Exempt Business Property
When individuals and businesses file bankruptcy or must satisfy legal debt obligations such as lien interests or judgments, the question arises as to how such obligations can be satisfied. Where debt obligations cannot simply be paid with cash, the law allows for the sale of the debtor’s property as a means of generating the necessary funds. However, where the debtor is an individual, the law protects (or “exempts”) certain property from being sold for this purpose. At the same time, however, such protection is limited to specific amounts, thereby allowing creditors (i.e., anyone to whom a debt is legally owed), in many cases, to recover some part of the amount owed.
While business corporations, limited liability companies and partnerships may not claim their property as exempt, individual debtors may claim exemptions for certain property they own but use in their business, trade or profession.
This article generally discusses the business property exemption provisions in Minnesota, Wisconsin and federal law, the types and amount of business property an individual may claim as exempt, and the process of claiming exemptions. It will refer to property subject to exemption as “business property” even though, as noted, the debtor, and not the business, must own the property for the exemption to apply.
Minnesota and Wisconsin Exemption Statutes
Minnesota’s exemption statute allows a debtor to claim as exempt “tools, implements, machines, business instruments, office furniture, stock in trade, and library reasonably necessary in the trade, business or profession of the debtor,” not exceeding $10,500 in value. Thus, it is clear that any exemption is limited to $5,000 worth of business property, but what property exactly qualifies as exempt is less obvious.
Wisconsin’s exemption statute is more succinct, but perhaps more ambiguous, allowing an exemption for “Equipment, inventory, farm products, and professional books used in the business of the debtor . . . not to exceed $15,000 in aggregate value.” Thus, not only is a debtor in Wisconsin able to claim a larger business property exemption than a Minnesota debtor, but could arguably claim a wider variety of business property as exempt, given the broader language of the Wisconsin statute.
Bankruptcy Debtors May Choose Federal, Rather Than State, Exemptions
Because bankruptcy proceedings are governed by federal law, federal statutes contain separate exemption provisions. However, debtors filing bankruptcy in Minnesota or Wisconsin may choose between state or federal exemptions. With respect to an individual debtor’s property used in a business, federal law provides an exemption of up to $2,025 for “any implements, professional books, or tools, of the trade of the debtor.” However, federal law also allows a debtor to both claim a “wild card” exemption (i.e., applicable to any property) of $1,075 and apply $10,125 of any unused homestead exemption to any other valid exemption. Thus, a Minnesota or Wisconsin debtor who chooses the federal exemptions may guarantee preservation of at least $3,100 of business property and may also, depending on whether and to what extent the homestead exemption is used, protect an additional $10,125 of business property (for a total of $13,225) from sale toward the payment of debts.
Given the differing statutory language and limits on exemptions, Minnesota and Wisconsin bankruptcy debtors should evaluate the importance of protecting a greater amount of business property, as well as the likelihood they will utilize other exemptions, in choosing to claim state or federal exemptions. Of course, debtors should also consider the importance and extent exemptions other than business property exemptions in making their final decision.
What Qualifies for the Business Property Exemption?
As noted above, business corporations, limited liability companies and partnerships may not claim exemptions under Minnesota or Wisconsin law. Rather, only property owned by an individual and used in a business, trade or profession qualifies. This rule applies equally to bankruptcy, judgment and other debt obligations.
But what, specifically, are the “tools,” “implements,” “instruments,” and other items that qualify as exempt? There is no precise answer, but decisions by courts in Minnesota and Wisconsin have shed some light the types of business property individual debtors may protect.
One court has highlighted the ambiguity of Minnesota’s business property exemption statute, referring to it as “descriptive, not definitive.” Because the statute does not clearly define what is exempt, courts determine exemptions based on the specific facts of each individual case. The most important factor in finding property exempt is the property’s connection to the business, as opposed to its connection to the debtor. Thus, one court determined that a semi-tractor used in a trucking business was exempt, while a car used by a real estate agent was not. The court reasoned that unlike the semi-tractor, which was specifically used in the business of trucking, the car was merely used in pursuing the business of selling real estate.
Similarly, Wisconsin courts look beyond the debtor or creditor’s subjective classifications of property as “business” or “non-business” and instead examine the extent of the property’s actual use in the debtor’s business, trade or profession. In one case, the court decided that property used in a bed-and-breakfast business could be exempt even though paying guests had only stayed at the bed-and-breakfast a total of 35 nights in eighteen months. The court stated that the key determination was the function the property served when in use. The fact that the property was not used for extended periods of time could not prevent it from being exempt.
Overall, although Minnesota and Wisconsin exemption statutes do not specifically list items that qualify as exempt business property, courts decisions in both states (though similarly non-exhaustive as to what is exempt) exist to guide debtors and creditors in determining whether property may be sold to satisfy a debt.
In bankruptcy cases, federal law requires the debtor to file a list of all the property claimed as exempt. The claimed exemptions will be allowed unless a creditor or the appointed bankruptcy trustee objects to the claim within the applicable time period. Disputes over whether property is exempt are ultimately decided by courts.
In non-bankruptcy cases, Minnesota and Wisconsin law differ. In Wisconsin, debtors are required by statute to claim business property as exempt either when the property is seized for sale or “within a reasonable time after the seizure.” Once the property has been sold or otherwise disposed of by court order, the debtor may not claim it as exempt.
Conversely, Minnesota statutes do not include time limits or procedural requirements for claiming business property as exempt (only the homestead exemption requires specific conduct). As one court has stated, where a statute provides that a certain amount of certain property is exempt, the debtor need not “select the same as exempt” because “the statute operates to choose and select it for him.”
Understanding Exemption Statutes Benefits Debtors and Creditors
The general goal of exemption statutes is to permit debtors to retain, among other things, some items of property used in their business, trade or profession that will allow them to continue to earn a living. At the same time, business exemptions are capped at certain amounts to allow creditors, in many cases, to recover some part of the amount owed. Thus, both debtors and creditors can benefit from understanding state and federal exemption laws.
However, exemption laws frequently differ and often do not specify exact items of property as exempt. While decisions by courts may serve as useful guidance, even they do not always address the particular circumstances of a claimed exemption. Given these uncertainties, consultation with an attorney would likely benefit both debtors and creditors faced with business property (and other) exemption questions.