“Bankruptcy Exemptions (Federal) What Are They?”

BANKRUPTCY EXEMPTIONS (FEDERAL) WHAT ARE THEY?

When an individual files for bankruptcy relief, they are principally interested in getting a discharge of most, if not all, of their debts.  (For more on the scope of the Bankruptcy Discharge, please check out my other Blogs on that topic).   A discharge would not do you a whole lot of good, however, if the Court (or actually the duly appointed Trustee) took away all of your property.  In order to assist in getting a debtor (the person who files bankruptcy) a so-called “fresh start”, the Bankruptcy Code (11 USC 101, et. seq.)  says that they can select and keep a certain amount of equity in various types of assets.  These are called exemptions and are available only to individuals.

When a bankruptcy filing is made the debtor(s) describes all of the property they own in bankruptcy schedules and then claims some (or all) of such property as exempt.  The property they claim as exempt is exempt unless the Trustee appointed in their case or some other interested party (like a creditor) timely objects and the objection is sustained.  If an objection is filed a hearing is then scheduled and the Bankruptcy Judge assigned to the case will decide if the objection should be sustained or if the claimed exemption should stand.  Even if an exemption is allowed, the Trustee could still sell that particular property if there was sufficient equity in it, over and above any unavoidable liens and the debtor’s allowed claim of exemption, so as to realize on such un-exempt equity for the benefit of the debtor’s creditors.

In Michigan, an individual can select the so-called “federal” exemptions, available under Bankruptcy Code section 522, or the state exemptions, available under state law.   Some states have “opted out” of the federal exemptions and only allow their debtors to select from the available exemptions under the laws of that particular state. In Michigan, if a joint filing is made by a married couple, both debtors must choose either the federal exemptions or the state exemptions.  Effectively, with a joint filing, all of the exemptions described below are doubled in value.

For most people, the federal exemptions are more liberal and thus allow the debtor(s) to keep more property.  Thus, in probably over 95% of the individual bankruptcy cases filed in Michigan, the debtor(s) choose those exemptions available under 11 USC section 522. The attorneys with Damon, Ver Merris, Boyko & Witte, PLC can be contacted at (616) 975-9951 to assist you in making these decisions.

So, you might ask, what are the federal exemptions?  The first exemption found under section 522(d)(1) is the residential exemption which allows a debtor to exempt up to $23,675 in equity or value in real or personal property the debtor (or his dependent) uses as a residence. Section 522(d)(2) allows a debtor to exempt up to $3,775 in value in one motor vehicle.  Section (d)(3) allows a debtor to exempt up to $12,625 in aggregate value in household goods and furnishings, wearing apparel, appliances, books, pets, and crops that are used primarily for household or  personal use, as long as the value of each item does not exceed $600.  Section (d)(4) allows you to exempt up to $1,500 in value in personal jewelry. Section (d)(5) is the default provisions if you do not have a residence to use the (d)(1) exemption against and it essentially halves such exemption and lets you use $11,850 on any property.  In addition, it gives you a so-called “wild-card” exemption of $1,250 that you can use on any property.  Thus, if you have a car worth say $5,000 and you can only exempt $3,775 under (d)(2) then you can use $1,225 of the (d)(5) exemption to exempt the remaining equity in that motor vehicle. (Note that all property should be valued at fair market value – i.e. what it would likely sell for – in the debtor’s Schedules, although nothing requires the debtor to get any property appraised before filing bankruptcy).

Bankruptcy Code section 522(d)(6) allows an individual to exempt up to $2,375 in value in implements and tools of the trade of that debtor.  Section (d)(7) allows a debtor to exempt any un-matured life insurance contract they own (no value limitation). Section (d)(8) allows a debtor to exempt up to $12,625 in loan value of an un-matured life insurance contact they own.  Section (d)(9) allows a debtor to exempt professionally prescribed health aids (again, no limitation on value).

Section (d)(10) allows a debtor to exempt the “right to receive” various types of benefits including social security, unemployment, public assistance, veterans’, and disability benefits.  Also, this section allows a debtor to exempt the right to receive alimony, support, separate maintenance, as well as pension (and like) benefits, “to the extent reasonably necessary for the support of  the debtor and any dependent of the debtor”.  (Note that this section is written in the prospective context; e.g  the right to receive “future” benefits.  Thus, if benefits of this nature have already been received and still on hand, in a bank account for example,  then they would constitute cash and would only be subject to exemption under section 522(d)(5)).

Unlike section (d)(10), section 522(d)(11) allows the debtor to claim as exempt the  right to receive or “property that is traceable to” certain types of property, mostly in the nature of certain “tort” type damage claims.  In other words, claims that are mostly related to  damages for  personal injuries, wrongful death, a payment under a life insurance contract, or loss of future earnings arising out of some type of accident.  There are quite often limitations on these types of exemption claims, again based upon the statutory caveat: “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor”.  This is often a very factually intensive inquiry and will vary from case to case.

Finally, Section (d)(12) allows a debtor to exempt all funds in a retirement account that are exempt from taxation (when initially withheld or funded) under the Internal Revenue Code.  These would typically include employer sponsored 401(k) accounts, individual IRA’s, and 403 accounts (typically made available for teachers and other public employees).

Note that all of the specific dollar limitations described above in various statutes are subject to adjustment every 3 years.  The other set of exemptions, available to Michigan residents under state law, will be addressed in my next Blog.

Exemption planning is something that is critical in the pre-bankruptcy planning process, to allow a person to maximize the property you get to keep.  Don’t be pennywise and pound foolish if you are thinking about filing for bankruptcy relief.  Contact the professionals at Damon, Ver Merris, Boyko & Witte, PLC. They will review your options and put their decades of experience in representing debtors to work for you so that you can do some appropriate exemption planning, select the correct set of exemptions, and retain the maximum amount of property available.

You have worked hard for your property; don’t lose it in bankruptcy by going to someone just based on price.  Call (616) 975-9951 to contact the knowledgeable bankruptcy professionals at Damon, Ver Merris, Boyko & Witte, PLC, today.  – Larry A. Ver Merris  /  January 15, 2018

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.