Bankruptcy: Am I Going To Lose My House?

Posted by William Kain on October 3, 2017 at 12:20 PM
William Kain

Your home and filing for bankruptcy.jpegFinancial problems make people anxious. And when clients come to visit with me about their finances, it is normal that they are anxious and stressed about their money situation. The anxiety comes, in large part, from the feeling that there’s not enough money to pay the bills - and the consequences that go along with that. The anxiety can be intense in these situations: worries about whether a person can be jailed if there is a civil judgment taken for an unpaid debt is common (no, the person is not going to jail). If a person files a bankruptcy case, who will know about it (creditors certainly will, but friends and neighbors almost always don’t).

What happens to your home if you file for bankruptcy?

And then there is the special anxiety that a bankruptcy will result in absolute poverty - that the bankruptcy debtor will lose personal property - such as vehicles (usually not), household goods and furnishings (no) and recreational equipment (sometimes, but not often).

But there’s no concern with quite as much of an edge on it as the concern that my clients who are homeowners have: is the house where my client and his family live “protected” if the client files a bankruptcy case? The answer in Minnesota is yes - your home is protected.

The purpose of this blog is to do a deep dive into the protection that the law offers homeowners who want to continue living in their home. When clients have the assurance that the home where he and his family live, a lot of the edge of the anxiousness the client is feeling goes away. So let’s look at the protection the law offers. But first, let’s set some parameters of what we’re talking about.

Two Different Definitions

If you’ve been reading blogs from our office’s attorneys, you know that Minnesota is one of fifteen states in the United States that give bankruptcy debtors the ability to “choose” exemptions to protect their property. Debtors can choose the exemptions contained in section 522(d) of the Bankruptcy Code, or they can choose to use Minnesota state law, or any other “non-bankruptcy” federal law to protect their property.

And both the Bankruptcy Code and Minnesota state law specifically provide an exemption for a debtor’s homestead real estate equity. But the definitions of what a homestead is, and the amount of equity is quite different between the Bankruptcy Code and state law - so keep in mind which statute is being applied to protect home equity.

It’s the Equity We’re Concerned With

Both bankruptcy law and state law protect the equity in a home - that is, the amount of value in a home less the outstanding balance owed by the debtor for a mortgage or mortgages on the property.

You Have to Live There

What both the Bankruptcy Code and state law exempt are homesteads - the person claiming the exemption must, as a general rule, live in the home being claimed as exempt (although Minnesota law has an exception to the requirement of occupancy).

We’re not Talking About Homestead Classification for Property Tax

Every now and then when I’m discussing exempt homesteads with clients the clients tell me that their home hasn’t been classified as a homestead for property tax purposes. That might be, but it doesn’t prevent a homestead exemption from being applied in a bankruptcy case - in other words, the fact that a home is not a homestead for property tax purposes doesn’t mean that it’s not a homestead for bankruptcy purposes.

You Have to Keep Paying Your Mortgage

As mentioned above, the exemption available to people who are looking at filing bankruptcy applies to homestead equity. The protection against creditors does not extend to mortgage companies with a perfected mortgage against the home. If a debtor defaults on a home loan, the mortgage company is entitled to foreclose on the home regardless of the amount of equity in the home. The protection afforded debtors regarding their homestead applies to non-mortgage judgment creditors.

With these issues defined, let’s look at the homestead exemption as it’s set out in both state law and bankruptcy law. Minnesota state law first.

The Exempt Homestead Under Minnesota Law

Section 510 of Minnesota Statutes deals with the protection debtors have in homestead equity. Section 501.01 sets out the basic exemption: “The house owned and occupied by a debtor as the debtor’s dwelling place, together with the land upon which it is situated to the amount of area and value hereinafter limited and defined, shall constitute the homestead of such debtor and the debtor’s family, and be exempt from seizure or sale under legal process on account of any debt ... except such as incurred for work or materials furnished in the ... improvement of such homestead.

Section 510.02 gives definition to the size of the exempt homestead and the amount of equity that can be exempted. Section 510.02 limits the size of the exempt homestead to 160 acres, and limits the exempt equity of the home to $390,000. But if the homestead is used “primarily” for agricultural purposes, the amount of exempt equity increases to $975,000.

The purpose of Minnesota’s exemption law is to give almost every conceivable debtor the ability to protect the equity in their home from creditors. The exemption, in terms of size and equity limits, is obviously very generous to people who live in cities and towns in Minnesota (since the size limit is so generous) and to farmers in rural areas who have significant equity in the farmland.

The policy in favor of preserving homes, even for people who have significant equity, is clear. The question is why this policy guides Minnesota law. It seems clear from the statute the two strong policy concerns are being served here. First, the state legislature does not want an increase in homelessness, and the legislature would rather have homeowners, rather than renters. Home ownership is a key factor in creating wealth - home equity can be turned into cash for various reasons and at various stages of life. For many people, home equity is the most valuable financial asset they have; the state legislature obviously wants to see that preserved.

The second policy goal is to allow farmers the security that the land they live on and the land they cultivate cannot be taken away from them. There is also a recognition that many farms are multi-generational, so that while a young farmer might have financial problems, the farmland he tills might have been in his family for generations and the land may not be collateral for loans. Allowing family farmers to remain on their land is a legislative goal that the Minnesota legislature wants to promote.

That’s enough for this week. Next week I will write about other aspects of Minnesota law regarding homesteads, and I’ll look at the federal Bankruptcy Code’s treatment of homesteads.

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Topics: Bankruptcy, Filing Bankruptcy