Before filing for personal bankruptcy in Alabama, you must consider the specific limitations that will be put in place in order to protect your property from seizure and liquidation. Your household income and Alabama’s exemptions will be the primary factors in determining which type of bankruptcy is right for you.
The Difference Between Chapter 7 and Chapter 13 Bankruptcy
Although exceptions can be made, chapter 7 bankruptcy is usually reserved for filers with lower incomes and/or assets, while chapter 13 bankruptcy is designed for filers with higher than average incomes and/or significant assets to protect from liquidation.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves complete liquidation of any assets that exceed the state's exemptions for specific types of property. The major benefit of chapter 7 bankruptcy is the complete forgiveness of all debt after the process is complete, but the issue is the loss of non-exempt property.
A filer qualifies for chapter 7 bankruptcy by proving that their household income is below the state's median income, as determined by the U.S. Census Bureau. As of January 2018, the current median household income for the state of Alabama is:
- $45,232 for a single-person household
- $53,206 for a two-person household
- $60,739 for a three-person household
- $75,978 for a four-person household
- $8400 added to annual household income for every additional member of the household
Household income includes every source of income used in maintaining the household, even if only one occupant files for bankruptcy. Household income even includes regular financial assistance from persons outside the household.
If household income exceeds the state's median income, a filer may still be able to qualify for Chapter 7 bankruptcy through a Means test. Means testing compares the monthly household income against monthly expenses to determine if there is any disposable income with which the filer can repay creditors.
However, monthly household expenses must not exceed allowable limits for expenses, which are determined by the Department of Justice to provide guidelines for reasonable monthly expenditures.
Filers who are determined to have little or no disposable income may file for chapter 7 bankruptcy, while those whose income exceeds their qualifying expenditures must file for a chapter 13 debt reorganization plan.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is designed for debtors who wish to get their finances under control while protecting their assets. A structured repayment plan is created to distribute disposable income among unsecured creditors over a prescribed period.
Filers whose income is lower than the state median but who file for chapter 13 protection to keep non-exempt property must make monthly payments for three years. Any filer whose income exceeds the state median must pay monthly for five years. All remaining unsecured debt is discharged after the repayment period.
Secured debts, such as home and vehicle loans, must be repaid in full unless the filer chooses to release them for liquidation. Chapter 13 bankruptcy also provides an opportunity to save vehicles and homes through separate repayment plans for past late payments, which is unavailable to chapter 7 filers.
What Are the Primary Bankruptcy Exemptions for Alabama Residents?
State exemptions mandate the amount of equity in specific types of property that can be protected from liquidation in chapter 7 or subject to repayment plans in chapter 13 bankruptcy. Alabama allows doubling for married residents, meaning that the exemption amounts are doubled if both spouses file together. Important Alabama exemptions include:
- Homestead: $15,500 per filer
- Clothing, Books, Family Pictures: Unlimited
- Wild card: $7,750 for any kind of personal property
Filing for bankruptcy protection is never an easy decision. If you're in the Mobile, Alabama area and you need a fresh start with expert and compassionate guidance, contact Frances H. Hollinger, Attorney at Law. We will be there for you throughout the entire process.