Most can agree that as a matter of public policy, it is unfair to allow a creditor to take everything from a borrower in satisfaction of debt. As a result, all states as well as the federal government have enacted laws that set rules as to what creditors can and cannot take from borrowers in collection actions. These laws are called exemptions and they apply to bankruptcy proceedings as well. The goal of exemptions is to insulate certain types of property from the claims of creditors so that the debtor isn’t left with nothing after a collection proceeding. The exemption laws allow certain dollar amounts to be protected in certain types of property. If the value of your property is below the applicable exemption limit, your creditors cannot take the property from you as part of a collections action. It’s exempt, untouchable. For example, a state with a $3,500 automobile exemption prohibits creditors from taking cars with $3,500 or less in equity (a car could be worth much more in actual value, however, exemptions factor in equity not debt). Kansas bankruptcy attorney, Jacob McElwee recently wrote an excellent post on the impact of exemptions on your property.

In some cases debtors will have a choice between federal and state exemptions. So what exemption law will apply to your case? In 11 U.S.C. § 522(b), Congress provided that a state may choose the exemption law available to any debtor filing for bankruptcy within its borders. What does this mean? States can allow their residents to utilize either state or federal exemption law when protecting property from creditors in bankruptcy or elsewhere.

For example, those filing bankruptcy in Ohio and Tennessee are not eligible to claim the federal exemptions because those state’s laws specifically require residents to use Ohio or Tennessee exemptions. Ohio and Tennessee have “opted out” of the federal exemptions choosing to use only their laws. Michigan, on the other hand, has not opted out. When a Michigan resident files bankruptcy, he or she can choose to exempt property under the federal exemption laws, or under Michigan law.  Should Michigan debtors choose the so-called “state exemptions,” they then have a choice to select exemptions under M.C.L. § 600.6023, which are generally applicable to all judgment debtors, or exemptions under M.C.L. § 600.5451, which are available only to debtors in bankruptcy.

The choice between federal and state exemptions is important because it may have an impact on how much property you can protect from creditors. In Michigan, debtors with significant equity in their homes may want to consider using state exemptions under M.C.L. § 600.5451(1)(n).  This Michigan law provides a much more generous homestead allowance than any alternative. Debtors who are either older than sixty-five years of age or disabled may protect up to $51,650.00 of home equity from their creditors. This means that their home cannot be subject to forced sale at the hands of creditors if the home equity is less than $51,650.00. Other Michigan debtors may protect up to $34,450 in homestead value under this law.  By contrast, the federal homestead exemption law is capped at $20,200.00. Clearly here the Michigan laws are more effective at protecting your property than the federal.

The above example demonstrates a situation in which state law will allow more property to be protected than federal exemptions will allow. However, there are circumstances in which federal law will provide more protection. If you are considering filing for bankruptcy, it is important to consult a bankruptcy attorney to discuss how best to protect your property.