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    Chapter 7 Bankruptcy

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    Bankruptcy Laws in Michigan

    You might think that, because your Michigan bankruptcy case is filed in a federal courthouse,  all bankruptcy law is determined by the federal government and that your bankruptcy is the same as bankruptcy in, say Alaska. While cases filed in both places are very similar, and federal law does determine most of the rules and procedures that you will have to follow in your case, lawyers and politicians can’t make anything that simple.

    In reality, some of the rules that will be most important to you are different in each state. For one, the eligibility rules for filing a Chapter 7 bankruptcy (the most popular form of bankruptcy) are set on a state-by-state basis because the cost of living in one state may be drastically different than in another state. And on a more complicated and frustrating note, the rules regarding the property that you can keep after filing bankruptcy are set at the state level, though some states (including Michigan) allow you to choose between state rules and federal rules.

    Don’t worry if all of that sounds a bit complicated — we will break it down step by step.

    Federal Rules and Courts Make Bankruptcy Filings Similar Across the Nation—State Rules Determine Eligibility and Exemptions

    As we mentioned, your bankruptcy filing will land on a clerk’s desk in federal court. Most of the rules that you have to follow are the same no matter which court you end up in. A bankruptcy in Alaska is very similar to a bankruptcy in Michigan, for example. That’s why most of the articles you read on our website about bankruptcy filing and procedures don’t specify states — the rules are mostly the same in every state.

    Where states differ is in the rules that govern how much property you get to keep after your bankruptcy (anything you don’t keep is sold off to pay your debts) and the rules that determine whether you make too much money to file.

    Michigan Means Test

    When most people think about bankruptcy, they are thinking about a Chapter 7 filing. This is the one where your excess assets are liquidated and the revenue generated from those sales is used to pay off some of your debt. The remainder of your debt is discharged, leaving you free to start your financial life over with some of your assets intact.

    Sounds good, right? To file for Chapter 7 bankruptcy, however, you must first pass either part of a two-part means test.

    The first component of the means test is based on household income: if your household income is below the median household income for Michigan, you are eligible to petition for bankruptcy. As of May 2022, the figure was $56,343 for a single filer and a greater amount for families.

    The second element of the means test is an assessment of your last six months of income to calculate your monthly disposable income. After paying for necessary living expenses like rent and food, disposable income is the amount of money that remains. Under this second element of the test, you are likely qualified for Chapter 7 bankruptcy if your disposable income was zero or close to nothing. But, before investing time and money in the application process, you should speak with an attorney to confirm your eligibility.

    Michigan Bankruptcy Property Exemptions

    While reading about bankruptcy, it may seem like you have to sell off everything you own to get a fresh start. That couldn’t be further from the truth, though the bankruptcy system certainly doesn’t allow you to keep everything — otherwise every rich person would declare bankruptcy, keep their Ferrari, and escape all of their debts. Instead, the government does put some limits to prevent what they see as abuse of the system.

    The set of rules that determine what property is “exempt” from sale as part of your bankruptcy is called the property exemption. Michigan has its own set of property exemptions, though they do allow you to opt into the federal set of exemptions — basically, you get to choose which set of rules is best for you. It may seem easy to go through the two sets of rules and find which ones are the most beneficial, but there can be gray areas or ways of applying unused exemptions to other properties that are not obvious to the inexperienced eye — it can be very beneficial to discuss your case with an attorney before assuming that certain exemptions apply or are the best fit for your case.

    Wildcard Exemption

    This will be a quick one. Michigan has no wildcard exemption. A wildcard exemption allows you to apply an exempt dollar amount to any property that you wish to protect. For example, you might want to protect an extra car.

    Don’t write off the wildcard exemption yet, though — remember that Michigan allows you to use the federal rules instead, which do have a wildcard exemption. The federal wildcard exemption is $1,475 plus up to $13,950 of any unused part of the federal homestead exemption, effective April 1, 2022. (If you’re married and filing a joint bankruptcy, these sums can be doubled.)

    Homestead Exemption

    Speaking of the homestead exemption, for most people, this is the most important one. They want to protect the home they live in and where their family sleeps at night.

    Michigan is fairly generous with its homestead exemption: you can be exempt up to $40,475 ($60,725 if you are 65 or older, or you are disabled). This amount is regularly adjusted by the state for inflation, so check with your attorney for the most recent numbers. Unfortunately, unlike many other states and the federal rule set, married couples cannot double their exemption even in a joint filing.

    Under federal law, the homestead exemption is $27,900 (twice that for married couples). 

    Automobile Exemption

    Are you one of the many people who have returned to in-person work? You will probably need your card to get there. Fortunately, Michigan exempts up to $3725 in equity in your motor vehicle. Equity is the value of the car minus what you still owe on it.

    The federal exemption isn’t too different: up to $4000 in equity.

    Keep in mind that if you owe on the car, and you decide to keep it, you will have to continue making payments on it and will still owe on the vehicle after filing for bankruptcy. You essentially reaffirm the debt, choose to keep the car, catch up on any back payments, and keep making your monthly payment as if you never filed for bankruptcy at all.

    Clothing, Household Goods, Personal Property, and Animals Exemptions

    Great news for everyone with designer threads: Michigan does not place a limit on the value of your clothing — it is all exempt. Don’t even think about going out and stocking up on designer clothes right before filing, only to sell them secondhand after your case is closed. The bankruptcy court is smarter than that and will look at your purchases before filing. The state also does not limit the value of your family pictures, food, and fuel to last up to six months, any health aids or equipment, or your burial plot.

    However, the state does play some limits on other properties. You can have up to $625 in each of the following categories, up to a little over $4000 in total: appliances, household goods, furniture, jewelry, and books. (Don’t they know that a single college textbook now costs more than $625?) You can also be exempt up to $700 for a computer, for a household pet, or your seat in a church.

    By contrast, the federal rule is much simpler. You can exempt up to $700 per item, with a cumulative limit for all of your personal property at $14,875.

    Retirement Benefits

    If you have been saving for retirement, you are probably terrified of losing your 401(k), IRA, or other retirement accounts. Not to worry: federal and state laws protect these retirement accounts. Most retirement accounts are protected, up to $1.28 million in value, though considering how important your retirement accounts are (especially if you are retired or near retirement), definitely discuss this with a lawyer before assuming the bankruptcy court won’t liquidate it for your creditors. There are some accounts, such as educational IRA accounts, that do have lower exemption limits.

    Exemptions are Complex: Get Professional Help

    If reading about these two sets of exemption rules has your head spinning, you are not alone — they are needlessly complicated and will determine everything from whether you can file to whether you will have retirement income and  home after you are done filing. It is not an exaggeration to say that these are the most important rules that you have to play by in bankruptcy court. This is where expert advice from a bankruptcy attorney can pay off — your attorney can help you maximize the amount of exempt property and set you up for a strong financial future after filing. For legal advice, schedule a consultation with one of our network attorneys.

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