- How Do the Federal Bankruptcy Exemptions Work?
- What Are the Value Caps on Federal Bankruptcy Exemptions?
- What Federal Bankruptcy Exemptions Were Updated in 2022?
- 2022 Federal Bankruptcy Exemptions: Talk to a Metro Detroit Bankruptcy Attorney
The Federal Bankruptcy Exemptions are provisions in the US Bankruptcy Code that allow you to protect most of your property in a Chapter 7 bankruptcy. They also allow you to prevent the value of your property from increasing the cost of your Chapter 13 bankruptcy.
However, the Federal Bankruptcy Exemptions can be applied to protect certain types of property only—and only up to certain dollar value limits.
That is, if you own highly valuable, luxury property, you will probably lose it in a Michigan Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, that luxury property will increase your monthly Chapter 13 Plan payment. (However, you do not lose the property in a Chapter 13 bankruptcy.)
So what are the dollar-value limits of the Federal Bankruptcy Exemptions? How did those limits change in 2022?
This Article will discuss these questions, as well as how the Federal Bankruptcy Exemptions function generally.
That question will be addressed first.
How Do the Federal Bankruptcy Exemptions Work?
The Federal Bankruptcy Exemptions allow you to remove specific types of property with values up to specific dollar-value limits from your Bankruptcy Estate.
The “Bankruptcy Estate” is the term for the legal possession of your property while you are involved in a Michigan bankruptcy proceeding. That is, you do not have the right to sell or transfer your property or assets while in a Chapter 7 or Chapter 13 bankruptcy.
In a Chapter 7 bankruptcy, the Chapter 7 Trustee assigned to your case has the right to seize and liquidate any property in the Bankruptcy Estate.
Likewise, in a Chapter 13 bankruptcy in Detroit or elsewhere in Michigan, the Chapter 13 Trustee takes the role of administrator of your Bankruptcy Estate, although she never seizes or liquidates the property of the Estate. Instead, it is the Chapter 13 Trustee’s job to ensure that your creditors are properly paid through the Chapter 13 process based on the value of your Bankruptcy Estate. (The value of the assets in the Estate, that is.)
The Federal Bankruptcy Exemptions allow you to “exempt” or remove property from the Bankruptcy Estate, essentially.
If property is not in the Bankruptcy Estate, it is not subject to liquidation by a Chapter 7 Trustee. It will also not require that your unsecured creditors be paid more than they otherwise would in a Chapter 13 bankruptcy in Michigan.
The Federal Bankruptcy Exemptions protect your stuff in Chapter 7, in other words. In Chapter 13, they protect your wallet.
What Are the Value Caps on Federal Bankruptcy Exemptions?
The value caps on the Federal Bankruptcy Exemptions vary from exemption to exemption—and from year to year.
Some types of property do not have any Federal Bankruptcy Exemption covering and protecting them at all.
When this is the case, that property is “non-exempt” and subject to liquidation in Michigan Chapter 7 bankruptcy cases. In a Chapter 13 bankruptcy in Detroit or elsewhere, the value of that property will constitute a minimum amount of money that unsecured creditors must be paid through a Chapter 13 payment plan.
Otherwise, the Federal Bankruptcy Exemption value cap varies. This is because the US Congress, in drafting the US Bankruptcy Code, decided that some types of property were more essential for a family’s “fresh start” after bankruptcy.
A gold-plated Harley Davidson? Not necessary to put food on the table for your kids. Not exemptible in bankruptcy.
The family car, on the other hand? Exemptible—up to the value limit of the automobile exemption.
What Federal Bankruptcy Exemptions Were Updated in 2022?
The values of the Federal Bankruptcy Exemptions were set in the text of the statute, originally, when it was enacted in 1978.
The economy has changed—for better and for worse—quite a lot since the 1970s. Fortunately, the Federal Bankruptcy Exemptions are indeed adjusted from time to time to keep up with the average cost of living as it currently stands at any given time.
The Federal Bankruptcy Exemptions were adjusted in 2022. Largely, these adjustments were positive improvements for debtors filing Michigan Chapter 7 and Chapter 13 bankruptcy cases.
These updated Federal Bankruptcy Exemptions for 2022 are as follows:
Homestead Exemption: $27,900
The Exemption aimed at protecting a “reasonable” amount of equity in the home that you actually live in was increased to $27,900. This is a few thousand dollars more than it was previously.
Given the increases in the cost of housing through 2022, this is a mild and probably insufficient increase. What a 2-bedroom ranch in Ferndale, Michigan, for example, sold for in 2008 is wildly lower than what that same home sells for in 2022. Not just a little lower
Ferndale is an egregious example of housing price inflation, it’s true, but the same is roughly true for housing across most of Metro Detroit.
Nevertheless, something is better than nothing.
Keep in mind that you only need to exempt and protect your equity in your primary residence. If your home is underwater (as most were in 2008) relative to the value of the mortgage(s) offsetting the home’s fair-market value, you may have little to no equity to worry about protecting.
If you have equity well above $27,900 and need bankruptcy protection, a Chapter 13 is probably a better avenue for you than a Chapter 7 bankruptcy.
Household Goods: $14,875
Most of what you own is probably included in the “household goods” category for Federal Bankruptcy Exemption purposes.
The Household Goods Exemption sweeps in furniture, dishware, cookery, linens, toiletries, home electronics, home décor, holiday decorations, and most of that “usual stuff” that clutters up most people’s homes.
