Whether you file for liquidation bankruptcy (Chapter 7) or reorganization bankruptcy (Chapter 13), a bankruptcy estate – a legal entity that is separate and distinct from you, the bankruptcy filer – will be created by operation of the bankruptcy code. All of your property will essentially be dumped into the bankruptcy estate and, for a time, the bankruptcy estate will actually own the property. However, Congress did not want people to emerge from the bankruptcy process completely destitute and with no ability to reorganize their financial situation. While there is a risk that one may lose some assets when one files for bankruptcy relief, such a situation is the exception rather than rule. Most people go through bankruptcy and retain all of their assets. Congress allocated various value allotments called “bankruptcy exemptions” that people can assert and absorb most or all of the property back out of the bankruptcy estate. Depending on your situation and the exemptions you claim, Behm Law Group, Ltd. can help you understand how your exemptions work and what role they play when you file for bankruptcy in Pipestone, MN.
When exemptions come into play during your bankruptcy case, you may use them to protect your value interest or equitable interest in your assets from liquidation. There is a common misunderstanding that one gets to keep a car or a house, etc. in bankruptcy. It is much more accurate to say that one gets to protect or keep an equitable interest in an asset. For instance, if you own a home worth $200,000 and the mortgage loan is $150,000, your equitable interest is $50,000. It is this $50,000 that you would protect with the applicable bankruptcy exemption. The applicable bankruptcy exemption would not make the underlying mortgage go away and you would still have to pay it or the mortgage lender could initiate foreclosure proceedings against your house. Every individual filer has access to the bankruptcy exemptions in both Chapter 7 and Chapter 13 cases. As indicated above, the policy goal of bankruptcy is rehabilitative and the intent behind the bankruptcy code is not to leave a bankruptcy filer completely destitute. Rather, the intent is to allow a person some property with which to reorganize one’s financial situation and move forward free of debt entanglement (other than those debts one actually wants to retain).
In Minnesota, a bankruptcy filer can choose either the exemptions provided under Minnesota state law or the exemptions provided under the federal bankruptcy code. Whether one elects one or the other depends largely on how much equity or value one has in one’s homestead. Again, equity is the value of an asset in excess of the debt owed on that asset. For instance, presume again that one owns a home worth $200,000 and that one owes $150,000 on the subject mortgage. One, therefore, has $50,000 equity. One would protect this equity with one’s homestead exemption. The homestead exemption under the Minnesota state exemptions is $390,000 for a homestead that is located in a city/town and $975,000 for a rural homestead or farm. The homestead exemption under the federal bankruptcy code is $23,675. In this example, given the $50,000 equity figure, one would want to use the exemptions provided under Minnesota state law where one could protect the full $50,000. If one were to choose the exemptions provided under the bankruptcy code, one could protect only $23,675 and the bankruptcy trustee administering one’s case could sell the house, pay off the $150,000 mortgage and pay the bankruptcy filer the exemption claim of $23,675 and use the rest to pay one’s creditors.
The analysis regarding one’s property and the applicable bankruptcy exemptions needed to protect it can be highly nuanced and exceedingly detailed and whether one chooses the exemptions provided under Minnesota state law or those provided under the federal bankruptcy code depends on one’s unique circumstances. For more information about how exemptions can benefit your situation when you file for bankruptcy in Pipestone, MN, contact Behm Law Group, Ltd. at (507) 387-7200.