How Michigan’s exemption laws protect your property from creditors

If you are not familiar with bankruptcy, you may still think that it involves losing everything that you own, leaving you out on the street. Although this may have been true in the nineteenth century, modern bankruptcy laws are much kinder to debtors because, in part, they include bankruptcy exemptions.

What are bankruptcy exemptions?

Bankruptcy exemptions are laws that exempt certain important assets from becoming part of the bankruptcy estate, meaning that creditors cannot sell or take away the asset. Each state (and the federal government) has its own exemption laws that list out the amount and type of property that you can claim as exempt during bankruptcy. Depending on which type of bankruptcy you file, bankruptcy exemptions work in different ways.

If you file Chapter 7 bankruptcy, your property can be sold to pay your debts. Although this sounds like a serious loss, only property that is not covered (or only partially covered) by an exemption can be sold. If an exempt asset is worth more than the amount that you are able to exempt under law, it may be sold, but you will be refunded the amount of the exemption.

In Chapter 13 bankruptcy, you get to keep all of your assets as you repay some or all of your debts by making monthly payments under a payment plan for a three to five-year period. In this type of bankruptcy, exemptions are deducted from the value of the bankruptcy estate, which can lower the amount that you ultimately must pay back under the payment plan.

Exemptions in Michigan

Under the Michigan bankruptcy laws, you may choose whether you would like the federal or the Michigan exemptions to apply (but not both). One of the most important assets protected by the Michigan exemption laws is the debtor's residence. Under the exemption law, you can exempt up to $35,300 worth of equity in your residence from the bankruptcy estate.

If you file for Chapter 7 and have more equity than is covered by the exemption, your house may be sold to pay your creditors the amount that exceeds the exemption. In reality, this rarely happens, as homeowners can file Chapter 13 instead, which allows you to stay in your home while your other debts are paid off.

Besides your residence, Michigan exemption laws also protect some of your most valuable personal property. Some of the most important exemptions are as follows:

  • Up to $3,250 in equity for a single automobile
  • All clothing and family pictures
  • With few exceptions, all pension or retirement accounts
  • All health, life or casualty insurance proceeds
  • Up to $2,350 worth of tools, stock or materials that are necessary to carry on a trade, profession or business
  • All workers' compensation, veterans', unemployment, welfare and other public benefits

In addition, married couples who file bankruptcy jointly are eligible to double the exemption amounts listed above. Unfortunately, this benefit is not available for the homestead exemption.

Consult an attorney

As bankruptcy is a complicated process that is full of exceptions, if you are considering filing for bankruptcy, it is important to learn how it would affect your individual situation. An experienced bankruptcy attorney can advise you of your debt relief options and recommend one that would best protect your most cherished assets.