This Exemption has always, at any value at which it’s been set, been mostly sufficient to cover the “garage sale” (fair market) value of this sort of property. It now also offers a few thousand dollars additional coverage for these types of property.
Unlike real estate, the fair market value of the household goods-level property that you own has probably not greatly increased in value. You still won’t get more than a coffee can full of quarters for your trouble at the end of a typical garage sale, right?
This Federal Bankruptcy Exemption is why most people won’t lose much, if anything, in a Chapter 7 bankruptcy.
The jewelry Federal Bankruptcy Exemption increased by around $1,000(-ish) in 2022. This covers, again, fair-market value, not insurance appraisal value.
That “$50,000” engagement ring your fiancée got you? Maybe it can sell or auction for 50 grand, maybe not. (Probably not.)
A good Detroit bankruptcy lawyer will help you find a proper appraiser for your jewelry so that you can find out whether you can truly protect it with this still rather small Federal Bankruptcy Exemption.
The vehicle or automobile Federal Bankruptcy Exemption will protect 1 vehicle that the debtor actually drives on a daily basis. If you drive a used 1997 Honda Accord, you should not expect to be able to protect your 2022 Harley motorcycle with the automobile exemption, in other words.
As with the homestead exemption, you only need to protect your equity in your vehicle. If your car is worth $10,000 in Blue Book value but you still owe $9,000 on its loan, you only have $1,000 that you need to protect.
Cars do not, largely, hold their value or appreciate in value. Thus, this Federal Bankruptcy Exemption does manage to cover the equity value of most typical household vehicles—most of the time.
Tools of the Trade: $2800
Are you self-employed? Or a 1099 contractor? A plumber, carpenter, or other tradesperson who uses your own tools to make a living?
This Federal Bankruptcy Exemption is designed to protect those tools required to make your living. Further, what is and what is not a “tool of your trade” is a rather broad possible category. The “tool” you require to earn your pay needn’t be a hammer or saw. It could be a laptop computer, for example.
It just depends on your particular profession.
In any case, it is also important to remember that the bankruptcy process in the US is designed to provide you a fresh start and not to hobble your ability to earn a living.
This Exemption ensures that this is the case.
Whole Life Insurance: $14,875
The Federal Bankruptcy Exemption for whole life insurance is value-capped to a “reasonable” amount.
This cap is intended to ensure that non-exemptible cash is not funneled into a whole life policy prior to filing for bankruptcy, unfairly exempting it at the expense of your creditors.
On the other hand, life insurance serves a purpose recognized as important by the US Congress: to put you in the ground if you pass and ease the expense of that process for your loved ones.
The value of this Federal Bankruptcy Exemption provides for that—but no more.
Personal Injury Lawsuits: $27,900
Largely, claims for legal damages or monies owed are not protected by any Federal Bankruptcy Exemption.
If your friend owes you money, that “asset” will not be something that you can protect in a Michigan Chapter 7 or Chapter 13 bankruptcy, for example.
A claim for damages related to personal injury are exemptible to certain extents, reflecting the “fresh start” goal of the US bankruptcy process.
Because personal injury damages often include bases such as lost wages and a negatively affected ability to earn income, this Federal Bankruptcy Exemption exists to ensure that these “reasonable” losses will be compensated.
However, it is important to note, briefly, what aspects of personal injury or PI lawsuit damages will not be protected. Notably, the “pain and suffering” and “emotional distress” components of personal injury claims are not covered by this Exemption.
These components of a PI claim are often the components with the highest value. These are where the PI lawyers you see blathering about “fighting” and “winning” all over your favorite TV program make their best arguments.
The lost wages components and medical bill reimbursement components are straightforward paper-pushing, at the end of the day.
If you believe that you can sue someone or have the right to sue for personal injury damages, it is vital that you speak to an experienced Michigan bankruptcy attorney before filing any Chapter 7 bankruptcy case in particular.
Wild Card: $1,475 + Unused Household
The “wild card” is the catch-call Federal Bankruptcy Exemption. That is, it can be used on any type of property. This includes those that have no other Exemption covering them and property which does have an applicable Exemption, to supplement that Exemption’s value.
Your non-exemptible copy of Iron Man #1 in Fair Condition is probably worth a few hundred bucks, for example. However, there is no “comic book” exemption. And the Household Goods Exemption does not extend to antiques or collectibles.
The Wild Card Exemption’s “base” 2022 value is $1,475.00.
However, there is more to the Wildcard Exemption than just that $1,475. You can also use up to $13,950 of your Homestead Exemption as an additional “wild card” if you do not happen to need it to protect your home’s equity.
If you are a renter, for instance, and have no home equity at all, you will have a full available Wildcard Exemption of $15,425 to use to protect—whatever you want.
This is the other Federal Bankruptcy Exemption that results in the vast majority of Michigan Chapter 7 bankruptcy filers losing no property at all.
2022 Federal Bankruptcy Exemptions: Talk to a Metro Detroit Bankruptcy Attorney
At the end of the day, if you are concerned about the scope of the Federal Bankruptcy Exemptions, you need to consult an experienced Michigan bankruptcy attorney before attempting to file Chapter 7 or Chapter 13 bankruptcy.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients.
If you are considering filing for bankruptcy and are concerned about asset protection, contact us now to schedule your free consultation.