National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Exemptions

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Fighting for Fairness: NCBRC, NACBA, and NCLC File Amicus Brief in Michigan Bankruptcy Exemptions Battle

“Michigan’s most vulnerable debtors deserve protection—not political obstruction.”

That’s the central argument made by the National Consumer Bankruptcy Rights Center (NCBRC), the National Association of Consumer Bankruptcy Attorneys (NACBA), and the National Consumer Law Center (NCLC) in a critical amicus brief filed before the Michigan Court of Claims. These leading consumer advocacy organizations are weighing in on a legal battle that could determine the financial future of countless struggling Michiganders.

At issue is House Bill 4901 (HB 4901)—a long-overdue update to Michigan’s bankruptcy exemption laws that would allow debtors to keep their homes, cars, and basic assets while seeking financial relief. The bill passed both chambers of the Michigan Legislature. But in a stunning act of defiance, House Speaker Matt Hall and Clerk Scott Starr have refused to present the bill to Governor Gretchen Whitmer, effectively blocking it from becoming law.

NCBRC, NACBA, and NCLC have stepped in to argue that this political maneuver not only undermines democracy but has real and devastating consequences for Michigan residents who desperately need relief from crushing debt.

Why This Amicus Brief Matters

The amicus brief filed by these three consumer advocacy powerhouses makes it clear: Michigan’s outdated bankruptcy laws are leaving debtors trapped in financial ruin. The brief highlights several key points:

  • The Michigan House’s refusal to present HB 4901 violates the state’s constitutional process. Once a bill passes both chambers, it must be transmitted to the Governor.
  • Current bankruptcy exemptions are outdated and inadequate. The laws were last updated in 2005, and inflation has left homeowners and car owners with far less protection.
  • Michigan’s most vulnerable residents—seniors, widows, and those on fixed incomes—are being unfairly punished. Many are forced to sell their homes or avoid bankruptcy altogether because the law doesn’t protect enough of their assets.
  • HB 4901 was passed with bipartisan support and must be enacted to ensure that Michigan residents can get the “fresh start” that bankruptcy is meant to provide.

A copy of the brief is here: Amici Brief

What Happens Next?

The Michigan Court of Claims will now decide whether the House Speaker and Clerk must comply with the law and transmit HB 4901 to Governor Whitmer. If the court rules in favor of the Senate, it will be a victory not just for legislative transparency, but for thousands of Michigan families who are struggling to stay afloat.

Stay Updated

NCBRC, NACBA, and NCLC remain committed to fighting for consumer bankruptcy protections. Follow this case closely—its outcome will affect thousands of Michigan families.

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Tenth Circuit to Decide Dispute Over Child Tax Credit Exemption in Bankruptcy

Facts

The Tenth Circuit is reviewing a case that centers on Colorado’s bankruptcy exemption statute, which allows debtors to exempt the “full amount” of tax refunds attributed to the Child Tax Credit (CTC). The debtor, Jose L. Garcia-Morales, filed for Chapter 7 bankruptcy in 2021 and claimed an exemption for his $1,800 CTC, which resulted in a $1,455 tax refund.

The Chapter 7 trustee, Robertson Cohen, objected, arguing that the refund was only partially exempt and sought to retain $914.40 for the bankruptcy estate using a pro-rata allocation method. The bankruptcy court, and later the district court, sided with Garcia-Morales, finding that the entire refund was exempt under the plain meaning of the statute. The trustee has appealed to the Tenth Circuit.

Issues on Appeal

The case raises significant questions about how bankruptcy exemptions should be applied:

  1. Interpretation of “Attributed To”: Does Colorado’s statute require a pro-rata allocation of tax refunds based on the contribution of different sources, such as wage withholdings and the Child Tax Credit? Or does it exempt the entire refund if the CTC is a “but-for” cause?
  2. Public Policy Goals: How should bankruptcy courts balance the legislative intent of providing debtors with a financial “fresh start” against trustees’ duty to maximize estate value for creditors?
  3. National Implications: Could this case set a precedent for how other courts interpret similar exemption statutes, particularly in states that allow for federal tax credit exemptions?

Amici Brief

The National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amici curiae brief supporting the debtor. The key arguments include:

  • Fresh Start Policy: Bankruptcy exemptions, such as those for tax credits, are designed to shield essential assets and ensure families can maintain a minimal standard of living. Denying full exemptions for public assistance benefits like the CTC undermines this purpose.
  • Role of the CTC: The CTC is a critical part of the social safety net, aimed at reducing child poverty and supporting working families. Exempting it in full aligns with public policy and ensures its intended benefits reach families in need.
  • Trustee Incentives: Current compensation structures incentivize Chapter 7 trustees to pursue minor assets, often at a net loss to creditors. In this case, litigation costs would likely consume most of the funds the trustee seeks to recover.

