Michigan Bankruptcy Exemptions and Law
If you live in Michigan and have gotten in over your head with debt, bankruptcy may be an option that gives you some breathing room while you pay down or eliminate your debt. Many people view bankruptcy as a last resort, but if you have no hope for paying off your bills, it is often the only real option for avoiding financial ruin.
The U.S. Bankruptcy Code, which is a federal law, governs bankruptcy. However, states may establish some of their own bankruptcy rules about which property is exempt from bankruptcy. Michigan has chosen to establish its own exemption rules but will also let you use the federal exemption system. It is important to understand you must choose one or the other for all of your exemptions.
Exempt property is generally protected from creditors and you will not lose it during bankruptcy. To understand the exemption process works in Michigan, you must first understand that there are two types of personal bankruptcy:
- Chapter 7 Bankruptcy. This is sometimes known as a “liquidation bankruptcy" and your income must fall below the state's median to take advantage of it. You will turn over all of your non-exempt assets to a bankruptcy trustee who will sell them to repay your creditors. It is usually in Chapter 7 bankruptcy where you use your state exemptions to protect certain assets. You will usually exit a Chapter 7 bankruptcy debt-free.
- Chapter 13 Bankruptcy. Bankruptcy under this chapter allows you to restructure your debts if you need some additional time to pay them off. These payments are usually made according to a court-approved repayment plan that will often allow you to get rid of some of your debt. Chapter 13 is popular with homeowners because it usually allows them to keep their homes.
One key benefit that either type of bankruptcy provides you is that the bankruptcy court will issue an automatic stay when you file. This usually stops all collection actions by creditors, including court proceedings and foreclosures. This is one of the primary benefits of filing for bankruptcy because it gives you some breathing room to work things out with your creditors through the bankruptcy process.
Secured vs. Unsecured Debt
When you have unsecured debt, a creditor has no right to seize any of your property for nonpayment. This is the debt that is most likely to be eliminated in bankruptcy. The most common type of unsecured debt is credit card debt, but medical bills and court judgments also qualify. Some unsecured debt, like child support obligations, must be repaid in full and cannot be discharged in Chapter 7.
Your debt to a creditor is secured when it has the right to repossess your property if you don't pay. Home mortgages, car loans, and property liens are the most common types of secured debt.
When you choose to file Chapter 7 bankruptcy, much of your unsecured debt will be eliminated. However, the creditors who hold secured debt will still have the option of seizing your property for failure to pay. If you are filing Chapter 7 bankruptcy and want to keep property used to secure a debt, you usually have three options:
- Return the property to your lender or creditor. You will lose the property, but you will no longer be required to pay for it because the outstanding balance is usually eliminated in bankruptcy.
- Keep the property while continuing to make payments. If the Michigan exemption is enough to cover your equity and you are up-to-date on payments, you can usually keep the property so long as you continue making payments.
- Purchase the property outright. Chapter 7 bankruptcy filers are unlikely to have the funds to do this. But if you have the money and the property falls within one of the Michigan exemptions, this is an option, so long as other requirements are met.
If you file for Chapter 13 bankruptcy, any non-mortgage secured debt is usually reworked so that you make payments under your court-approved bankruptcy plan over three to five years. Your mortgage will not be included in your plan and you will be expected to continue making payments. If you were behind in your payments prior to filing for bankruptcy, the bankruptcy trustee and your lender can often work out a settlement. Any unsecured debts are paid with whatever is left over after the secured creditors are paid. Once you complete your plan, any unpaid unsecured debt is eliminated.
There are two means tests for determining whether you can file for Chapter 7 bankruptcy in Michigan. Under the first test, if your household income is less than the median income for households of equal size in Michigan, you immediately qualify. The U.S. Department of Justice collects data on median household incomes for use in bankruptcy cases and for a three-person Michigan family, the median household income was $79,484 in November 2020.
The second means test is more thorough and uses your financial data from the previous six months to calculate your disposable income. If you are found to have little to no disposable income, you are eligible to file under Chapter 7.
If you have more than $419,275 in unsecured debt you cannot file for bankruptcy under Chapter 13. You are also not allowed to file for Chapter 13 if you have more than $1.26 million in secured debts. Those numbers are changed periodically to reflect inflation.
Personal bankruptcy offers people who have more debt than they can repay a way to eliminate their debt and start over. To help you start over after Chapter 7 bankruptcy, Michigan allows you to exempt some property from the bankruptcy process if it is not being used as collateral. Essentially, exempt property is property you get to keep.
