Michigan Bankruptcy Exemptions Found Constitutional by the Sixth Circuit

An important new decisionRichardson v. Schafer, was handed down this week by the Sixth Circuit Court of Appeals finding that Michigan’s bankruptcy exemptions are, in fact, Constitutional, contrary to the arguments made by Western District of Michigan Chapter 7 Bankruptcy Trustee Thomas Richardson.

The argument centered on Michigan’s state bankruptcy exemption scheme, and, in particular, on the homestead exemption, which allows $30,000 of equity in a person’s primary residence to be exempted (that is, protected from liquidation/sale by the Chapter 7 bankruptcy Trustee), or up to $45,000 if the homeowner filing for bankruptcy is over the age of 65.

Alternatively, the Federal exemptions allow a homestead exemption of just(currently) $21,625.00.

The US Bankruptcy Code allows states to use the Federal exemptions, to opt out of the Federal exemptions and use their own exemptions, or, as Michigan does, allows residents to choose between the Federal and state exemptions on an individual basis.

The dispute in this case focused on the exemption claimed on a homestead owned by Chapter 7 debtor Schafer with more equity than could be protected from liquidation by the Chapter 7 Bankruptcy Trustee Richardson under the Federal exemptions. As a result, Schafer and his Michigan bankruptcy attorney applied the larger Michigan exemptions when filing the Chapter 7 bankruptcy, enabling Schafer to protect his home fully.

Trustee Richardson objected to the exemption, arguing that the Michigan statute creating the Michigan exemption was unconstitutional because it applied only to debtors “in bankruptcy” rather than to all Michigan resident debtors. Trustee Richardson’s argument was, basically, that the section of the US Bankruptcy Code allowing states to enact their own exemption schemes, 11 USC 522(d), did not allow states to enact exemption laws specific to debtors in bankruptcy. Richardson argued that this was a violoation of the Uniformity Clause of the US Constitution, which requires that laws similarly treat classes of citizens.

Additionally, Richardson argued that the Michigan exemptions violated the Supremacy Clause of the US Constitution, which prohibits state laws from conflicting with Federal laws.

The Sixth Circuit Court of Appeals rejected both of these arguments, finding, with respect to the first argument, that the Uniformity Clause prohibits non-uniform processes, not necessarily non-uniform results, and, with respect to the Supremacy Clause argument, that the Michigan exemptions were not preempted on a theory of preemption known as “field preemption,” which is a form of Federal preemption found on occasion to have occurred by the US Supreme Court where a Federal statute is intented to occupy the “field,” or general subject-matter area.

In short, for the first time in several years, since the filing of the Trustee’s original appeal from the Western District of Michigan Bankruptcy Court’s initial decision in favor of Debtor Schafer, the Michigan homestead exemption is again available for use by potential bankruptcy debtors in Michigan who have the fortunate position of having more than $20,000 in equity in their home and who don’t require the other advantages of the Federal exemption scheme.

If you are a southeast Michigan resident considering filing for bankruptcy, please feel free to contact me at (866) 674-2317 or john@hillalaw.com.

One response to “Michigan Bankruptcy Exemptions Found Constitutional by the Sixth Circuit

  1. Pingback: In Chapter 7 Bankruptcy, Can I Protect Life Insurance Proceeds Already Received? | Michigan Bankruptcy Lawyer

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