To Be or Not to Be: Exclusivity of State Bankruptcy-Specific Exemption Statutes

Recent decisions from Michigan and Georgia have cast further confusion on the issue of exclusivity of “bankruptcy-specific” exemption statutes. Under 11 U.S.C. § 522(b), a debtor filing for bankruptcy is provided with two sources from which to claim property as exempt. The debtor may choose from those exemptions enumerated under 11 U.S.C. § 522(d) or select from exemptions available under “State or local law that is applicable on the date of the filing of the petition.” [1] The advent of bankruptcy-specific exemption statutes in several states has raised the question of whether these bankruptcy-specific statutes replace, or merely supplement, other general-exemption statutes. [2]

The issue has caused conflict in cases where a debtor attempts to elect both exemptions in the state’s bankruptcy-specific exemption statute, and those provided for in that state’s general exemption statutes. Debtors often argue that the bankruptcy-specific statute is a means by which the legislature sought to allocate more protection to bankrupt debtors and is not the only source of exemptions in bankruptcy. Conversely, trustees and creditors argue that the debtor is restricted to the exemptions listed in the bankruptcy-specific statute and that the debtor is “double-dipping” by seeking to claim exemptions under the bankruptcy-specific statute and other general-exemption statutes. The answer has significant consequences for debtors, trustees and creditors alike.

What Are State Bankruptcy-Specific Exemption Statutes?
Several states have instituted exemption statutes that are available only to debtors in bankruptcy. [3] Generally, these statutes provide additional cash exemptions, allow for exemptions in property not otherwise exempt under general state law, which in some cases, replicate exemptions provided for elsewhere, and arguably replace the general exemption statutes altogether for bankrupt debtors. In 2005, the Michigan Legislature enacted MCL § 600.5451, which provides, inter alia, that:

(1) A debtor in bankruptcy under the [B]ankruptcy [C]ode, 11 U.S.C. 101 to 1330, may exempt from property of the estate property that is exempt under federal law or, under 11 U.S.C. 522(b)(2), the following property (emphasis added).

Similarly, West Virginia has enacted W.Va. Code § 38-10-4, which provides:

Any person who files a petition under the federal bankruptcy law may exempt from property of the estate in a bankruptcy proceeding the following property (emphasis added).

Georgia’s bankruptcy-specific statute states:

[A]ny debtor who is a natural person may exempt, pursuant to this article, for purposes of bankruptcy (emphasis added).

The confusion concerning bankruptcy-specific exemption statutes partially stems from the fact that many of the same exemptions are often found in other provisions of the state code. For example, MCL § 600.5451(1)(o) allows a bankrupt debtor to exempt “[p]roperty described in Section 1 of 1927 PA 212, MCL § 577.151 or real property, held jointly by a husband and wife as tenancy by the entirety.” MCL § 600.6023a, a general exemption statute, provides for the identical exemption:

Property described in Section 1 of 1927 PA 212, MCL 557.151, or real property, held jointly by a husband and wife as tenancy by the entirety is exempt from execution under a judgment entered against only one spouse.

Section 600.5451 allows a debtor in bankruptcy to exempt retirement accounts and annuities as follows:

All individual retirement accounts, including Roth IRAs, or individual retirement annuities as defined in section 408 or 408a [of] the IRC, 26 U.S.C. 408 and 408a and the payments or distributions from those accounts or annuities. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of the bankruptcy code, 11 U.S.C. 522.

The language of MCL § 600.6023 is substantially the same:

(k) An individual retirement account or individual retirement annuity as defined in section 408 or 408a of the IRC of 1986 and the payments or distributions from such an account or annuity. This exemption applies to the operation of the federal bankruptcy code as permitted by section 522(b)(2) of title 11 of the United States Code, 11 U.S.C. 522.

However, noticeably absent from MCL § 600.5451 are several exemptions that, prior to 2005, were historically claimed by bankrupt debtors. One such exemption not included under § 600.5451 is found under MCL § 500.2207, which allows a debtor to exempt the full cash surrender value of a life insurance policy.

