Regardless of a Debtor’s Choice Between Federal or Michigan Bankruptcy Exemptions, Creditors Should Carefully Scrutinize and Challenge Questionable Claims

By David M. Eisenberg and Deborah S. Lapin

Filing for personal bankruptcy in the face of overwhelming debt and financial distress is never an easy choice or pleasant experience for a debtor. But it need not be catastrophic either. In fact, preventing catastrophe and providing a debtor with the space, plan, and resources to move forward is one of the underlying principles of Chapter 13 bankruptcy. However, such a financial resurrection is difficult, if not impossible, if a debtor is left with no assets or resources to serve as a foundation for rebuilding their future. That is why exemptions are such a critical, if somewhat confusing, aspect of the bankruptcy process.

In a Chapter 13 bankruptcy, exemptions help determine how much a debtor must repay through a reorganization plan and what property is shielded from liquidation or repayment. Accordingly, from a creditor’s perspective, exemptions can be the battleground on which recovery is won or lost. Michigan presents a unique landscape for debtors and creditors alike because it allows debtors to choose between the federal exemption system and its own state-specific exemptions. Understanding the interplay between these two schemes, and knowing when and how to challenge the validity of claimed exemptions, is essential for creditors seeking to protect their interests and maximize recovery.

Debtor’s Choice: Michigan or Federal Exemptions

The debtor’s choice between Michigan and federal exemptions can significantly affect the pool of assets available to creditors. In practice, debtors will select the scheme that protects the greatest amount of their property, which often leaves creditors with limited recourse unless they give those exemptions careful scrutiny and, where appropriate, challenge their validity.

Under the federal exemption system (set forth in 11 U.S.C. § 522(d)), debtors benefit from relatively generous protections, including the homestead exemption, which, as of April 1, 2025, can shield up to $31,575 in equity in the debtor’s primary residence. Additionally, the federal framework also provides for a “wildcard” exemption of $1,475, plus up to $13,950 of any unused homestead exemption. This wildcard is highly flexible and can be applied to virtually any property, including cash, a second vehicle, a tax refund, or anything else not covered by a specific exemption. For unsecured creditors, this flexibility can be particularly frustrating, as it allows debtors to strategically protect liquid or easily transferable assets that might otherwise be available for distribution.

Michigan has its own exemption statutes, primarily found in MCL 600.5451, that operate the same way as federal exemptions. A debtor who chooses the Michigan system opts out of the federal exemptions entirely. Michigan’s state exemptions are structured differently and, in some cases, may be more or less favorable to debtors depending largely on the nature of the assets involved. 

For example, as of April 1, 2026, Michigan’s homestead exemption can shield up to $51,150 in home equity (or $76,725 if the debtor is 65 or older, or disabled). This is notably higher than the federal homestead exemption, making it potentially very valuable for homeowners with significant equity. Conversely, the absence of a broad wildcard exemption under Michigan law can limit a debtor’s ability to shield miscellaneous assets, potentially creating opportunities for creditors.

Challenging Claimed Exemptions

Exemption claims are not exempt from creditor and court scrutiny. Creditors have the right to challenge exemptions that are improperly claimed, exceed statutory limits, or are based on inaccurate valuations. In many cases, a well-founded, successful objection can bring otherwise protected assets back into the estate, increasing the chances and amount of recovery for some creditors.

Valuation disputes offer particularly fertile ground for challenging a claimed exemption. Debtors often undervalue assets to fit them within exemption caps. Instead of accepting these valuations at face value, creditors can obtain independent appraisals or market comparisons that can reveal additional non-exempt equity.  

Exemptions Don’t Eliminate Mortgage Liens

It is important to recognize that exemptions do not eliminate mortgage liens. A properly perfected mortgage lien generally survives bankruptcy, regardless of the exemption claimed. However, exemptions can affect a lender’s practical ability to enforce its rights. For example, if the debtor’s equity in the property is fully covered by the homestead exemption and senior liens, there may be little incentive for a trustee to liquidate the asset. This often results in the property being abandoned from the estate, leaving the lender to rely on state law remedies such as foreclosure.

Ultimately, the exemption framework in Michigan and under federal law reflects a policy balance between debtor relief and creditor recovery. For creditors, the challenge lies in navigating that framework with precision and vigilance. By closely examining exemption elections, challenging questionable claims, and leveraging available legal tools, creditors can improve their position even in a system designed to leave debtors with the resources needed to get back on their feet. 

If you are a creditor with questions about Michigan or federal bankruptcy exemptions or would like to discuss your bankruptcy concerns generally, please contact Deborah Lapin or David Eisenberg at Maddin Hauser.