With the temporary problems faced by the auto industry, Michigan has been one of the states hardest hit by the lingering recession. If you are considering bankruptcy as an option for dealing with financial problems in the Great Lakes State, we have compiled a short list of information that you should be aware of before you seek bankruptcy protection.
Michigan Bankruptcy Courts
Michigan bankruptcy courts are divided into two federal districts: the Eastern District and the Western District. The Eastern District of Michigan bankruptcy court is further divided into divisions. Bay City, Detroit and Flint all have a bankruptcy court to serve local debtors. Similarly, on the west side of the state, Grand Rapids and Marquette both house bankruptcy courts. The city that you live in will determine the location of your meeting of creditors as well as the bankruptcy court that will hear any issues that may arise in your case.
Which Chapter of the Bankruptcy Code Will I File Under?
Although it is possible for individuals to file for Chapter 11 bankruptcy, by far the most common forms of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 7, otherwise referred to as “straight” bankruptcy is a relatively fast process that usually lasts somewhere between 4 to 6 months. At the end of a chapter 7 case, the debtor is issued discharge papers by the bankruptcy court and their unsecured debts, such as credit cards and medical bills are eliminated. By contrast, chapter 13 bankruptcy, often referred to as a wage earners plan, involves crafting a repayment plan to your unsecured creditors that last between 3 to 5 years. At the end of the chapter 13 repayment plan, the debtor is also issued a discharge of debts. While there are benefits to filing for Chapter 13 bankruptcy, most debtors prefer the faster chapter 7 process, that is, if they qualify. Thanks to bankruptcy reform legislation passed in 2005, debtors must meet certain income guidelines in order to qualify for chapter 7 bankruptcy. If, based on the last six months, your income is below the median in Michigan for a family of your size, you automatically qualify to file chapter 7. If your income is above the median, your disposable income is evaluated against the means test to see whether you can “afford” to pay something back to your unsecured creditors. A good bankruptcy lawyer will be able to crunch the numbers for you to determine whether you qualify.
Will I Lose My Home?
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.
How Homestead Exemptions Work
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. Some states such as Texas, allow chapter 7 debtors to protect unlimited home equity, others such as New Jersey have no homestead exemption. Michigan, at $34,450, is about in the middle nationally.
Michigan Chapter 7 Bankruptcy: An Example
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).
Home Equity is the Issue
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.
What About My Car?
Michigan also allows debtors to protect up to $3,250 of equity in a car. For a complete list of Michigan’s updated bankruptcy exemptions, visit www.legalconsumer.com. It should also be noted that on February 24, 2011, the Sixth Circuit Bankruptcy Appellate Panel found Michigan’s bankruptcy only exemptions to be unconstitutional. There is a state of flux within the law, making it all the more important to consult an attorney if you’re considering filing for bankruptcy.