How much home equity can you protect under Michigan Bankruptcy Laws?

Michigan Homestead Exemption: How will your home be affected if you file for bankruptcy in Michigan? Perhaps the number one concern of those filing for bankruptcy is how their assets will be affected. There is a common misconception that filing for bankruptcy involves losing all your stuff. However, in many cases, debtors retain all of their property through the bankruptcy process while getting out from under burdensome credit card debt. Under Michigan Bankruptcy laws, debtors can protect up to $34,450 of equity in a home. Michigan’s homestead exemption increases to $51,650 if the debtor is elderly or disabled. There is a catch: the property claimed as exempt cannot exceed 1 lot in a town, village, city, or 40 acres elsewhere.

Homestead exemptions operate as a shield that prevents creditors or the bankruptcy trustee from selling your home to satisfy creditors claims. Homestead exemptions, including Michigan’s, protect home equity. It is important to understand that if your mortgage balance exceeds the value of your home (your home is “underwater”), there is nothing to exempt. If, however, you own your home outright or have seen your home steadily appreciate in value, the homestead laws become crucially important.

How does the Michigan homestead exemption work in the context of a chapter 7 bankruptcy? Let’s say Chris, from Oakland County, owns a home in Birmingham worth $300,000 encumbered by a mortgage of $150,000. Chris is considering filing for bankruptcy. In this example, Chris has accumulated $150,000 of home equity (value of home minus the mortgage). Michigan Bankruptcy Laws only allow Chris to protect $34,450 of home equity, anything above that is considered non-exempt. Because Chris has over $100,000 of non-exempt equity, his home would be subject to sale by the bankruptcy trustee if he were to file for bankruptcy. Chris would have the option of making a cash payment to the trustee to avoid the sale, but based on the sizable amount of equity he has in his home, this could prove difficult. If Chris’ home was sold by the trustee, he would be entitled to a check for the full amount of his claimed exemption under Michigan law ($34,450).

As the above example demonstrates, your ability to file for bankruptcy in Michigan and keep your home will be a function of home equity. If you have less than $35,000 of home equity or are underwater on your home, the bankruptcy trustee will not be able to go after it. The property will be fully exempt. If you have questions about how your property will be affected in bankruptcy, consult an attorney.

RECENTLY MOVED? A recent move may impact which state’s homestead exemption will apply to your bankruptcy.