Most people do not loose their home or car when they file bankruptcy. Many people considering the bankruptcy option are under the false impression that if they file bankruptcy, they will loose their home and car. This is not necessarily true. In most bankruptcy cases, even in Alabama, debtors have the option of keeping their home and car. If the debtor is allowed and decides to keep the home or car, he must continue making monthly payments to the creditor. The other option is to surrender the home or car to the creditor.
Bankruptcy exemptions determine what can be kept in bankruptcy. Although bankruptcy law is federal in nature, bankruptcy exemptions vary from state to state, due to an “opt-out” provision available to the states. Although there are federal bankruptcy exemptions, many states have chosen to “opt-out”, creating their own exemptions. To the detriment of its citizens, the Alabama legislature has chosen to create it’s own set of exemptions. The Alabama bankruptcy exemptions, compared to the federal exemptions and most other state exemptions, are draconian in nature.
The homestead exemption in Alabama is $5,000 per person; $10,000 if a married couple is filing together (the federal homestead exemption is $20,200). Strike one for the Alabama resident filing bankruptcy. This means that if a married couple owns a home worth $150,000 and they owe less than $140,000, the Chapter 7 Trustee might sell their home. Although anything over $10,000 ($5,000 if individual filing) is technically “at risk”, as a practical matter, the Chapter 7 Bankruptcy Trustee will rarely attempt to sell any property that has less than $25,000 worth of equity. Thus, if a couple owns a home worth $150,000, and they only owe $125,000, then they will likely be able to keep the home, based on my experience. To state is differently, if you have more than $25,000 worth of equity in your home, and are considering filing Chapter 7 Bankruptcy, you might loose your home by doing so. Most people filing bankruptcy do not have over $10,000 (or $25,000) of equity in their home, thus they are not in danger of having the trustee sell it.
The personal property exemption in Alabama is only $3,000 per person; $6,000 for a married couple filing a joint petition. The federal personal property exemption is $9,850. Strike two for the Alabama resident. Fortunately, most people who file bankruptcy do not have equity in their vehicles over $3000 (or $6,000 if couple filing). Thus, if the debtor has a car that is worth $15,000, but he owes $14,000, then only $1,000 of his exemption must be utilized. On the other hand, if the debtor owns a car worth $9,000, and he doesn’t owe any money on the auto, the bankruptcy trustee will likely sell the vehicle, since the debtor will not have enough exemptions to protect the vehicle.
Bankruptcy exemption issues can become very complicated. It is best to consult with an experienced bankruptcy attorney to determine how federal or state exemptions will effect you.
A comparison of the federal bankruptcy exemptions and the Alabama bankruptcy exemptions clearly shows the disadvantage Alabama residents have when filing bankruptcy. Bluntly put, it is unconscionable for Alabama lawmakers to continue to punish it’s owns citizens (and taxpayers) for filing bankruptcy. A change should be made, but don’t hold your breath. Montgomery, as usual, is asleep at the wheel, continuing to focus on pay-raises, re-election and pork-barrel spending (pretty much in that order).
If you have questions about filing bankruptcy, bankruptcy exemptions, or any other matter, please feel free to CONTACT ME at any time.