(Source: MIRS.news, Published 06/12/2024) Elderly residents unable to pay off debt could have up to $200,000 of their home's value shielded from debt collection if they declare bankruptcy, under a Senate bill that raises the exemption for seniors' homes from $60,725 in terms of what can be sold to pay off what they owe.  

According to Sen. Mary Cavanagh (D-Redford Twp.) – chair of the Senate Finance, Insurance and Consumer Protection Committee, as well as sponsor of SB 409 – Michigan's bankruptcy law is around 25 years out of date.  

"Bankruptcy is an important function in our economic system," Cavanagh told MIRS. "But it doesn't really serve its purpose if the individuals who really need to use it are left destitute…without a home, without (a vehicle) to get to their jobs, or even their childcare or a means to just sustain themselves, so I think that is the main priority of this legislation." 

Cavanagh's committee took testimony on SB 409 Wednesday afternoon, which was a bill introduced alongside SB 408 by Sen. Jeff Irwin (D-Ann Arbor). Irwin's bill would no longer allow creditors to garnish up to 25 percent of someone's weekly net income when they owe large amounts of debt, allowing those earning up to $516.50 per week to be completely shielded from court-ordered garnishments.  

"This is a package that I have been keeping my eye on…and actually seeing in my district and in Michigan, just the real life consequences of not updating laws when it comes to real life people's homes, people's auto (and) to their futures," Cavanagh said.  

If unable to fulfill monthly debt payments, citizens have access to Chapter 7 bankruptcy. Once successfully filed for, the individual would be assigned a bankruptcy trustee responsible for transforming their assets into cash, like through selling property and using earnings exclusively to pay off creditors.  

So far in 2024, there have been 4,936 Chapter 7 bankruptcy filings in the Eastern District of Michigan's U.S. Bankruptcy Court, and there were 10,136 filings in 2023.  

Additionally, 4,915 Chapter 13 bankruptcy filings were made during 2023 in the same court, which often involves a debt repayment plan of three to five years for someone with a more consistent income stream.  

Under SB 409, a bankruptcy trustee would not be able to sell one motor vehicle worth up to $15,000 to pay off the owner's debt – an increase from $2,775. 

The legislation would raise the exemption for electronic devices, growing from $500 in interest for one computer and its accessories to $5,000 in interest for multiple devices, including mobile phones.  

Furthermore, SB 409 would completely exempt people's household pets from being affected by a bankruptcy filing, as well as a seat, pew or slip a debtor's family occupies in places of public worship.  

In terms of homesteads, $60,725 for a senior (at least 65 years-old) or disabled person's home value is currently exempted in Michigan from being used as an asset to pay off debt.  

Without exemptions considered, a bankruptcy trustee can seek payments from the $70,000 in equity someone has generated off their $100,000 house, without selling the physical home itself because $30,000 continues to be owed on it in the person's mortgage agreement.  

"They're not going to sell it just to pay your mortgage off, so it's the equity we've got to deal with there," said James Frego II, founder of the Frego and Associates bankruptcy law firm. "They're being forced into Chapter 13…you're gonna make payments for the next three years, four years, five years…$200 a month, some kind of small amount…and when you're talking (about) an elderly person, maybe on a fixed income, that's everything to them."  

Frego told MIRS he has clients choosing between making bankruptcy payments or purchasing their medicine. Essentially, he described situations where residents intentionally file for Chapter 7 bankruptcy because they cannot provide debt payments on their own, wanting to see their assets turned into debt-paying cash. However, Frego explained, because of their home's value and leftover mortgage payments, a trustee could ask individuals to make payments based on their house's equity.  

Trustees can put the homes themselves up for sale as well.  

"Right now what this (bill) will do is let honest but unfortunate people keep their homes," bankruptcy lawyer David Wilkinson told MIRS. "Someone has a house with maybe $35,000 of equity. There's a crazy story out there (of how) a house on their block sold for this much – what the trustees will do is say 'well, you're close to the edge, so we're going to list your house for sale and just see if anyone buys it.' It's like when a loan shark breaks your legs."  

Wilkinson described a scenario where there's a for-sale sign up, the affected resident is freaked out and all they want to do is get rid of their medical debt.  

Also, for homesteads, the exemption for non-senior and disabled residents would grow from $40,475 to $125,000.  

According to Century Communities, the median home price in Michigan was $281,186 by November 2023, representing a 10.3 percent increase from the previous year.  

"I think the increase in the homestead exemption is huge," Frego said. "We're not looking for a windfall, we're just looking for a safe harbor, and the idea of raising the protection on your home equity into the six figures…is huge when compared to what they actually get right now – it's like $40,000 or $45,000 – well, that's woefully insufficient for most people." 

06/14/2024 Publishers note: This article was updated to reflect dollar changes made in a substitute bill.