Michigan Bankruptcy Blog

6th Circuit B.A.P.: Michigan's bankruptcy-specific exemption statute is unconstitutional.

In re Schafer, 6th Cir. B.A.P., Feb. 17, 2011 (2011 WL 534752, authored by Hon. Marci B. McIvor).

Under the Bankruptcy Code, debtors may choose between the federal exemptions listed in 11 U.S.C. § 522(d) or exemptions available under state law, unless their state has "opted out" of the federal exemption scheme. Michigan has not opted out, so debtors may choose between federal and state exemptions. Since 2005, Michigan law has provided two alternative state-law exemption schemes:

(1) an exemption statute available to all Michigan residents, which provides that certain property is exempt from execution by creditors (MCL 600.6023); or

(2) an exemption statute available only to bankruptcy debtors (MCL 600.5451), also known as the "bankruptcy-specific exemption statute."

For some debtors, Michigan's bankruptcy-specific exemption statute is advantageous because it allows a much larger homestead exemption than either the federal exemption or the generally applicable Michigan exemption. As a result, debtors can protect more equity in their homes.

But a debtor's ability to exempt property under the bankruptcy-specific exemption statute has been in doubt for some time. In the Western District of Michigan, both the Hon. James D. Gregg and the Hon. Jeffrey R. Hughes have concluded that the statute is unconstitutional. See In re Pontius, 421 B.R. 814 (Bankr. W.D. Mich. 2009); In re Wallace, 347 B.R. 626 (Bankr. W.D. Mich. 2006). The Hon. Scott W. Dales, on the other hand, recently held that the statute is constitutional. In re Schafer, 428 B.R. 720 (Bankr. W.D. Mich. 2010).

In In re Schafer, the trustee appealed the bankruptcy court's decision, and the Bankruptcy Appellate Panel of the Sixth Circuit recently reversed, holding that Michigan's bankruptcy-specific exemption statute is unconstitutional under the Bankruptcy Clause of the United States Constitution.

The panel held that by adopting the Constitution, states ceded their authority to legislate in the area of bankruptcy. Consequently, states do not have the authority to create their own bankruptcy exemptions. Rather, states only have the authority to "opt out" of the federal exemptions and limit debtors to the exemptions generally available under state law – that is, available to everyone in the state, not just those who have filed bankruptcy. Put simply, "[s]tates may not pass legislation which relates only to debtors in bankruptcy." Id. at 23, emphasis in original.

The panel also reasoned that the Bankruptcy Clause's uniformity requirement applies to state enactments, and Michigan's bankruptcy-specific exemption statute is not uniform because it differentiates between Michigan citizens who have filed bankruptcy and those who have not. For example, a person who has not filed bankruptcy may protect only a limited amount of home equity (presently $3,500). Any equity above that amount can be reached by judgment creditors. But under the bankruptcy-specific exemption statute, the same person could protect $30,000 of equity if the person filed bankruptcy. The panel found that this disparity violates the uniformity requirement of the Bankruptcy Clause.

Unless this decision is appealed, debtors should avoid claiming an exemption under Michigan's bankruptcy-specific exemption statute and should instead rely on either the federal exemptions or Michigan's generally applicable exemption statute, MCL 600.6023.

Categories: 6th Circuit Court of Appeals, Western District of Michigan