Similar to Michigan’s bankruptcy-specific statute, OCGA § 44-13-100 provides a list of property that may be exempted by those debtors filing for bankruptcy. Section 44-13-100 permits bankrupt debtors to exempt annuity payments only “to the extent necessary for the support of the debtor.” However, § 33-28-7 of the Georgia Code allows a debtor to exempt the entire amount of any annuity. Thus, the question arises: Can a bankrupt debtor go outside of a state bankruptcy-specific exemption statute to claim exemptions under the state’s general exemption statutes?

Michigan’s Struggle to Find Clarity
To understand the decisions dealing with the exclusivity of bankruptcy-specific statutes, a brief overview of the context in which MCL § 600.545 was enacted by the Michigan Legislature is necessary. Prior to 2005, all Michigan debtors—bankrupt and nonbankrupt alike—enjoyed exemptions provided for in numerous provisions under the Michigan Code. 

The lack of clarity in the statute itself and the scant legislative history available have hindered Michigan bankruptcy courts in deciding the question of exclusivity as to MCL § 600.5451, which began as H.B. 5763 and would amend MCL § 600.6023. Eventually, H.B. 5763 was passed in a package of bills as a distinct statute and not as an amendment to MCL § 600.6023. There is little other language that clarifies the intent of the legislature in enacting MCL § 600.5451.

Michigan Decisions
In Michigan, the issue of exclusivity has been addressed squarely on two occasions in In re Eisenberg and In re Sassak. The question of exclusivity of Michigan’s bankruptcy-specific statute was decided oppositely in each case.

In In re Eisenberg, the debtor sought to exempt his entire interest in the cash-surrender value of a life insurance policy pursuant to MCL § 500.2207. [4] The trustee objected on the basis that MCL § 600.5451 was the exclusive source of exemptions for bankrupt debtors and it did not contain an exemption for life insurance policies, which was sustained by the court.

First, the court was persuaded that although the word “only” did not appear in the preamble to MCL § 600.5451, the language in the opening paragraph did “clearly imply that the following list of property is the list and the exclusive list of property that the debtors may claim is exempt if they elect Michigan exemption law under Bankruptcy Code section 522(b).” [5] In this vein, the court opined that the life insurance exemption provided for under MCL § 500.2207 was enacted many years prior to enactment of MCL § 600.5451, and that the legislature was aware of the life insurance exemption and elected not to provide it to bankrupt debtors. [6]

Second, the judge believed that if the Michigan Legislature had intended merely to amend and not supplant the former exemption scheme for bankrupt debtors, then it would have left H.B. 5763 as an amendment to MCL § 600.6023. “[T]he legislature could have and would have likely simply just amended Section 600.6023 to put in any updates or amendments to the substantive exemptions, listed exemptions in that statute rather than enacting an entirely different statute, 600.5451.” [7]

Lastly, the court took notice of the fact that on the same day that MCL § 600.5451 was enacted, six other bills were also passed, which included MCL § 600.6023a. Both statutes contained an identical exemption relating to property held in tenancy by the entireties, and the judge reasoned that “had the Legislature intended that a bankruptcy debtor could claim an exemption under MCL 600.6023(a) for tenancy by the entirety or for husband and wife jointly held property under MCL 557.151, it would have been unnecessary for the legislature to put a provision very similar to that in as subsection (0) to MCL 600.5451(1).” [8] The court concluded that pursuant to 11 U.S.C. § 522(b)(3), MCL § 600.5451 was the applicable state law on the date of the debtor’s filing. [9]

The opposite conclusion was reached in In re Sassak. [10] The Sassak court viewed the issue under the backdrop of 11 U.S.C. § 522(b)(3), noting that under § 522(b)(3), a debtor was permitted to claim property as exempt under applicable state or local law. Under the court’s rationale restricting a debtor to those exemptions under § 600.5451 would run counter to the language of § 522(b)(3):

