Bankruptcy-Specific Exemptions Will Stand in Michigan

SLWYYesterday the U.S. Supreme Court denied certiorari in Richardson v. Schafer, 2013 WL 598486 (U.S. Feb. 19, 2013).  This case, which came out of the 6th Circuit Court of Appeals, revolved around this question:  Are state exemptions that may only be used in bankruptcy constitutional? Because the Supreme Court will not review the case (called denying cert), the 6th Circuit Court of Appeal’s decision will stand — which means people can use the bankruptcy-only exemptions in Michigan.

What Are Bankruptcy-Only Exemptions?

In bankruptcy, exemptions help you protect certain property in Chapter 7, and play a role in how much you must repay creditors in Chapter 13. (Learn about bankruptcy exemptions and how they work.) There are a set of federal bankruptcy exemptions, and each state has its own set of exemptions. Many states have a set of exemptions that you can use both in bankruptcy and also to protect your property from collection efforts by judgment creditors.  Some states have a set of exemptions that can be use in bankruptcy only — you cannot use them against judgment creditors. This last type of exemptions (often called bankruptcy-only exemptions) were at the heart of the Schafer case.

In Re Schafer

The bankruptcy trustee in this case challenged the debtor’s use of one of the bankruptcy-only exemptions, arguing that these types of exemptions were unconstitutional. The 6th Circuit Court of Appeal ruled that bankruptcy-only exemptions were constitutional — a win for bankruptcy debtors. Now that the U.S. Supreme Court has refused to hear the case, the 6th Circuit’s decision stands. This means that bankruptcy filers in Michigan (the only state within the 6th Circuit that has bankruptcy-only exemptions) will be able to use the state’s bankruptcy-only exemptions.

To learn more about the Schafer case and what is means for bankruptcy filers, see my previous post: 6th Circuit Says Michigan Debtors Can Use Bankruptcy-Only Exemptions.