The objective of bankruptcy laws in Detroit, and broadly across the United States, is to provide a structured and fair system for individuals and businesses struggling with insurmountable debt. These laws aim to offer debtors a fresh start by discharging certain debts while ensuring that creditors receive an equitable share of the debtor’s available assets.
By establishing clear eligibility criteria, such as income thresholds and waiting periods between filings, bankruptcy laws prevent abuse of the system and promote responsible financial management. These laws balance the interests of debtors seeking relief and creditors seeking repayment, thereby maintaining economic stability and fairness in the financial system.
Bankruptcy Laws in Detroit
When considering filing for bankruptcy in Detroit, there are several laws that debtors must be aware of. For debtors seeking to file for Chapter 7 bankruptcy, there are income eligibility thresholds based on the state median income. To qualify for Chapter 7, the debtor’s income must be below the median Michigan income threshold, or they must pass the means test, which evaluates the debtor’s income, expenses, and family size to determine eligibility.
The frequency with which a debtor can file for bankruptcy is regulated to prevent abuse of the system. In Detroit, as elsewhere in the United States, debtors can file for Chapter 7 bankruptcy once every eight years. If the debtor has previously filed for Chapter 13 bankruptcy, they must wait at least six years before filing for Chapter 7. If considering filing for Chapter 13 after a Chapter 7 discharge, they must wait four years.
Automatic Stay
Upon filing for bankruptcy (whether Chapter 7 or Chapter 13), an automatic stay goes into effect immediately. This stay halts most collection activities by creditors, including lawsuits, wage garnishments, and harassing phone calls. It provides temporary relief as you work through the bankruptcy process. [1]
Credit Report Impact
Bankruptcy will impact your credit report for several years:
- Chapter 7 Bankruptcy: Remains on your credit report for 10 years from the filing date.
- Chapter 13 Bankruptcy: Remains on your credit report for 7 years from the filing date
Exemptions
Michigan law allows you to exempt certain property from the bankruptcy process to help you start over:
- Homestead Exemption: Up to $40,475 of equity in real property can be exempted, which increases to $60,725 if you are 65 or older or disabled. [2]
- Motor Vehicle Exemption: Up to $3,725 of the equity in a vehicle is exempt.
- Personal Property Exemptions: Includes clothing, family pictures, food and fuel for six months, and more. Specific limits apply to other personal property such as appliances and furniture.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy aims to provide debtors and businesses with a fresh financial start by eliminating their unsecured debts. Unsecured debts refer to debts that are not guaranteed by any collateral, such as:
- Credit card bills
- Medical bills
- Personal loans
The primary purpose of Chapter 7 bankruptcy is to help debtors who are overwhelmed by their financial obligations and have no feasible way to repay their debts. By filing for Chapter 7 bankruptcy, debtors can potentially have their debts discharged, meaning that they are no longer legally obligated to repay those debts.
This type of bankruptcy is often considered a last resort for those facing extreme financial hardship. It offers debtors the opportunity to gain relief from their unmanageable debts, relieve the stress of constant creditor harassment, and start afresh with a clean financial slate.
The process of Chapter 7 bankruptcy involves a debtor filing a petition with the bankruptcy court, providing detailed information about their financial situation, assets, liabilities, income, and expenses. Once the petition is filed, an automatic stay is put into effect, which halts all collection actions from creditors.
The court will appoint a trustee to oversee the bankruptcy process, including liquidating the debtor’s non-exempt assets to repay creditors. However, most Chapter 7 cases are “no-asset” cases, which means that the debtor does not have any non-exempt assets to be liquidated.
Chapter 13 Bankruptcy in Detroit
Chapter 13 bankruptcy allows debtors with regular income to create a repayment plan to pay off their debts over a specified period of time, typically three to five years.
One of the main features of Chapter 13 bankruptcy is the repayment plan. Under this plan, the debtor proposes a monthly payment to the bankruptcy court based on their income and expenses. The court reviews the plan and approves it if it meets certain criteria. The debtor then makes monthly payments to a trustee, who distributes the funds to creditors according to the plan.