Conclusion

This appeal has far-reaching implications for bankruptcy law, particularly regarding the treatment of public assistance benefits. If the Tenth Circuit affirms the lower courts’ decisions, it would bolster protections for vulnerable families by ensuring tax credit exemptions are interpreted broadly. Conversely, a reversal could encourage more aggressive challenges to exemptions, reducing the effectiveness of safety-net programs in bankruptcy.

A decision is expected later this year. Oral arguments have yet to be scheduled.

Garcia-Morales Amici Brief

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State Law Does Not Create Exemption in Trust

A state statute protecting a trust from judgment creditors is not an exemption statute for bankruptcy purposes where it was not designated as such and it did not provide unequivocal protection against all forms of collection. In re Morris, No. 21-30468 (Bankr. N.D. Ill. Jan. 13, 2023).

In his chapter 7 bankruptcy schedules, the debtor listed an interest as a potential beneficiary in a trust that did not have a spendthrift provision. The debtor claimed an exemption for the interest under Illinois law, 735 ILCS 5/2-1403 (1999), which provides:

Judgment debtor as beneficiary of trust. No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor. . . .

The trustee objected, arguing that the statute did not create a bankruptcy exemption.

Illinois is an opt-out state, so the court looked to state law to determine whether the trust interest would be exempt even though, unlike other specified exemptions like retirement plans and worker’s compensation awards, the statute at issue here did not create an explicit exemption. The court found that exemptions under the state laws are not limited to those so designated. Rather, “exempt property is any property that the legislature has identified and declared to be free from liability to processes such as seizure and sale, or attachment to satisfy debts.” The essential characteristic of an exemption “is simply whether the provision unequivocally protects the identified property against all forms of collection.”

In this case, the statute the debtor relied on was limited to protecting a debtor’s interest in a trust from judgment creditors. But the court found the chapter 7 trustee was merely gathering estate assets under section 541. He was not a judgment creditor nor was he attempting to collect on a judgment. The court quoted from In re Gutterridge, 2013 WL 395140 (Bankr. C.D. Ill., Jan. 31, 2013), discussing the same state statute, that “once a bankruptcy petition is filed, the Illinois statute in this case cannot apply to create an exemption to a trust that is otherwise simply an asset of the bankruptcy estate.”

The court noted that the grantors could have placed the trust out of reach under section 541(c)(2) by including a spendthrift provision. But the trust in this case did not do so.

The court rejected the debtor’s argument that because certain forms of collection such as levy, garnishment and attachment, all involve a judgment the state statute essentially applies to all collection actions. The court found no support for the argument in the language of the statute. Had the legislature intended to create an exemption, it could have done so.

The court concluded that the narrow language of the Illinois statute was not an “unequivocal” protection of the trust for bankruptcy exemption purposes. It sustained the trustee’s objection.

Morris Bankr SD Ill Jan 2023

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“Sham” Carve-Out Agreement Rejected

Calling the agreement a “sham,” the district court affirmed the bankruptcy court’s denial of a carve-out agreement between the chapter 7 trustee and the state and federal tax creditors. The court found the agreement would adhere to no one’s benefit but their own. The court also upheld the bankruptcy court’s finding that the debtor’s homestead exemption applied to section 724(b). Summerlin v. Turnage (In re Turnage), No. 22-122 (W.D. N.C. March 14, 2023).

The 72-year-old widowed debtor living on Social Security income and help from her son, filed for chapter 7 bankruptcy. She claimed an exemption of $55,000 in her home which she valued at $124,510.00. Her secured debts at the time of her petition totaled $231,788.29, and consisted of a mortgage on her home and both federal and state tax debts.

The chapter 7 trustee valued the debtor’s home at between $175,000 and $180,000. He objected to her exemption as inapplicable to her tax liens under North Carolina law. He then entered into a carve-out agreement with the debtor’s tax creditors under which he would receive $30,000 for his expenses and “[t]he IRS and NCDOR each get 60% of their secured tax liens. The remaining 40% carved out of the tax liens (approximately $38,000 after payment of the Trustee’s expenses) would be used to pay priority unsecured claims in full and the remainder would be disbursed pro rata among the general unsecured creditors.” He moved the court for authority to sell the property so he could carry out this distribution plan.

