How Bankruptcy Procedures Affect Taxes & Estates in Minneapolis


Bankruptcy proceedings begin with the filing of a petition with the bankruptcy court. The filing of the petitions creates a bankruptcy estate.

The Identity of the Bankruptcy Estate

If the debtor is an individual who files for bankruptcy under chapter 7 or 11, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer.

Tax Obligations

The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under which the petition was filed.

Generally, when a debt owed to another is canceled the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. However, the canceled debt reduces the amount of other tax benefits the debtor would otherwise be entitled to.

If a husband and wife file a joint bankruptcy petition and their bankruptcy estates are jointly administered, their estates must be treated as two separate entities for tax purposes. Two separate tax returns must be filed (if they separately meet the filing requirements).

Exempt Assets in Administration of the Estate

The estate in a chapter 7 case is represented by a trustee. The trustee is appointed under the Bankruptcy Code to administer the estate and liquidate any nonexempt assets of the estate. Exempt assets are not taken by the bankruptcy trustee, are not liquidated, and ownership of exempt assets is retained by the debtor.

Some examples of exempt assets include:

  • equity in a home, up to a point;
  • equity in a car, up to a point;
  • receipt of some benefit payments;
  • some tools of the trade or business of the debtor.

Other exemptions may depend on whether an individual is permitted to use the Minnesota exemption list, or whether an individual is not permitted to use the Minnesota exemption list. The Minnesota exemption list differs from the federal exemption list is many ways.

One major difference between the Minnesota exemption list and the federal exemption list is that the Minnesota exemption list allows a debtor retain a greater amount of equity in a home. However, the federal exemption list contains a catch-all provision permitting a debtor to retain any assets not otherwise listed up to $1,150, plus other assets up to $10,825 if the full home exemption was not used.

Generally speaking, a person who is permitted to choose between the federal exemption list and the Minnesota exemption list (no one is permitted to use both) will be better off choosing the Minnesota list if he or she has a large amount of equity in his or her home. Otherwise, a debtor is generally better protected by using the federal exemption list. These are large generalizations however, and it is important to conduct a careful analysis of all assets and the exemption lists before making this determination.

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