Last week, I wrote about the Bankruptcy Exemption Laws contained in both the Federal Bankruptcy Code as well as the exemptions contained in Minnesota’s debtor-creditor statutes. As noted, Minnesota is one of 15 states that are “opt-in” states - states that allow bankruptcy debtors to choose between the Bankruptcy Code exemptions or state law to protect property in a bankruptcy case. We also covered the exemptions available for commonly-owned property: homestead real estate, motor vehicles, household goods and furnishings, clothing and personal effects and jewelry. This week we’ll take a look at the exemptions available to people filing a bankruptcy case for property that is not quite as commonly present for most people. And we’ll look at what the differences and similarities in the state statutes and the Code tell us about the philosophy of bankruptcy law.
The Tools of Your Trade
Section 522(d)(6) of the Bankruptcy Code allows debtors to exempt up to $2375 in equity in “implements, professional books, or tools, of the trade of the debtor or of the dependent of a debtor.”
Minnesota Statute Section 550.37 Subd. 5 allows debtors to exempt up to $13,000 in equity in “farm machinges and implements used in farming operations by a debtor engaged principally in farming.”
Subdivision 6 of 550.37 allows debtors to exempt up to $11,500 in equity in “the tools, implements, machines, instruments, office furniture, stock in trade and library.” Subdivision 6 qualifies this exemption to limit the protection to property that is “reasonably necessary in the trade, business or profession of the debtor.”
Subdivision 7 of 550.37 limits this exemption further for farm debtors. Subdivision 7 says that the total value of the property selected in subdivisions 5 and 6 cannot exceed $13,000, if the two subdivisions are combined.
The question of whether a particular item is a tool of the trade is a question of fact. In Minnesota, in order to qualify as a tool of the trade, the tool must have a specific purpose and must apply to the trade, profession or occupation of the debtor. Dual purpose items - such as a pickup truck for a construction contractor, are generally not seen as tools of the trade unless there is something that makes it essential to the debtor’s job. For instance, advertising on the side of a pickup probably qualifies the truck as a tool of the trade. A regular, generic pickup probably wouldn’t, since there is no specialized use of the pickup.
The Life Insurance Policies You Own
Section 522(d)(7) exempts an “unmatured” life insurance contract in its entirety. This exemption applies to term life policies that have no cash value.
522(d)(8) deals with whole life policies that have cash value. 522(d)(8) allows debtors to exempt up to $23,675 in any accrued dividend or interest under, or loan value of any life insurance contract owned by the debtor or an individual of whom the debtor is a dependent.
Minnesota Statute section 550.37 allows a debtor to exempt up to $9200 in any accrued dividend or interest under or loan value of any unmatured life insurance contract owned by the debtor under which the insured is the debtor or an individual of whom the debtor is a dependent.
The language of both the bankruptcy code and the Minnesota statute is similar. Unmatured life insurance means that the insured isn’t dead. The language describing dividend, interest or loan value is a long way of saying cash value. The exemptions are similar except for the amount. While Minnesota has a more generous homestead and tools of the trade exemption, with life insurance, more value is protected in the bankruptcy code.
Health Aids
The Bankruptcy Code offers protection for “professionally prescribed health aids for the debtor or a dependent of the debtor. There is no dollar limit on this exemption. There is no comparable exemption in Minnesota law, although Minnesota’s motor vehicle exemption statute allows an exemption of up to $46,000 in equity in a motor vehicle that has been modified to accommodate the physical disability of a person who qualifies for a handicapped parking sticker.
Your Social Security, Unemployment or Public Assistance Benefit
Section 522(d)(10) of the Bankruptcy Code has five sub-paragraphs that each exempt a financial benefit or source of income for debtors.
522(d)(10)(A) exempts the right to receive a social security benefit, unemployment compensation or a local public assistance benefit. Minnesota state law allows debtors to exempt unemployment compensation and “relief based on need.” The exemption for unemployment compensation is not found in section 550.37. Rather, unemployment compensation is exempted in the state unemployment compensation statute (268.17). Section 550.37 does cover relief based on need, however. That exemption is found at 550.37 subd. 14. Social security benefits are exempt under Federal non-bankruptcy law. The exemption for social security benefits is found at 42 U.S.C. section 407.
A couple of points should be made about the provisions of these statutes. First, note that the bankruptcy exemption relates to “the right to receive” the benefits. However, the social security statute protects social security benefits both prior to and after the benefit is received. Another subdivision of the Bankruptcy Code protects unemployment compensation from the bankruptcy trustee after that benefit has been received.
Second, the state statute’s exemption of “relief based on need” is more expansive than the Bankruptcy Code’s exemption for “local public assistance.” Relief based on need includes more than public assistance. For instance, the earned income credit available through the income tax laws, or the Minnesota Working Family Credit, which is the state version of the earned income credit, have been interpreted by the courts to be “relief based on need,” since these programs base their benefits on the household income of the taxpayer, and the lower the income, the higher the amount of the benefit.
