter 13, you can often keep the property you put up as collateral for secured debts. In return, you’ll propose a payment plan to repay those debts over three to five years.

The plan will restructure your past-due debt and can force creditors to forgive a portion of the unsecured balance. Homeowners who want to keep their home must catch up on missed mortgage payments through their bankruptcy plan while continuing regular monthly mortgage payments.

While unsecured creditors almost always fare better in Chapter 13 than they do under Chapter 7, they’re rarely repaid in full. They’re paid using your calculated disposable income over the life of the plan. The total amount paid to unsecured creditors must equal or exceed the value of any nonexempt property you own. The court will usually discharge any eligible unsecured debt that remains after you’ve successfully completed your Chapter 13 repayment plan.

While bankruptcy can give you a fresh start, there are ramifications as well. Either type can negatively affect your credit rating, making it harder to get approved for loans until you rebuild it. In general, Chapter 7 has a more severe effect and stays on the report longer than Chapter 13.

Can I File for Bankruptcy in Minnesota?

The two types have different eligibility requirements. To file for Chapter 7 bankruptcy in Minnesota, you’ll need to show that you lack the disposable income to repay your debts by qualifying under one of two means tests.

Chapter 7 Means Tests

The first means test requires that you show your gross household income is lower than that of the median Minnesota household of the same size. Federal data shows that the median income for a three-person household in the state is $126,487. If you live in a three-person household and earn less than this threshold, you automatically qualify for Chapter 7.

If your household income is too high to pass the first means test, you may be able to use a second one to qualify for Chapter 7. The second test reviews your financial data from the past six months and lets you deduct standardized IRS living expenses and required debt payments from your income. If the final calculation shows you have little to no disposable income left each month, you may still qualify for a liquidation bankruptcy.

Chapter 13 Eligibility

If you don’t qualify for Chapter 7, you can file under Chapter 13 as long as you have steady income that’s high enough to support a repayment plan. You can’t file under Chapter 13 if you exceed the federal debt limits, which cap your liabilities at $526,700 in unsecured debt and $1,580,125 in secured debt.

Minnesota’s Bankruptcy Exemptions

You’re not required to use the Minnesota exemption system if you file for bankruptcy in the state, but 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.

Homestead Exemption

Minnesota’s homestead exemption is among the most generous in the country. You’re allowed to exempt up to $540,000 of the equity you have in your home. That amount jumps to $1,350,000 for farms of up to 160 acres.

You can also protect up to $540,000 of proceeds from the sale of your home (or $1,350,000 for agricultural land) for up to one year after it’s sold. Manufactured homes are also protected under the standard homestead exemption.

Motor Vehicle Exemption

You’re allowed to exempt up to $5,600 of the value of your motor vehicle. If you spent at least $3,750 modifying the vehicle to accommodate someone with a disability, that amount rises to $56,000.

Wage Exemption

Minnesota lets you keep up to 75% of your weekly earnings or 40 times the federal minimum wage, whichever is larger.

Personal Property Exemptions

Minnesota completely exempts certain personal property items. These include:

• Necessary clothing
• One watch
• Utensils
• Food
• Professionally prescribed health aids
• A burial plot
• A seat in a house of worship

Family Bibles/religious items are capped at an aggregate value of $2,000. The same applies to musical instruments. A personal library is exempt up to an aggregate value of $750.

The following are exempt up to an aggregate total value of $12,150:

• Household furniture
• Household appliances
• TVs
• Electronics (like computers, tablets, and smartphones)
• Phonographs

In addition, wedding rings and other jewelry are exempt up to an aggregate total value of $3,308.

Wildcard Exemption

Many states have a “wildcard” exemption that lets a debtor apply a specified exemption amount to any of their property. Under Minnesota law, a debtor may exempt up to $1,500 of any property, including funds in a bank account.

Tools of the Trade Exemption

The tools, machines, implements, books, office furniture, and stocks-in-trade that are reasonably necessary for you to pursue your trade or profession are exempt up to $13,500. Farm machines and implements are exempt up to $13,000. For those who use both types of equipment, the total combined value of property exempted may not exceed $13,000.

Insurance Benefits Exemption

Minnesota offers the following insurance exemptions:

• Proceeds of a life insurance policy benefiting a surviving spouse or child up to $56,000
• 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

Minnesota regards these payments as necessary for a debtor’s support and stability.

Pension and Retirement Exemptions

Standard retirement funds, including IRAs, Roth IRAs, 401(k)s, 403(b)s, and profit-sharing plans, are completely exempt.

Public Benefit Exemptions

Minnesota exempts most public benefits, including:

• Social Security
• Unemployment benefits
• Disability benefits
• Veterans’ benefits
• Need-based public assistance

Minnesota protects these benefits as essential for someone’s basic support.

Other Exemptions

• Health savings accounts (HSAs) up to $27,100
• Child support or alimony
• Personal injury or wrongful death recoveries

This last category is a major advantage over the federal track, which caps bodily injury payouts. The protected funds must be strictly compensatory (for pain, suffering, or medical bills), not punitive damages.

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 determine whether you can pay your debts without filing for bankruptcy and help you create a repayment plan if you file under Chapter 13. Your bankruptcy filing must include a course completion certificate showing that you completed the course within 180 days of filing. After your case is filed, you must also complete a debtor education course before you can receive a bankruptcy discharge.

If you’re filing for bankruptcy with an attorney, they’ll guide you through the filing process. For those filing themselves (known as filing “pro se”), the process begins by downloading the bankruptcy forms for Minnesota. The accompanying instructions explain what additional documents you need to provide.

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 are the same regardless of whether or not you have an attorney. If you can’t 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 people filing for personal bankruptcy choose to work with an attorney. The fees charged by Minnesota bankruptcy attorneys can vary depending on where you live and the complexity of your financial situation. A straightforward Chapter 7 case usually runs between $1,500 and $2,500. Chapter 13 filings are longer and often more complex, so Minnesota attorneys often charge between $3,000 and $4,500 for a case.

Legal Advice

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’s recommended that you seek a local bankruptcy lawyer’s assistance before filing. Most attorneys don’t 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 help ensure you exit bankruptcy with as many assets as the law allows.