“Bankruptcy Exemptions (Michigan) What Are They?

BANKRUPTCY EXEMPTIONS  (MICHIGAN):  WHAT ARE THEY?

In my prior Blog, I briefly described what bankruptcy exemptions are, how they are claimed, and then went into detail on the numerous, available, “federal” exemptions.  Since Michigan has not “opted out” of the federal exemptions, like many other states, you can choose either the federal exemptions (which is done in most cases) or the state exemptions, available under Michigan law.  This article will review the  state bankruptcy exemptions.

The statutory framework for the Michigan exemptions is found under MCL 600.5451.  This is the set of “Bankruptcy Specific” exemptions that Michigan provides to its citizens who file for relief under the Bankruptcy Code.  (Note that there is a separate set of exemption options available to individuals who are the subject of collection actions, outside of bankruptcy).  These state exemptions are indexed for inflation and are adjusted as of March 1 every 3 years, starting in 2005.   The figures stated below are rounded inflation adjusted values as of March 1, 2017.

Section (1)(a) allows for the exemption of family pictures, arms (required by law to be kept by a person), wearing apparel (except furs), cemetery plots, and professionally prescribed health aids.  Section (1)(b) allows for exemption of provisions and fuel for a comfortable subsistence of each householder and his family for 6 months, Section (1)(c) provides for exemption of $3,000 in value of household goods and jewelry, provided each item does not exceed $450 in value.  Section (1)(d) allows a debtor  to exempt up to $500 in value in a pew in a house of worship.  Section (1)(e)  allows for an exemption of up to $2,000 in value in crops, farm animals, and feed for them.  Section (1)(f) lets a debtor exempt up to $500 in value in pets.  Section (1)(g) allows a debtor an exemption of up to $2,775 in 1 motor vehicle.  Section (1)(h) allows a person to exempt up to $500 in value in a computer and its accessories.  Section (1)(i)  provides for an exemption of up to $2,000 in value in tools of the trade or profession in which  the debtor is principally engaged so as to allow them to carry on their occupation.

Section (1)(j) allows for the exemption (without limit) of money or benefits paid, provided, allowed to be paid or provided, by a life, health, or casualty insurer because of disability due to injury or sickness of an insured person.  Section (1)(k) provides for exemption of all retirement accounts, including Roth IRA’s or individual retirement annuities and the payments or distributions from those accounts or annuities.  (Note that the exemption does not apply to the amount contributed to an IRA or individual retirement annuity within 120 days before the debtor files for bankruptcy.  Also, there are limitations on such exemptions for portions of such accounts that are subject to an order of a court pursuant to a judgment of divorce, or a court order that concerns child support; and further  provided that such annual contributions do not exceed the limits on deductible amounts allowed for that year under federal law).

Probably the most beneficial exemption, and the reason why the bulk of the debtors who choose the state exemptions select them, is for the enhanced exemption found under Section (1)(m) that allows a debtor to exempt up to $38,225 of equity in a homestead.  If the debtor is 65 years of age or older, when the bankruptcy petition is filed, or is disabled, the exemption goes up to $57,350. Thus, a husband and wife, in a joint filing, could exempt or keep almost $115,000 of equity in their home before the Trustee could look at selling it.  For example, if you have a $200,000 home with an $85,000 mortgage on it, you could file for bankruptcy claim the state exemptions, and keep the house (subject to reaffirming the mortgage debt thereon, for which the debtors would still be liable if they wanted to retain the place).  Contrast this exemption to the federal residential exemption found under Bankruptcy Code section 522(d)(1) of $23,675 (or $47,350 when doubled for a married couple) and you can quickly see why debtors might elect the state exemptions if the bulk of their assets are tied up in their house.

Section (1)(n) is another reason why debtors may elect the state exemptions.  This provision follows Michigan law on property held as tenants by the entirety by a husband and wife, and indicates that, per Michigan law, such property is only liable for joint debts of the husband and wife.  (Again, you may want to review my prior Blog on Tenancy by the Entireties Property). This exemption would likely only be claimed if only the husband or only the wife filed bankruptcy.  In such case, the Trustee would likely send out what is commonly referred to as a “Trickett Notice” to all creditors, advising them to file a joint claim in the case by a date certain in order to determine if he or she could sell such property, as it would only be available to satisfy joint creditors’ claims. If no such claims came in, then that property would be exempt.  This statutory revision would also apply to “stocks, bonds and other evidences of indebtedness”, which are treated just like real property owned jointly by a husband and a wife.

Section (1)(o) provides that if the owner of a homestead dies, leaving a surviving spouse but no children, then the surviving spouse can, before they remarry,  exempt the homestead and its rents and profits.  Section (2) makes it clear that the exemptions claimed under this statute do not invalidate a consensually given or obtained mortgage, lien or security interest.  Section (3) indicates that if property is exempt and it is subsequently sold, destroyed, or acquired for public use, the proceeds are exempt from the bankruptcy estate in the same fashion and amount as the exempt property.

The Michigan exemptions, as stated above, as well as the federal exemptions, described in my prior post, are available to individuals who file for bankruptcy relief in the State of Michigan.   While the Michigan exemptions are not nearly as liberal as those found under federal law, in most respects, they may have application to your situation if you are “land poor” and have quite a bit of equity tied up in your home. In that case, or if you are married and have very little or no joint debts, you may want to consider the Michigan exemptions.

Filing for bankruptcy relief is serious business.  Most people do not want to file but, because of circumstances, many of which were out of their control, they are forced to consider this option.  When doing so, make sure that you are retaining the most property you can, through selecting the proper exemptions. Congress gave each state the ability to opt out of the federal exemptions and to limit their citizens to those available under the laws of their state.   Michigan has decided to give is residents the option of selecting federal or its state exemptions.

While the state exemptions are not beneficial for most people, they do have application, particularly to elderly people who have a lot of equity tied up in their home.  Don’t make the wrong exemption choice.  Consult with the bankruptcy professionals at Damon, VerMerris, Boyko & Witte, PLC.   We can be reached at (616) 975-9951 and have been assisting debtors in making these choices, from an educated standpoint, for decades.  – Larry A. Ver Merris  /  January 22, 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