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Residential Bankruptcies
June 6, 2009
Necessity of an Attorney
Attorneys can provide legal advice to your client on the best route to
take if they are facing the possibility of a bankruptcy and how it will
affect their real estate. The purpose of this Guide is to provide you
with information on the bankruptcy process and its relationship to real
estate, for your personal knowledge. The bankruptcy process can be
complex and confusing and a client attempting to do it on their own may
run into numerous roadblocks and may only alleviate their problems rather
than solve them. If you have a client who is contemplating a bankruptcy
it may be best to avoid giving them bankruptcy advice and instead have
them turn to an attorney who can steer them in the proper direction.
Will I Lose My House If I File for Bankruptcy?
This is the most common question received when someone calls looking for
bankruptcy advice. Often times the debtor is up to their knees in debt,
be it from credit cards, medical bills, back taxes, judgments, etc. But
no matter what else the debtor owns, the one asset they are often most
afraid of losing is their home. And why shouldn’t they be. They worked
hard in their life to acquire their home, they may be making all their
mortgage payments, yet they are in debt in other areas of their life and
are looking for a way out but at the same time trying to keep their home.
The answer – It depends!
What Does It Depend On?
The first thing it depends on is if the prospective bankruptcy client even
wants to keep their home. If the person is behind on their mortgage
payments, doesn’t see an opportunity to catch up on their payments and is
facing foreclosure, often times they will not keep their house and instead
lose it through the bankruptcy process. However, if the person does want
to keep their home they have that option if they are able to exempt it.
I. HOMESTEAD EXEMPTIONS
If the debtor is current on their payments they usually want to stay in
their home. The next question is how they are able to exempt it. When
filing bankruptcy you are allowed to claim exemptions of certain property,
including your homestead. Your choice as to what exemptions to use is
between the Federal exemptions and the State exemptions. You can not mix
and match your exemptions between Federal and State, you must choose one
or the other. Your ability to exempt your homestead depends on how much
equity you have in your home and what exemption you will be able to use –
the Minnesota state exemptions or the Federal exemptions.
A. Minnesota Homestead Exemption – Minn. Stat. 510.01 and 510.02
The Minnesota bankruptcy exemptions provide a homestead exemption of
$300,000 in equity. Minn. Stat. 510.02, Subd. 1. The property can not
exceed 160 acres of land. If the homestead is used primarily for
agricultural purposes the exemption rises to $750,000.
B. Federal Homestead Exemption – 11 U.S.C. Stat. 522(d)(1)
The Federal bankruptcy exemptions provide a homestead exemption of $20,200
in equity, per person. This means that if both spouses file, each spouse
can claim $20,200, bringing a combined exemption of $40,400 in equity.
C. Which Exemption Should I Choose?
The question comes down to how much equity you have in the house to
protect. Obviously the Minnesota exemption provides the better exemption
for larger equities and it is the main reason why the Minnesota exemptions
are more often used when the debtor has a homestead they are looking to
protect.
However, the benefit to using the Federal exemptions is that they offer
more protection for other assets due to the “Wild Card” provision it
offers of up to $11,200. 11 U.S.C. Stat. 522(d)(5). The Minnesota
exemptions do not offer this provision and therefore you might end up
being able to protect fewer of your assets.
The decision as to what exemption to use when attempting to protect a
debtor’s homestead comes down to two questions: How much equity is in the
home and what other assets are they trying to protect?
If there is more than $20,200 in equity in the home (if filing single),
then they will want to file using the Minnesota exemptions so that they
can protect all the equity in the home. If there is only $10,000 in
equity in the home, then they will probably use the Federal exemptions,
which will then allow them to protect other assets with the “Wild Card”
provision that they might not be able to protect under Minnesota
exemptions.
Once the debtor has determined the answer to these questions they will be able to choose their exemptions.
D. Example
- Debtor owns a homestead valued at $200,000. The debtor has a mortgage
on the home for $150,000, leaving him with $50,000 in equity. The only
other asset of value that the debtor has is a car that is paid off. The
debtor has a large amount of debts that have qualified him for bankruptcy.
The debtor’s choice is to protect it under Minnesota’s $300,000 exemption
or the Federal exemption of $20,200.
The obvious answer is the Minnesota exemption since there is $50,000 in
equity to protect. If the debtor were to use the Federal exemption of
$20,200, there would be $29,800 in unprotected equity that the Trustee
could then go after.
II. WHAT IF THE DEBTOR IS NOT ABLE TO KEEP THE HOME
If the debtor is behind on their mortgage payments or a foreclosure
process is started, the debtor will probably not keep their home after
going though bankruptcy. More than likely the debtor would choose not to
exempt the homestead since they are in default on the mortgage(s) that
exist on the property.
If this occurs the mortgage lender will usually bring a motion to the
bankruptcy court asking that the automatic stay be lifted so that the
foreclosure proceedings can proceed. Once the stay is lifted the home
would be sold through the foreclosure process and the proceeds would be
used to pay off the debt.
III. MORTGAGES
If the debtor is going to keep their homestead after going through the
bankruptcy, they will need to continue making their mortgage payments
throughout the process. As long as they continue to make their payments
and don’t go into default, they should come out of the bankruptcy with
their homestead. The mortgage, or mortgages, would be listed on the
bankruptcy schedules and the debtor would indicate that they are keeping
those debts by exempting the property.
For those debtors that are not keeping their property when filing
bankruptcy, they would list their mortgage(s) on the schedule and they
would be discharged along with the other debts once the bankruptcy process
is done.
IV. CONCLUSION
There are of course many more questions and answers that can come up in
regards to the bankruptcy process and its relationship to real estate.
But this is a basic guide that can get you started in knowing the details
of how a homestead can or can’t be protected by a debtor. The most
important thing to know is that a debtor will not necessarily lose their
home if they file for bankruptcy, as this is the first question many
debtors ask. The answer of “it depends” does not always satisfy the
person asking the question, but it really does just depend on the value of
their homestead and the other assets they own.
But more than likely, the debtor will be able to come out of the
bankruptcy process with their prized asset – their home.
DISCLAIMER
The information contained in this Residential Bankruptcies: A Guide for
the Realtor (“Guide”) is provided as educational information to the
Minnesota realtor community, and does not constitute legal advice. Jensen
Sondrall & Persellin, P.A. (“Firm”) tries to provide quality information,
but we make no claims, promises or guarantees about the accuracy,
completeness, or adequacy of the information contained in this Guide and
its associated statements made by the attorneys of the Firm and we make no
claim that any of the free forms contained in this web site are
appropriate for your particular needs.
As legal advice must be tailored to the specific circumstances of each
case, and laws are constantly changing, nothing provided herein should be
used as a substitute for the advice of competent counsel.
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you agree to the following:
- You will not rely on any information contained in this Guide or
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