Debtors seeking Chapter 13 relief must have combined total secured and unsecured debts under $2,750,000 at the time of filing, regardless of self-employment or running an unincorporated business. 11 U.S.C. § 109(e). [3]
Chapter 13 bankruptcy provides the opportunity to eliminate or reduce certain types of debts. Some types of debts, such as credit card debt, medical bills, and personal loans, can be discharged, meaning that the debtor is no longer legally obligated to repay them. Some debts, such as child support, alimony, and student loans, cannot be discharged under Chapter 13 bankruptcy.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy allows businesses to reorganize their debts and continue operating while repaying creditors. It is often considered a lifeline for struggling companies, providing them with an opportunity to restructure their operations, reduce expenses, and improve their financial health.
Under Chapter 11, a debtor retains control over the business and develops a plan to repay creditors gradually. This plan must be approved by the bankruptcy court and is typically monitored by a trustee or a committee of creditors. One of the key benefits of Chapter 11 bankruptcy is its flexibility. It allows businesses to negotiate with their creditors, modify loans, and renegotiate contracts in order to improve their financial position.
This flexibility also extends to the sale of assets, as companies are able to sell non-essential assets to generate funds for debt repayment. By prioritizing the reorganization and restructuring of the business, Chapter 11 allows companies to stay in operation and potentially emerge from bankruptcy as a stronger and more viable entity.
Key Differences Between Chapter 7 and Chapter 13 in Detroit
Chapter 7 and Chapter 13 bankruptcies are two of the most common types of bankruptcies filed by debtors. The key differences between them lie in the types of bankruptcies, repayment plans, and eligibility requirements.
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets to repay their debts. This process is overseen by a trustee, and any remaining qualifying debts are typically discharged. On the other hand, Chapter 13 bankruptcy, also known as reorganization or wage earner’s bankruptcy, establishes a repayment plan that allows the debtor to repay some or all of their debts over a three to five-year period.
Eligibility requirements for Chapter 7 bankruptcy are based on the debtor’s income and their ability to pass the “means test,” which evaluates their income against the median income of their state. Those who do not meet the requirements for Chapter 7 may be eligible for Chapter 13 bankruptcy.
Debts, filing eligibility, and property rights are subject to specific rules and exceptions. For example, filing for bankruptcy may not discharge debts obtained through fraudulent means or debts incurred shortly before filing. Eligibility for bankruptcy may be affected if the debtor has received a bankruptcy discharge within a certain timeframe. Property rights, including exemptions, vary depending on the state in which the bankruptcy is filed.
If you are interested in filing for bankruptcy in Detroit, contact the experienced bankruptcy attorneys at Frego & Associates today.
FAQs
For Chapter 7, eligibility is determined through a means test comparing your income to the state median. If your income is too high, you may need to file for Chapter 13, which requires you to have a steady income to meet the payment obligations of the repayment plan. [4]
Michigan’s bankruptcy courts are divided into the Eastern and Western Districts, with the Eastern District including divisions in Detroit, Flint, and Bay City. The specific division you file in usually depends on where you reside. [5]
As of 2023, the fees for filing bankruptcy are as follows:
- $338 for Chapter 7
- $313 for Chapter 13
- $1,738 for Chapter 11 [6]
Sources:
[1] Glossary of Bankruptcy Terms | Eastern District of Michigan | United States Bankruptcy Court. (n.d.). Www.mieb.uscourts.gov. Retrieved May 22, 2024, from https://www.mieb.uscourts.gov/glossary-bankruptcy-terms
[2] MCL – Section 600.5451 – Michigan Legislature. (n.d.). Www.legislature.mi.gov. Retrieved May 22, 2024, from https://www.legislature.mi.gov/Laws/MCL?objectName=MCL-600-5451
[3] 11 U.S. Code § 109 – Who may be a debtor. (n.d.). LII / Legal Information Institute. https://www.law.cornell.edu/uscode/text/11/109
[4] Bankruptcy. (2024). Michigan.gov. https://www.michigan.gov/reinventretirement/reinventing/crisis-management/bankruptcy
[5] Court Locations | Western District of Michigan | United States Bankruptcy Court. (n.d.). Www.miwb.uscourts.gov. Retrieved May 14, 2024, from https://www.miwb.uscourts.gov/court-info/court-locations
[6] Fees | Western District of Michigan | United States Bankruptcy Court. (n.d.). Www.miwb.uscourts.gov. Retrieved May 14, 2024, from https://www.miwb.uscourts.gov/fees
