When an individual or married couple files for bankruptcy, they are often concerned about losing their home or other personal property. However, bankruptcy exemptions can help to protect certain assets from being taken by the bankruptcy Trustee in a Chapter 7 Bankruptcy case. Keep in mind that assets are never taken and sold to pay creditors in a Chapter 13 bankruptcy case which involves repaying your creditors all or more typically, a portion of your debt through a Court supervised repayment plan.
In this post, we will discuss what bankruptcy exemptions are and how they can help a debtor protect their property in a consumer bankruptcy case.
What are Exemptions in Bankruptcy?
Bankruptcy exemptions are a set of laws contained in the United States Bankruptcy Code that allow debtors to keep certain assets during the bankruptcy process. In Michigan, debtors have the option of choosing either the Federal bankruptcy Exemptions or the State of Michigan bankruptcy exemption scheme, which are provided by State law. These exemptions are fundamental to the debtor’s fresh start in a consumer bankruptcy case and are there to prevent creditors from seizing, garnishing or levying against all of a person’s assets . Typical exemptions help protect assets like a primary residence, electronics, bank deposits, pension plans, clothing, jewelry, household goods, appliances and other personal property. In some states, like Michigan, exemptions also include retirement accounts, insurance policies, and even vehicles. The federal exemption scheme also has what is called a “wild card” exemption pursuant to 522(d)(5) which can protect any asset, including cash on hand, up to a certain dollar amount.
The “wild card” exemption, also known as the “catch-all” exemption, is a powerful tool for debtors who are filing for bankruptcy. Pursuant to section 522(d)(5) of the U.S. Bankruptcy Code, the wild card exemption allows debtors to protect a certain amount of property that is not otherwise covered by other exemptions. The wild card exemption is a federal exemption that is available to all debtors who are filing for bankruptcy, regardless of the state they live in. It can be used to protect any property that is not covered by other exemptions, such as a car, jewelry, or even cash.
The amount of property that can be protected by the wild card exemption varies depending on whether or not you use the homestead exemption to protect real estate in which you reside. It allows a debtor to exempt (as of this writing) $1,475 plus up to $15,425 of any unused homestead exemption under Sec. 522(d)(1). However, these numbers are subject to change depending on inflation and other factors and are adjusted every few years (usually upward).
One of the main benefits of the wild card exemption is that it provides debtors with more flexibility when it comes to protecting their assets. For example, if a debtor has a car that is worth more than the exemption for a car, they can use the wild card exemption to protect the excess value. Similarly, if a debtor has jewelry or other personal property that is not covered by other exemptions, they can use the wild card exemption to protect it. Another benefit of the wild card exemption is that it can be used in conjunction with other exemptions. This means that a debtor can use the wild card exemption to protect property that is not covered by other exemptions, and then use other exemptions to protect property that is covered by them.
However, it’s important to note that the wild card exemption is not unlimited. If a debtor has assets that exceed the wild card exemption, they may be required to give up some of them to satisfy the bankruptcy court.
As you can see, the purpose of these exemptions is to allow debtors to keep some of their property so that they can rebuild their financial situation after the bankruptcy is over. Without these exemptions, debtors would have to give up all of their assets, leaving them with nothing to start over with.
What is the Bankruptcy Estate and How Can I Protect or “Exempt” my Assets?
When an individual or business files for bankruptcy, all of their assets become part of the bankruptcy estate. The bankruptcy estate is essentially a pot of assets that is created to pay off the debtor’s creditors. However, not all assets in the bankruptcy estate are necessarily up for grabs. The bankruptcy code allows for certain assets to be protected through exemptions.
To claim exemptions, the debtor must file a list of assets and their values with the United States Bankruptcy Court. They must also provide proof of ownership for each asset. It’s important to review the exemptions available in the debtor’s state and consult with a bankruptcy attorney to determine which assets they may be able to keep. Once the debtor has filed their list of exemptions, the court will schedule a hearing to review the exemptions.
When claiming exemptions, it’s important to be as accurate and honest as possible. Failing to disclose assets or providing false information can result in penalties or even criminal charges.
It’s important to note that exemptions are not automatic and must be claimed by the debtor. Failure to claim an exemption may result in the asset being sold to pay off creditors. Hiring an experienced bankruptcy attorney who is an expert at claiming exemptions on your behalf is well worth the cost of any legal fees that may be incurred.
When an individual files for bankruptcy, they will need to list all of their assets and liabilities. The bankruptcy Trustee will then review these assets and determine which ones are protected by the exemptions. This means that the debtor will be able to keep these assets, even though they are filing for bankruptcy as exempt assets are not included in the bankruptcy estate.
However, it’s important to note that exemptions do have limits, and if a debtor has assets that exceed the exemptions, they may be required to give up some of them to satisfy the Chapter 7 bankruptcy Trustee.
Bankruptcy exemptions are a set of laws that allow debtors to keep certain assets during the bankruptcy process. These exemptions can include things like a primary residence, personal property, and tools of the trade, and are intended to help the debtor rebuild their financial situation after the bankruptcy is over. By protecting these assets, exemptions can help a debtor to start over with some assets and a fresh financial beginning. It’s important to consult with a bankruptcy attorney to understand the exemptions laws in your state as they vary and to see how they can help you in your specific case.
The Michigan Homestead Exemption in Bankruptcy
The Michigan bankruptcy homestead exemption is a legal provision that allows individuals filing for bankruptcy to protect a certain amount of equity in their primary residence. Specifically, it allows individuals to exempt up to a certain dollar amount of equity in their home to prevent it from being sold or liquidated by the Chapter 7 Trustee to pay off creditors during the bankruptcy process.
The Michigan homestead exemption is sometimes utilized because it provides greater protection to homeowners who are facing financial hardship and need to file for bankruptcy than the Federal bankruptcy exemption scheme. In a bankruptcy case, the court will typically look at all of an individual’s assets to determine how much can be sold or liquidated to pay off creditors. However, certain assets are exempt from this process, and the Michigan homestead exemption increase provides additional protection for individuals’ primary residences. In 2023, the Michigan Homestead exemptions increased:
- Homestead § 600.5451(1)(m) increased from $40,475.00 to $46,125.00 – effective April 2023
- Homestead (senior citizen or disabled) § 600.5451(1)(m) increased from $60,725.00 to $69,200.00 – effective April 2023
For example, let’s say that an individual owns a home worth $200,000 with a remaining mortgage balance of $155,000. Prior to the new law, they would have been able to exempt up to $40,475.00 of equity, leaving $4,525 unprotected. If they filed for bankruptcy, the court could potentially force them to sell their home and use the proceeds to pay off creditors. However, with the new homestead exemption increase, this individual can now protect up to $46,125 of equity, and if the debtor is a senior citizen or disabled, this amount jumps to $69,200. This provides much greater protection for their primary residence and gives them a better chance of keeping their home during the bankruptcy process.
It’s worth noting that this increase only applies to bankruptcy cases filed in Michigan. If an individual files for bankruptcy in a different state, they will be subject to that state’s exemption limits. Additionally, the homestead exemption only applies to an individual’s primary residence, not any additional properties they may own such as rental homes.
In conclusion, the Michigan bankruptcy homestead exemption increase is a significant development for individuals facing financial hardship. By providing greater protection for primary residences during the bankruptcy process, this law helps ensure that homeowners have a better chance of keeping their homes and rebuilding their financial stability. If you’re considering filing for bankruptcy in Michigan, it’s important to speak with a qualified bankruptcy attorney to understand how this new law may impact your case.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
If you are considering filing for bankruptcy in Michigan, contact us now to schedule your free initial consultation.