Bankruptcy is Federal Law, so it should be the same in every state, right? Not quite. Unfortunately for individuals in Alabama the Bankruptcy Code allows individual states to opt out of the Federal Law in one key area; that is exemptions. This in effect creates Alabama Bankruptcy Laws.
How does this affect Alabamians? First, let us look at real estate. The Federal Exemption for real estate is currently $21,625 for a single debtor or double, $43,250, for a married couple debtors. This means a married couple could have a house worth $150,000 and only owe $100,000, that is $50,000 in equity, and still have no problem filing a Chapter 7 bankruptcy and keeping their house.
However, in Alabama the real estate homestead exemption is only $5,000 for an individual debtor and $10,000 for a married couple. So, in the example above of the $50,000 equity, $40,0000 of it would be non-exempt in Alabama. Therefore, a trustee in a Chapter 7 may seek to take the real estate to obtain the equity. To save the house debtors may be force to file a Chapter 13 and pay this non-exempt equity to the trustee over a period of a maximum of 5 years. Many debtors are not able to make these payments.
The Federal Exemptions are similarly higher and better regarding personal property as well, when compared to Alabama’s exemptions.
Every now and then, the Alabama Legislature does discuss raising our state’s behind the times exemptions. Unfortunately, the banking and insurance lobby is much more powerful than the consumer lobby. Hopefully, one day exemptions based on modern day real and personal property values will be passed in Alabama.In the meantime, if you do have equity in your house, do not despair, there are still bankruptcy and non-bankruptcy options, of which you may be able to take advantage. Contact me or another qualified bankruptcy attorney immediately. I have free initial consultations, so you have nothing to lose but a little of your time.