Michigan’s Homestead-Exemption Law for Bankruptcy Debtors Upheld

The National Law Review recently published an article, Michigan’s Homestead-Exemption Law for Bankruptcy Debtors Upheld, by Stephen F. MacGuidwin of Varnum LLP:

Varnum LLP

A Michigan law that allows bankruptcy debtors to exempt up to $45,000 of the value of their home is valid under the U.S. Constitution, according to the recent decision of the U.S. Court of Appeals for the Sixth Circuit in Richardson v. Schafer (In re: Schafer), — F.3d—-, 2012 WL 3553294 (6th Cir. 2012).   The decision resolves a split of authority that had developed between different decisions in the U.S. Bankruptcy Court for the Western District of Michigan.

Michigan law, as the Court explained, allows a debtor to choose her list of property exemptions from three sources:  the federal Bankruptcy Code, 11 U.S.C. § 522(d); a Michigan law applicable only to bankruptcy debtors, M.C.L. § 600.5451; or (3) a Michigan law that applies to all Michigan residents (regardless of bankruptcy status), M.C.L. § 600.6023.  As far as exempting the equity in a homestead, the Michigan law for bankruptcy debtors is the most generous, protecting up to $30,000 of the value of his homestead (or up to $45,000 if the debtors is disabled or at least 65 years old).  This is significantly more than what is protected under the Bankruptcy Code ($21,625) or the Michigan general exemptions statute ($3,500).

In Schafer, the bankruptcy trustee challenged the $35,000 homestead exemption, arguing that the Michigan statute was unconstitutional under the Bankruptcy Clause and the Supremacy Clause of the U.S. Constitution.  The bankruptcy court held that the statute was constitutional, but the U.S. Bankruptcy Appellate Panel of the Sixth Circuit reversed.

On appeal, the Sixth Circuit agreed with the State of Michigan, holding that the Michigan law did not violate the Bankruptcy Clause or the Supremacy Clause:

  • The Court rejected the argument that the Bankruptcy Clause endowed Congress with the exclusive authority to pass bankruptcy laws, reaffirming the concurrent authority shared between state and federal legislatures to promulgate bankruptcy laws.  Where state laws are inconsistent with federal bankruptcy laws, the Supremacy Clause and pre-emption doctrines will invalidate those state laws.
  • The Court held that the Michigan act does not violate the “uniform Laws” phrase in the Bankruptcy Clause.  Assuming that the phrase applies to state laws (and not just federal laws), the Michigan act operates uniformly because it provides a uniform process (as opposed to a uniform outcome).
  • Third, the Michigan act does not violate the Supremacy Clause, because there is no actual conflict between it and the Bankruptcy Code, because field pre-emption does not apply in the area of bankruptcy exemptions, and because the Michigan act “actually furthers, rather than frustrates, national bankruptcy policy.”

© 2012 Varnum LLP

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