The bankruptcy court denied the motion to sell and overruled the objection to the debtor’s exemption. The trustee appealed to the district court.

The court found the appeal turned on application of section 724(b). In addition to establishing the order of distribution where tax liens are involved, that section provides that after the first mortgage is paid off, claimants holding certain types of priority claims may substitute in for the tax lien to the extent of the tax lien. The court noted that the only priority claim that would be available to substitute in for the tax lien would be the trustee’s own compensation, related primarily to the sale of the debtor’s home.

Notably, section 724(b) makes no provision for exemptions. Because North Carolina opted out of the federal exemptions, the court turned to state law to determine how the debtor’s homestead exemption would fare under a section 724(b) distribution scheme. It found state law emphasizes a liberal construction of exemption laws, favoring their application.

The court was unpersuaded by the trustee’s argument that permitting the debtor to take her homestead exemption would impinge on the tax liens. The court differentiated between the homestead exemption’s applicability to proceeds from sale of the home and its applicability to the tax liens themselves. It found that “once the tax agencies agree to the carve-out they cannot direct the allocation of the value created by such carve-out.”

Finally, the court noted with distaste that the carve-out benefited only the trustee and the tax agencies. It stated: “for her ‘fresh start,’ the Debtor, a 72- year-old widow with no meaningful source of income, loses her home and gets no more than a check for about $2,000. The minimal benefit to the other general unsecured creditors does not obscure the reality of this agreement.”

The court affirmed the Bankruptcy Court’s decision that the Debtor’s homestead exemption applies to section 724(b) and its denial of the Motion to Sell.

Turnage WD NC March 2023

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Post-Petition Fee Agreement a No-Go

A fee agreement that purports to attach an attorney’s lien on the debtor’s as exempt personal property is unenforceable under section 526(a) where state law allows such liens only on non-exempt property or on exempt personal property for specified exceptions, not including attorney’s fees. In re Turner, No. 22-41570 (Bankr. D. Minn. Dec. 2, 2022). [Read more…] about Post-Petition Fee Agreement a No-Go

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Exemption Amount in Lien Avoidance Action

For purposes of lien avoidance under section 522(f), the debtor was able to claim a homestead exemption in the amount of the California exemption in effect at the time of his bankruptcy petition, despite California law that fixed the exemption amount at the time of lien creation. Barclay v. Boskoski (In re Boskoski), No. 22-55098 (9th Cir. Nov. 14, 2022). [Read more…] about Exemption Amount in Lien Avoidance Action

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Absent Objection 100% FMV Exemption May Exceed Statutory Cap

A claimed exemption for 100% of FMV is allowed when no party in interest objects even though once the property appreciated post-petition, the exemption was greater than the statutory limit. Masingale v. Munding (In re Masingale), No. 22-1016 (B.A.P. 9th Cir. Nov. 2, 2022). [Read more…] about Absent Objection 100% FMV Exemption May Exceed Statutory Cap

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Hockey Player Shoots but Doesn’t Score

The district court found that the “mansion loophole” cap on exemptions provided for in section 522(p) applies even in opt-out states where the debtor does not have the option to choose between state and federal exemptions. It also held that rule 4003(b)(4) does not impose a deadline on notice to the debtor of filing an objection to exemptions. In re Kane, No. 21-8209 (N.D. Cal. Sept. 2022). [Read more…] about Hockey Player Shoots but Doesn’t Score

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Exemptions for Joint Tenancy and Separate Living

The debtors were entitled to exempt only their one-half interest in one of the two residences where they owned both properties jointly but the husband lived in one residence and the wife lived in the other. They could avoid the creditor’s judgment lien to the extent the lien impaired those exemptions. In re Snyder, No. 21-31521 (Bankr. N.D. Ohio Sept. 23, 2022). [Read more…] about Exemptions for Joint Tenancy and Separate Living

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Tenancy by Entirety Not Exempt from IRS Debt

The debtor could not exempt property of the estate which he owned as a tenant in the entirety with his non-filing spouse with respect to a debt he owed to the IRS where section 522(b)(3)(B) exempts such property only to the extent it would be exempt under nonbankruptcy law and the Tax Code permits the IRS to collect against the property. Morgan v. Bruton (In re Morgan), No. 21-891 (N.D. N.C. Aug. 12, 2022). [Read more…] about Tenancy by Entirety Not Exempt from IRS Debt