Each Michigan homeowner can exempt up to $40,475 of the equity in real property under the homestead exemption. That amount increases to $60,725 if you are aged 65 or older or are disabled. This amount is adjusted by the Michigan Department of Treasury every few years.
The Michigan exemption applies to any house, condo, mobile home, motor home, co-op unit, or boat that is your permanent residence if you hold title to it.
Unfortunately, Michigan is not among the states that allow married couples filing for bankruptcy jointly to double the dollar amount of their exemption for real property they own together in most circumstances.
Motor Vehicle Exemption
Up to $3,725 of the equity in your motor vehicle is exempt from bankruptcy in Michigan.
You may exempt up to 60% of the wages earned by the head of household but not paid or the head of household may exempt $15 per week plus $2 for each dependent other than a spouse. Others in the household can protect 40% of their earned but unpaid wages or $10 per week.
Personal Property Exemption
Michigan provides a bankruptcy exemption for each of the following, regardless of value:
- Clothing (other than furs)
- Family Pictures
- Food and Fuel to last six months
- Professionally prescribed health aids
- Burial plots
You may claim per-item exemption amounts of up to $625 on each of the following, up to $4,050 in total value:
- Household goods
The following types of personal property are exempt up to $700:
- Computers and accessories
- Household pets
- A church pew, slip, or seat
Finally, up to $2,700 in farm animals, feed, and crops are exempt.
Retirement and Pension Benefits Exemption
Most of your retirement accounts and pension benefits will be exempt in Michigan. Traditional, simple, and Roth IRAs are exempt up to $1.28 million and educational IRAs are exempt up to $6,425. Amounts that were contributed to your IRAs or profit-sharing plans within 120 days of filing for bankruptcy are not exempt.
Tools of the Trade Exemption
Any tools, materials, implements, or other things you need to do your job are exempt up to a total of $2,550. Additionally, arms and accoutrements that you are required by law to keep are exempt.
The following types of insurance and insurance benefit are exempt from bankruptcy in Michigan:
- Life insurance
- Employer-sponsored life insurance policies or trust funds
- Disability, mutual life, or health benefits
- Insurance proceeds held by an insurer.
No Wild Card Exemption
Unlike many states, Michigan does not offer a wild card exemption. A wild card exemption is an amount that may be applied to any property, no matter how it is classified.
In Michigan, as in other states, you must complete credit counseling within 180 days of filing for bankruptcy. You may request a 30-day waiver if you were unable to complete the course for legitimate reasons.
If you are not using an attorney you will begin the bankruptcy process by downloading the correct form for your bankruptcy court district. The same form is used for both Chapter 7 or Chapter 13 bankruptcy.
The U.S. Bankruptcy Courts are federal courts and there are two federal districts for the state of Michigan. The Eastern District of Michigan is headquartered in Detroit, while the Western District of Michigan is headquartered in Grand Rapids.
The Eastern District has bankruptcy courts in:
- Bay City
The Western District has bankruptcy courts in:
- Grand Rapids
If you do not know where the nearest court is located, search under “U.S. Bankruptcy Courts" in the U.S. Court Locator.
It costs $338 to file for Chapter 7 bankruptcy and $313 to file under Chapter 13. The filing fees are the same if you are using a lawyer or are filing for yourself (known as “pro se" filers). If you cannot afford the fee you can ask to pay in installments over 120 days or seek a fee waiver if your household income is less than 150% of the poverty line.
Everyone's bankruptcy case is different, making it difficult to put an average price on the cost of a Michigan bankruptcy lawyer. Sometimes, attorneys will offer to file very simple Chapter 7 cases for as little as $500, but that is usually for individuals with few assets. Most Michigan attorneys charge between $1,000 and $3,500 for a Chapter 7 bankruptcy, depending on your case's complexity. Since Chapter 13 cases are usually more complex, an attorney will usually run between $2,500 and $6,000.
Need Help Filing for Bankruptcy in Michigan?
It can be tempting to represent yourself in bankruptcy, but it is usually a good idea to seek the assistance of a local attorney to guide you through the process. Bankruptcy is a complicated court procedure and a mistake can mean the loss of your home, car, or other major assets. An attorney will help you get the best possible result from your bankruptcy filing.
Additionally, not everyone who is having trouble with debt needs to file for bankruptcy. An attorney can determine whether a bankruptcy filing really is the best solution for you and suggest other ways to resolve your debt issues.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.
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