Bankruptcy refers to a legal proceeding which is initiated when a person or business cannot meet their financial obligations. There are different types of bankruptcy, all of which are governed under federal law. Consumer bankruptcy is one specific type of bankruptcy, and is filed when a debtor cannot pay back the debts they have incurred for their personal needs.
Once the bankruptcy proceeding has completed, the debtor is no longer liable for the debts they have incurred. The bankruptcy court will enter a discharge order, which releases the debtor from their debts. The debtor then has a clean financial slate; however, in exchange, the bankruptcy will remain on their credit report for up to ten years. This is just one example of how bankruptcy can have lasting consequences. As such, it should only be used as a last resort during times of extreme financial hardship.
An exemption is what allows a debtor to keep certain property or assets once the bankruptcy has concluded. A debtor who files bankruptcy under federal law must follow 11 U.S.C. 522 when claiming exemptions. Additionally, these exemptions are defined by statute. This means that the exemptions vary from state to state. Some of the major exemptions that may be available to a person filing bankruptcy are under federal law.
Bankruptcy exempt properties cannot be sold, nor can they be sold for the purposes of satisfying the debts owed by the person filing for bankruptcy. In a Chapter 7 bankruptcy, exemptions are what help determine which property the debtor may keep after the bankruptcy discharge has been granted. In a Chapter 13 bankruptcy, exemptions help determine how much the debtor must pay to their unsecured creditors. This can mean the difference between getting the bankruptcy plan confirmed, and getting knocked out of Chapter 13.
What Are the Alabama Bankruptcy Exemptions?
As previously mentioned, there are some federal bankruptcy exemptions. However, bankruptcy law generally varies by state. Federal bankruptcy law allows each state to determine which assets a debtor is allowed to keep when a bankruptcy case is filed. A state may allow the debtor to choose between federally-created exemptions, as defined in 11 U.S.C. 522, or state-created exemptions.
Alternatively, a state may limit a debtor to only the state-created exemptions. A debtor is allowed to utilize the exemptions from only one statute, either the federal or the state, but not both. For states that provide more than one exemption statute or system, the debtor is allowed to use the exemptions from only one statute.
Below are the major bankruptcy exemptions available in Alabama. The state of Alabama has opted out of the federal bankruptcy exemptions. As such, Alabama law defines and lists the exemptions that can be used:
- Homestead-Equity in Dwelling Used as Residence: Up to $15,000, and up to 160 acres. It is important to note that the amount doubles to $30,000 if filing jointly as a married couple;
- Personal Property: These items are unlimited, unless otherwise stated. This means that there is no limit to the number of books that may be considered bankruptcy exempt property. Personal property includes the following:
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- Personal or family church pew;
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- Family portraits and pictures; and
- Wages: 75% of wages, for personal services as an employee. It is important to note that these wages are wages that are owed to a debtor. Thus, this exemption only comes into play if a debtor filed for bankruptcy after they completed work, but before they got paid;
- Tools of the Trade: Some specific examples of such items would be military uniform, construction tools, and trade equipment. It is important to note that work vehicles do not qualify for this exemption;
- Insurance: Life insurance proceeds for spouse or child of the deceased; fraternal benefit society benefits; mutual aid association benefits; and/or, annuity or disability proceeds, up to $250 per month;
- Pensions and Retirement: IRAs and other qualified trusts under the Internal Revenue Code; state employee retirement system accounts and benefits; peace officer retirement benefits; teacher’s retirement system retirement accounts and benefits; and, federal employee retirement benefits;
- Public Benefits: Public assistance such as
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- Earned income tax credits;
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- Unemployment compensation;
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- Crime victims’ compensation;
- Wildcard: This is essentially the debtor’s choice of property. Up to $7,500 in personal property can be exempted. However, this does not include wages, salaries, or other forms of compensation.
It is important to note that in Alabama, there is no specific exemption for a vehicle. As mentioned above, you can utilize the wildcard exemption of $7,500. In most cases, there is no equity in the vehicle, which means the debtor may keep the car so long as they keep making timely payments on the vehicle. However, if there was only $1,000 left due on the vehicle loan, and the vehicle is valued at $11,000, the debtor can apply the wildcard exemption of $7,500 towards the $10,000 of equity in the vehicle.
What if I Have a Dispute or Conflict Regarding Bankruptcy Exemptions?
Any debtor who files for bankruptcy can file for bankruptcy exemptions. In order to determine what property you will keep if you file for Chapter 7 bankruptcy, you should start by making an inventory of your property. Additionally, you should then list each property’s replacement value. From there, you will need to compare the value to your state’s exemption for that type of property. If your state offers a choice between systems, you should go through this process for each system in order to determine which one allows you to keep the property that matters the most to you.
Typically the process of bankruptcy is a smooth process. However, in some cases disputes or conflicts may arise during the bankruptcy process. Some of the most common legal issues that may arise in connection with a bankruptcy include:
Right to Discharge: It is important to note that the Alabama bankruptcy code gives creditors the right to challenge the debtor’s right to discharge. Typically, a creditor will only challenge the debtor’s right to discharge the debt if the debtor has defrauded the creditor or the court, such as hiding assets, etc.; and
Insufficient Proof of Claim: A proof of claim is a statement written by a creditor and verifying documentation that is filed which describes the reason the debtor owes the creditor money. If the creditor receives notice of the bankruptcy proceedings, but does not timely file a proof of claim, or if there is some other error, the debtor may challenge the creditor’s claim.
If there is a dispute or conflict with an exemption or discharge, the most important thing a debtor can do is consult the Alabama Bankruptcy Code. The code will inform the debtor of their legal rights at the specific part of the bankruptcy process they are at. The debtor may also choose to communicate with the creditor outside the court in order to come up with an agreement as to how the dispute or conflict should be resolved without the need for litigation.
Do I Need an Alabama Bankruptcy Lawyer?
If you are filing for bankruptcy in Alabama, and you have questions regarding exemptions or are facing legal issues related to bankruptcy exemptions, you should consult with an area Alabama bankruptcy lawyer.
A skilled and knowledgeable attorney can help you understand Alabama’s bankruptcy and bankruptcy exemptions laws, as well as your rights and options. Finally, should any legal issues arise, the bankruptcy lawyer will also be able to represent you in court as needed.
