New Alabama Bankruptcy Exemptions
On June 11, 2015 the State of Alabama increased their bankruptcy exemptions for the first time since 1982. Bankruptcy exemptions are used to protect a debtor’s property during a Chapter 7 bankruptcy. When a Chapter 7 bankruptcy is filed, it is possible that your unprotected property could be liquidated and the money received from the sale used to pay your unsecured creditors. However, you can usually protect all of your assets through these bankruptcy exemptions. For example, there are bankruptcy exemptions for your retirement accounts, wages, social security, and other property that have specific exemptions that can be used to protect all of these types of assets. However, concerning items of personal property (vehicles) or your home, there is only so much value that you can protect in Alabama. In the past, you could protect up to $5,000 of equity in your home ($10,000 if you filed jointly with your spouse) and $3,000 of equity in your personal property such as vehicles or boats ($6,000 if you filed jointly with your spouse). However, the new exemptions have raised these amounts to $15,000 of equity in your home ($30,000 if you filed jointly with your spouse) and $7500 of equity in personal property ($15,000 if you filed jointly with your spouse).
There are both federal and state bankruptcy exemption laws. Depending on the state you are filing in, you may be able to use the federal exemptions or a state’s exemptions. Sometimes the federal exemptions can be higher than the state you reside in. However, if you reside in Alabama, you generally cannot take the federal exemptions and must take the state exemptions in most cases.
A typical scenario will show how this increase in bankruptcy exemptions can help a potential debtor. Let’s say that you have a vehicle with no lien against it (you owe no money on it and own it free and clear) that is valued at $8000. In the past, you could only protect $3000 of the value of this vehicle. If you had filed a Chapter 7 bankruptcy, and exempted $3000 of equity in the automobile, then the Trustee would likely have taken the vehicle and sold it for $7500, paid you $3000, and paid the creditors in your case the remaining $4500. Therefore, if you had consulted with a bankruptcy attorney they would likely have warned you of this, and you would not have filed a Chapter 7 bankruptcy if you wanted to keep your vehicle. Now, with the new $7500 personal property exemptions, you could file and protect all of the equity in your vehicle and have no fear of losing it in the Chapter 7 bankruptcy.
The homestead exemption in Alabama was also increased in order to help potential debtors. Let’s say you have a home that appraises for $150,000 and it has a mortgage on it for $105,000. In the past, if you had filed a Chapter 7 bankruptcy with your spouse then you could protect $10,000 of the equity in your home. This means that if the Trustee were to sell your home for $150,000, they would have to pay you the $10,000 that you protected, pay the mortgage company $105,000, and there would be closing costs and costs of sale (usually about 10% or so of the selling price) of about $15,000. This means that if the Trustee were to sell the house they would get $20,000 to distribute to your unsecured creditors after they sold the home, which means that you would not likely have been able to file a Chapter 7 bankruptcy and keep your home. However, now the homestead exemption for a married couple filing together is $30,000. Therefore, if the home in the above scenario was sold in your bankruptcy, then the Trustee would have to pay you $30,000, the cost of sale would be $15,000, the mortgage company would be paid the remaining $105,000, and there would be no money from the sale to pay your unsecured creditors. So you could now file a Chapter 7 bankruptcy in the above scenario without fear of the Trustee in this case selling your home.
I hope that this helps to explain why this increase in the Alabama bankruptcy exemptions is so important. It potentially allows more Alabama debtors access to the Chapter 7 bankruptcy courts by removing some of the threats of losing their homes, vehicles, or other items of personal property. If you are considering filing a bankruptcy in Alabama and have questions about these new exemption amounts, then give us a call today and our bankruptcy lawyers will be happy to speak with you.