Schedule C instructs the debtor to check one of two boxes when claiming exemptions: one box for 11 U.S.C. § 522(b)(2) (the federal scheme) or the other box for 11 U.S.C. § 522(b)(3) (the state scheme). If MCL 600.5451 is intended to be the exclusive list available to a debtor claiming under the state exemption scheme, one would expect the second box to read “MCL 600.5451” instead of referring the debtor to broader scope of 11 U.S.C. § 522(b)(3). [11]

The court also decided against reading MCL § 600.5451 as the exclusive source of exemptions on the basis that if this was the legislature’s intent it would have included limiting language such as the word “only.” [12] The court was also persuaded that such an interpretation of § 600.5451 conflicted with the language of a bill analysis that stated that the intent of H.B. 5763 was to “modernize and liberalize” laws applicable to bankrupt debtors. [13] The court concluded that MCL § 600.5451 was not intended to be the exclusive source of exemptions for bankrupt debtors in Michigan.

Indecision in Other Jurisdictions
There is little guidance or clarity from other states where bankruptcy-specific exemption statutes exist. In Georgia, at least two cases address the question of whether that state’s bankruptcy-specific statute, OCGA § 44-13-100, limits bankrupt debtors to the exemptions provided for therein.
In In re Allen, the debtor sought to exempt the entire amount of her annuity under a provision of the Georgia Insurance Code. [14] The trustee objected on the basis that the debtor was restricted to the exemptions under OCGA § 44-13-100. Under OCGA § 44-13-100, only certain types and limited amounts of annuities may be exempted by bankrupt debtors. The provision that the debtor sought to employ had been enacted contemporaneous to the state’s bankruptcy-specific statute and allowed a debtor to exempt the entire amount of any form of annuity. The court adopted an analysis similar to that in In re Eisenberg. The court believed that the Georgia Legislature did not intend to allow for conflicting exemptions as to bankrupt debtors:

[T]here is no indication that the Georgia Legislature intended to amend or supplement the bankruptcy-specific exemptions found in Section 44-13-100 by way of the more general Georgia Insurance Code provisions. Rather, it appears that the Legislature intended the Georgia Insurance Code to apply to nonbankruptcy situations, with the bankruptcy specific exemptions in Section 44-13-100 applying in bankruptcy cases. [15]

A different result was reached in In re Fullwood. [16] In In re Fullwood, the debtor sought to exempt his worker’s compensation settlement under OCGA § 34-9-84. A creditor objected, arguing that the debtor was not permitted to exempt a worker’s compensation benefit as OCGA § 44-13-100 did not provide for such an exemption. The court rejected the creditor’s argument, reasoning that under § 522(b)(3), the Bankruptcy Code allowed for a debtor to select exemptions from any and all state laws. [17] As in Sassak, the court believed that restricting a debtor to the exemptions listed in Georgia’s bankruptcy-specific statute would run afoul of § 522. The court further reasoned that Georgia’s worker’s compensation statute was enacted long prior to the enactment of its bankruptcy-specific exemption statute and therefore it would have been redundant to include the same exemption in OCGA 44-13-100. [18] The court also gave substantial consideration to the fact that worker’s compensation benefits has historically enjoyed protection throughout the country. [19] The court concluded that “not all of Georgia’s exemptions are within the four corners of OCGA § 44-13-100.” [20]

Conclusion
This issue currently finds courts taking one of two very different positions. Those ruling that bankruptcy-specific statutes are not exclusive seem to do so because they are unwilling to preclude debtors from claiming exemptions that have been claimed by debtors, but that are left out of bankruptcy-specific statutes. On the opposite side, courts consistently point to the fact that a specific statute was enacted for bankrupt debtors and the legislature was aware of the exemptions historically relied on by bankrupt debtors, making a conscious decision to omit them with respect to bankrupt debtors. Absent more direct statutory language from lawmakers or a ruling from the circuit courts, the tug-of-war over assets between trustees and debtors appears destined to continue.