Your Benefits as a Veteran
Section 522(d)(10)(B) exempts veterans’ benefits, whether that be a VA disability payment, veterans’ pension or even tuition programs like the GI Bill. Minnesota Statute section 550.38 - just next door to 550.37 - protects veterans’ benefits for one year after the benefit is received. But the bankruptcy debtor using non-bankruptcy law to exempt property has another exemption available. 38 U.S.C. section 5301 exempts veterans’ benefits, also. And like the bankruptcy code, this exemption covers all benefits, and there is no dollar or time-limit on the exemption.
Your Workers Compensation and Disability Benefit
Section 522(d)(10)C allows a bankruptcy debtor to exempt a disability, illness or unemployment benefit. Minnesota Statutes section 550.39 exempts payments from accident or disability insurance. As mentioned earlier, unemployment benefits are exempt under Minnesota law, although that exemption is found in the unemployment compensation statute.
522(d)(10)C is used, among other statutes, to protect workers compensation benefits from the bankruptcy trustee. Minnesota Statutes section 176.175 specifically exempt workers compensation benefits for bankruptcy debtors who elect to use non-bankruptcy law to exempt the property they own.
The Child Support or Spousal Maintenance Due to You
Section 522(d)(10)(D) allows a bankruptcy debtor to exempt payments due to the debtor for child support, alimony or separate maintenance. There is a limit to this exemption, unlike the other subdivisions of 522(d)(10). The amount exempt must be reasonably necessary for the support of the debtor and any dependant of the debtor. So the individual who receives a significant amount of spousal maintenance, for instance, is not necessarily entitled to exempt the entire amount he or she receives. Rather, the exemption applies to the amount received by the debtor that will allow the debtor to pay living expenses as they come due, when combined with all other sources of income.
There is no similar provision in the state statute. However, Minnesota law offers protection for the bankruptcy debtor who receives child support for his or her minor children. Minnesota courts interpreting the state child support statute have concluded that child support is owed to the child, not the parent. Because of these court decisions, parents do not have the ability to waive the right to receive child support with court approval. Since the parent cannot bargain away child support, or adjust the amount of child support in deviation of Minnesota child support laws, it follows that the bankruptcy trustee does not have the ability to claim that the child support owed to a bankruptcy debtor is actually property of the bankruptcy estate.
There is no such provision for spousal maintenance, though. A bankruptcy debtor who receives spousal maintenance is well advised to use Bankruptcy Code exemptions, if at all possible, or face the risk that a bankruptcy trustee will collect the spousal maintenance payments from an ex-spouse and use those payments to pay creditors.
A bankruptcy debtor who, with some advance knowledge, characterizes a property settlement payment as child support or maintenance is probably going to be on the losing end of an objection by a bankruptcy trustee to a claim of exempt property. Property settlement payments owed to debtors by ex-spouses are not exempt under either bankruptcy law or non-bankruptcy law. And whether a payment is an exempt alimony or child support payment is a question of fact for a bankruptcy judge to decide.
Your Retirement Account
Section 522(d)(10)(E) allows a bankruptcy debtor to exempt a payment under a stock bonus, pension, profit-sharing annuity, or similar plan on account of illness, disability, age or length of service. There are limitations to this exemption.
The exemption for the pension or profit sharing program is not available if it was established for the debtor by an "insider" (that is, a relative or business partner), the financial product is set up to pay based on age or length of service, and the financial product does not meet the legal requirements set out in the Internal Revenue Code.
Minnesota Statute section 550.37 subd. 24 allows debtors to exempt present or future payments under a stock bonus, pension, profit sharing, annuity, IRA, individual retirement annuity, simplified employee pension, or similar plan, on account of illness, disability, death, age, or length of service, up to a value of $69,000, and "additional amounts under all plans and contracts to the extent reasonably necessary for the support of the debtor and any spouse or dependent of the debtor.
Both the bankruptcy code and non-bankruptcy law exemptions should be read in the context of other statutes. Retirement accounts that are qualified plans under ERISA (think 401(k) and 403(b) accounts) are exempted under another subdivision, and IRAs can be exempted, whether or not the debtor has elected to use bankruptcy law exemptions under a provision of the Bankruptcy Code.
So both of these statutes cover primarily pension interests, although the state statute also functions to protect IRAs.
Section 522(d)(12) is the bankruptcy law provision that protects 401(k) and 403(b) accounts. Specifically, the statute exempts all retirement accounts that are tax exempt under sections 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986. There is no dollar limit on this exemption.
There is no similar exemption available under Minnesota law. But not to worry: it has been settled law for 25 years that ERISA qualified plans are not part of the bankruptcy estate and thus cannot be administered by a bankruptcy trustee. So debtors relying on non-bankruptcy law exemptions don't have to list a 401(k) as an exempt asset - it's not part of the debtor's estate.
And similarly, individuals with large-balance IRAs need not worry that a part of their IRAs are non-exempt. Section 522(n) provides an exemption for IRAs, whether or not the IRA was funded through salary or wages, of $1,283,025. And this section of the bankruptcy code allows this exemption to be claimed by bankruptcy debtors using either bankruptcy law or non-bankruptcy law to protect their property.
So as you can see, Congress and the Minnesota State Legislature acted to be very protective of a debtor's retirement accounts. Next week, I'll write about why that is, and look at more of the bankruptcy and non-bankruptcy law exempt property provisions.
