Bankruptcy

Types of Bankruptcy in Michigan

1. Chapter 7 Bankruptcy (Liquidation)

   Chapter 7 bankruptcy is often referred to as "liquidation" because it involves the sale of non-exempt assets to pay off creditors. For most individuals filing Chapter 7, however, they don’t have many assets that are not protected by state exemption laws, meaning they are able to keep most or all of their property. In this type of bankruptcy, most unsecured debts (like credit card balances, medical bills, and personal loans) are wiped out.

   The process of Chapter 7 typically takes about 3-6 months, making it the quicker of the two options. However, not everyone qualifies for Chapter 7 bankruptcy. Michigan residents must pass a “means test,” which compares their income to the state’s median income for a household of their size. If their income is above the median, they may not qualify for Chapter 7 and would have to file for Chapter 13 instead.

2. Chapter 13 Bankruptcy (Reorganization)

   Chapter 13 bankruptcy, also called “reorganization,” allows debtors to create a repayment plan to pay back all or part of their debts over a period of 3 to 5 years. Unlike Chapter 7, Chapter 13 doesn’t involve the liquidation of assets. Instead, it involves restructuring your debt and making regular monthly payments to a trustee, who then distributes the funds to your creditors.

   This option is ideal for individuals with a regular income who may be behind on mortgage or car payments, or who have assets they want to protect. Chapter 13 allows you to keep property, like a home or car, and make payments according to a manageable plan based on your income, debts, and expenses.

3. Chapter 11 Bankruptcy (For Businesses)

   While less common for individuals, Chapter 11 bankruptcy is another option available to businesses in Michigan. It allows businesses to continue operations while reorganizing their debts and attempting to return to profitability. The process is complex and generally involves a detailed plan for restructuring debt.

The Bankruptcy Process in Michigan

1. Pre-Filing Considerations

   Before you can file for bankruptcy, you must complete credit counseling. The counseling session, which is required by federal law, helps you evaluate your finances and explore options other than bankruptcy, such as debt management programs. Once completed, you can move forward with the filing process.

2. Filing the Petition

   To begin the bankruptcy process, you must file a petition with the bankruptcy court in Michigan. The court will require you to submit a detailed list of your assets, liabilities (debts), income, expenses, and other financial documents. You will also need to provide information on any recent property transfers, lawsuits, or payments made to creditors prior to filing.

   In Michigan, you’ll file your petition in one of three federal district courts: the Eastern District (Detroit area), the Western District (Grand Rapids area), or the Southern District (Lansing area).

3. Automatic Stay

   Once your bankruptcy petition is filed, an automatic stay goes into effect. This legal provision halts most collection activities, such as creditor calls, wage garnishments, and foreclosure proceedings. The stay provides immediate relief and ensures that creditors cannot take further action against you while your bankruptcy is being processed.

4. The Meeting of Creditors

   After filing, you’ll attend a meeting of creditors (also known as a 341 meeting), which is typically scheduled about 30-45 days after your petition is filed. During this meeting, you’ll be questioned under oath by the bankruptcy trustee and your creditors (if they choose to attend). The trustee will review your financial situation and make sure your petition is accurate.

5. Bankruptcy Discharge

   For Chapter 7, a discharge of your eligible debts usually occurs within a few months of the filing. This means that the court legally wipes out your responsibility for most of your debts. However, some debts, such as student loans, child support, and certain tax obligations, are not dischargeable.

   For Chapter 13, your debts are not fully discharged until you complete the repayment plan. Once you’ve made all required payments, the court will discharge any remaining eligible debts.

Michigan Bankruptcy Exemptions

One of the key elements of bankruptcy law in Michigan is the state’s exemption laws. Exemptions allow debtors to protect certain types of property from being seized and sold to pay creditors. Michigan has both state and federal exemptions, and debtors can choose which set of exemptions to use.

Some common Michigan exemptions include:

• Homestead Exemption: Protects up to $37,800 of equity in your primary residence (or $75,600 for a married couple).
• Motor Vehicle Exemption: Protects up to $3,925 in equity in a vehicle.
• Personal Property: Exempts up to $4,000 in personal property, such as clothing, furniture, and appliances.
• Wages: Wages earned within 6 months prior to filing are typically exempt up to a certain amount.
• Retirement Accounts: Many retirement accounts, including 401(k)s and IRAs, are fully exempt from bankruptcy proceedings.

Impact of Bankruptcy on Your Financial Future

While bankruptcy can provide relief, it also has a long-term impact on your credit score. A Chapter 7 bankruptcy stays on your credit report for 10 years, and a Chapter 13 bankruptcy stays on your report for 7 years. This can make it more difficult to secure new credit, obtain loans, or even rent a home.

However, many people who file for bankruptcy find that their credit score improves over time as they manage their finances more effectively. In some cases, individuals who file Chapter 13 can begin rebuilding their credit even during the repayment plan by making on-time payments.

Conclusion

Filing for bankruptcy in Michigan can be an effective way to regain control of your financial situation, but it’s important to fully understand the process and consider all options. Whether you’re looking to discharge unsecured debts through Chapter 7 or reorganize your finances with Chapter 13, bankruptcy provides a legal pathway to a fresh start. If you’re considering bankruptcy, it’s highly recommended that you consult with an experienced bankruptcy attorney who can help you navigate the complex legal landscape and protect your interests.

Works Cited

1. U.S. Courts. (2024). Types of Bankruptcy. U.S. Courts. Retrieved from https://www.uscourts.gov/FederalCourts/Bankruptcy/TypesofBankruptcy.aspx
2. U.S. Department of Justice. (2024). Means Testing for Chapter 7 Bankruptcy. U.S. Department of Justice. Retrieved from https://www.justice.gov/ust/means-testing
3. Michigan Legal Help. (2024). Bankruptcy in Michigan. Michigan Legal Help. Retrieved from https://michiganlegalhelp.org/self-help-tools/bankruptcy
4. Michigan Legislature. (2024). Exemptions from Property Seizure in Michigan Bankruptcy. Michigan Legislature. Retrieved from https://www.legislature.mi.gov/
5. American Bankruptcy Institute. (2024). Chapter 7 Bankruptcy. American Bankruptcy Institute. Retrieved from https://www.abi.org
6. National Consumer Law Center. (2024). Bankruptcy Basics. National Consumer Law Center. Retrieved from https://www.nclc.org/
7. Federal Trade Commission. (2024). How Bankruptcy Works. Federal Trade Commission. Retrieved from https://www.consumer.ftc.gov/articles/0153-how-bankruptcy-works