Michigan allows residents to choose between the federal bankruptcy exemptions and state exemptions.
What Are the Michigan Bankruptcy Exemptions, and Why Are They Important in a Chapter 7 Bankruptcy?
For a lot of individuals experiencing financial hardship due to excess credit card debt and student loans, bankruptcy is one of the best options to get back on the road to financial recovery. However, many people believe that filing Chapter 7 bankruptcy means that they have to give up all theirassets and belongings and start over with almost nothing.
Luckily, this isn't true. The majority of Michiganders who file Chapter 7 bankruptcy get to keep most, if not all, of their property thanks to bankruptcyexemptions. Bankruptcy exemption laws allow you to keep certain kinds of property. Some exemptions protect property and assets up to a specific amount and others protect them fully.
Does Michigan Allow Filers To Use Federal Bankruptcy Exemptions?
Yes. Bankruptcy filers in Michigan can choose between two sets of exemptions:federal bankruptcy exemptions and state exemptions so long as they've lived in Michigan for at leasttwo years. Keep in mind that you can’t protect property by using both sets of exemptions. You’ll have to pick the set that works best for you. If you decide to use Michigan's exemptions, you can also use the federal nonbankruptcy exemptions.
How do you decide which set of exemptions to use? You’ll need to compare the two and look at what property you own and want to protect. We’ll lay them out side-by-side in this article, which should give you a good start.
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Michigan Bankruptcy Exemptions
In most cases, bankruptcy exemptions in Michigan allow you to keep exempt property that you need to maintain a household and job. This includes personal property like clothing, home furnishings, and the equity you have in your car. It also covers real property like your home or land you own and intangible assets like money, insurance, and certain retirement accounts.
Note that spouses in Michigan who file a joint bankruptcy may double most of the exemption amounts, whether they use the state or federal exemptions. One exception is the homestead exemption.
Real Property: The Michigan Homestead Exemption
The homestead exemption allows you to protect theequity in your home up to a specified amount. Under current state law, you can protect up to $38,225 of equity in your real property. The amount increases to $57,350 if you or one of your dependents is at least 65 or disabled. This is higher than the federal homestead exemption, which allows an individual filer to protect $27,900 in their home.
If the equity in your home is lower than the exempted amount, then you can protect your home. To calculate your equity you subtract your outstanding mortgage loan amount from your home's current fair market value. So if your home is worth $225,000 and you still owe $190,000 on your mortgage, you have $35,000 in equity. That's less than the state exemption amount, so your home will be safe.
Personal Property Exemptions
Michigan bankruptcy filers can also claim bankruptcy exemptions for personal property like jewelry, appliances, furniture, and clothing. Let’s look at some of the most commonly used personal property exemptions.
Household goods, such as utensils, furniture, books, jewelry, and appliances, can be protected under state exemptions up to $600 per item and $3,825 in total. This is less generous than the federal exemptions, which allow you to protect up to $700 per item for a total of $14,875.
All clothing (excluding furs) is exempt under state law.
All family pictures are exempt under state law.
You can protect $650 in computer accessories.
All professionally prescribed health aids are fully exempt under both state and federal law.
You can protect your household pets up to a value of $650 with Michigan’s exemptions.
Crops, animals, and feeds up to $2,550 are exempt by state law.
You can protect up to $1,000 in tools of trade, which are items necessary to carry on your trade, profession, occupation, or business. This includes tools, materials, implements, stock, apparatus, a motor vehicle used for work, and a horse and harness. By contrast, federal exemptions allow you to protect up to $2,800 for tools of the trade.
You can fully protect all burial plots and burial rights under the law.
Federal exemptions don’t have all the same categories as state exemptions, but anything that’s not listed in the federal exemptions can be protected using the wildcard exemption. There’s a $1,475 federal wildcard exemption. Also, if you don’t use the homestead exemption and you’re claiming federal exemptions, you get an additional $13,950 to use as a wildcard. The wildcard allows you to protect any property that’s not otherwise protected. Note that Michigan doesn’t have a wildcard exemption.
Motor Vehicle Exemption
Under state exemptions, you can protect the equity in a single vehicle up to $3,525 using the vehicle exemption. By contrast, the federal exemptions allow you to protect up to $4,450 in car equity.
You calculate your equity the same way we noted above for your home. That is, take the fair market value of the car and subtract what you owe on the loan, if you have one. If your vehicle is paid off, your equity is equal to the car's fair market value. In that case, it may be more difficult to protect your car using only the motor vehicle exemption.
The final category of exemptions is money benefits, including certain pensions and retirement accounts, certain kinds of public assistance, and more.
Pension and Retirement Account Exemption
Most retirement accounts and pensions are completely protected under the law. You can protect individual retirement accounts as well as annuities except for any amounts that were contributed within the 120 days before filing bankruptcy.
Simple, traditional, or Roth IRAs are also protected under the law up to $1,512,350. You can also protect pension, stock bonus, profit-sharing, or other qualified plans with the exception of amounts that were contributed in the 120 days before filing.
Exemptions protect pensions for police officers and firefighters, public school employees, state employees, probate judges and judges, and legislators.
Using Michigan’s exemptions, if you’re the head of household, you can protect up to 60% of earned butunpaid wages. And an exemption of $15 a week along with $2 each week is allowed for each dependent other than your spouse. Other people can protect up to 40% or $10 a week.
Public Benefit Exemptions
Crime victims’ compensation is fully exempt under the law. You can protect unemployment compensation and Korean War veterans’ benefits as well. Benefits for Vietnam War veterans are exempt under the law. Worker’s compensation benefits and welfare benefits are also exempt.
Insurance benefits are fully protected under state law regardless of the amount. Also, the benefits paid on behalf of the employer are exempt. You can protect benefits paid by any investment in stock as well as mutual life, casualty, or health insurance.
Life insurance is exempt
Insurance proceeds that are held by an insurer are exempt
Fraternal society benefits are exempt
You can protect disability, health benefits, or mutual life benefits
You can protect trust funds and life insurance policies that are employer-sponsored
Filing Chapter 7 Bankruptcy?
Filing bankruptcy in Michigan doesn’t mean that you have to give up all your possessions, such as your home and car. Exemptions allow you to protect certain items. You’ll need to decide whether Michigan’s exemption or the federal bankruptcy exemptions will serve you better. If you’re a homeowner, consider that Michigan’s homestead exemption is higher than the federal homestead exemption. If you don’t own a home, the federal exemptions may be a better fit since they have higher exemptions for car equity and household goods, plus a generous wildcard exemption.
If you’re not sure whether the state or federal exemptions will be more beneficial for your case, you can contact an experienced bankruptcy lawyer in Michigan. Many offer free consultations. If you already know you want to file Chapter 7 and you have a simple case, you can use Upsolve’s filing tool to complete your bankruptcy paperwork for free.