Some Useful Terms
A person or company that owes money is known as a debtor. The person or company to whom the money is owed is called a creditor. While creditors are allowed to use legal processes to collect the money owed to them by taking property belonging to the debtor, some property that debtors own cannot be taken from them by most creditors. Such property is considered to be exempt, and perhaps the most important exemption provided by state laws and by the Bankruptcy Code is the homestead exemption.
Homestead Exemption Basics
While the specifics vary from state to state and between states and federal law, homestead exemptions all require that the debtor have a legal or equitable ownership interest in the property to be exempted and that it (generally) be used as the debtor’s residence. The basics of the Minnesota homestead exemption are found in Minnesota Statutes §§ 510.01and 510.02 and include these specifics:
- The house owned and occupied by the debtor as the debtor’s dwelling place, together with the land upon which it is situated
- The property can include any quantity of land not exceeding 160 acres
- The value of the interest that may be exempted (measured by the total fair market value less any valid liens or encumbrances, such as mortgages, mechanics’ liens, and liens for taxes or assessments) is currently $480,000 or, if used primarily for agricultural purposes, $1,200,000 (and by statute these values are subject to periodic adjustments)
- The Minnesota exemption is per homestead, whether claimed by one or more debtors
- The Minnesota homestead exemption will protect the proceeds from the sale of homestead property for one year after it is sold, and the proceeds of an insurance claim on an exempt homestead are also exempt for one year.
- There is a separate Minnesota exemption statute found at Minnesota Statutes §550.37, Subd. 12 that permits debtors to exempt a manufactured home which is actually occupied by them. The term “manufactured home” is what is commonly referred to as a mobile home, and is defined at Minnesota Statutes §327.31, Subd. 6.
The Minnesota homestead exemption protects all Minnesota debtors who have not filed for bankruptcy relief and can also be selected for use in the bankruptcy cases of Minnesota debtors who do file bankruptcy. Alternatively, Minnesota debtors who file bankruptcy can select the exemption scheme provided under the Bankruptcy Code itself, which includes a homestead exemption. The Bankruptcy Code homestead exemption is found at 11 U.S.C. §522(d)(1) and specifies that it can be used to exempt the debtor’s interest in either real property or personal property used as a residence. Specifics of the Bankruptcy Code exemption include:
- The current value of the interest that may be exempted may not exceed $25,150 (and by statute this value is subject to periodic adjustments)
- In a joint case each debtor is entitled to claim the full value of the exemption
Homestead Exemption Details
The public policy behind homestead exemptions includes not only the goal to preserve a place where debtors can reside, but also a place where dependents of the debtor can reside. For this reason (and to the surprise of some) the homestead exemption is available not only to protect the interest of the debtor in property that the debtor is personally using as a residence, but also the debtor’s interest in property being used as a residence by the spouse and dependents of the debtor. Especially for debtors who are separated or divorced, knowing that they may be able to exempt their interest in property where they are not residing but where a spouse or their dependents are residing may be important.
And for debtors whose homestead exemption claim is based upon their own occupancy of the property they should understand that the requirement for “actual occupancy” is liberally construed and that a homestead exemption is not automatically lost by temporary absences from the property, even prolonged ones. In deciding whether property from which a debtor has been absent qualifies for a homestead exemption courts often consider whether the facts show that the debtor has ceased to occupy the property with no intention to return and reside there; the standard of proof for such abandonment is clear and convincing evidence. However, if the owner ceases to occupy homestead property for more than six consecutive months the owner is deemed to have abandoned the property as a homestead. This result can be avoided by the filing in the real estate records a Notice of Continuation of Homestead, although the exemption will be lost unless the premises is occupied as the actual dwelling place of the debtor or the debtor’s family within five years of the filing of that notice.
When And How Homestead Equity Is Created Can Matter
Debtors who rely on the Minnesota homestead exemption can exempt a great deal of equity in their homestead (up to $480,000 per residence for non-agricultural homesteads), but the ability to successfully exempt that amount can depend on both when and how the equity in the property was created. Precisely how those issues are analyzed can depend on whether or not the debtor has filed for protection under the Bankruptcy Code.
As a matter of Minnesota law (Minnesota Statutes §§ 513.44), and without regard to whether or not a debtor has filed for bankruptcy, a creditor or other party in interest (such as a Chapter 7 trustee) can challenge for up to six years the transfer by a debtor of non-exempt property for the purpose of generating cash to purchase or increase the equity in an exempt homestead. Such transfers may be nullified or “avoided” if the party challenging them can prove that the transfer was made with the actual intent to hinder, delay or defraud any creditor or that it was made without the debtor receiving reasonably equivalent value in exchange and at a time when the debtor was or expected to become insolvent. Although Minnesota case law requires that there be extrinsic evidence of fraudulent intent beyond the mere conversion of non-exempt assets to exempt assets, there are few if any bright lines.
The situation does not become more clear or less treacherous for debtors claiming a Minnesota homestead exemption in their bankruptcy cases. Three separate provisions of the Bankruptcy Code can be invoked to challenge all or some part of the claim of a debtor to a Minnesota homestead exemption in their bankruptcy case. The first, found at 11 U.S.C. §522(o), provides that a homestead exemption claim shall be reduced to the extent that the value is attributable to property that would have been non-exempt but was instead disposed of by the debtor within 10 years before the bankruptcy petition was filed and the proceeds put into the homestead with the intent to hinder, delay or defraud a creditor. While this provision has a long (ten-year) lookback period, a successful challenge to the homestead exemption under it requires proof that the debtor created the homestead equity with the actual intent to hinder, delay or defraud a creditor.
The second Bankruptcy Code provision allowing for a challenge to a claim of exemption in a Minnesota homestead, found at 11 U.S.C. §522(p), provides that a debtor may not exempt any equity in the homestead in excess of $170,350 in value to the extent that the interest was acquired by the debtor during the 1215-day period before the bankruptcy petition is filed (except to the extent that value was attributable to proceeds transferred from a prior principal residence that was also located in Minnesota). This provision generally operates as an effective bright line to prevent debtors from claiming as exempt equity in a Minnesota homestead that they created in the 1215-day (roughly 40-month) period before the bankruptcy case was filed.
The third Bankruptcy Code provision allowing for a challenge to a claim of exemption in a Minnesota homestead, found at 11 U.S.C. §522(q), provides that a debtor may not exempt any equity in the homestead in excess of $170,350 if the court determines that the debtor has been convicted of a felony which demonstrates that the filing of the bankruptcy case would be an abuse of the provisions of the Bankruptcy Code, or that the debtor owes a debt arising from certain specified conduct, including a violation of federal securities laws or various intentional or reckless acts that caused physical injury or death to another individual within the preceding five years.
The homestead exemption is an important protection for debtors, both inside and outside of bankruptcy. The homestead exemption provided under the Bankruptcy Code is substantial, but only a fraction of the size of the exemption available under Minnesota law. But whether the homestead exemption is claimed under Minnesota law or the Bankruptcy Code, care must be taken to ensure that the requirements for claiming the exemption have been met. (Note: additional information about what happens to your property in bankruptcy can be found in another post on this website, “Will I Lose All My Property If I File Bankruptcy?” )