When debtors in Wetumpka, Alabama, file for bankruptcy, they may have to sell their personal assets depending on the type of bankruptcy. Exemptions help a debtor exclude assets that they would otherwise have to include in petitions. Exemptions are important in Chapter 7 and Chapter 13 bankruptcy, but they work in different ways.
How assets in bankruptcy work
Chapter 13 helps debtors reorganize debts with a court-approved payment plan that they pay over several years. Exempt assets in Chapter 13 determine how much a debtor pays to creditors with disposable income. Debtors commonly have to at least repay the value of the non-exempt property to creditors.
Chapter 7 requires the debtor to sell non-exempt assets, which are things that the bankruptcy court considers nonessential for living. The proceeds from the selling of assets get divided among creditors based on priority. Nonexempt assets include second vehicles or homes with little equity, jewelry or valuable collections.
Federal and state exemptions
Some bankruptcy courts recognize federal or state exemptions, but debtors can’t use both. Alabama does not recognize federal exemptions, and debtors must have lived in the state for two years.
Under the homestead exemption, consumers may claim up to $15,500 for single homeowners, and the amount doubles for married couples. Homestead in this case means mobile homes or real property, which can’t exceed 60 acres. Alabama residents can exempt 75% of their income or 30 times the federal minimum wage and the full value of retirement accounts.
Alabama does not offer a motor vehicle exemption, but residents may be able to apply the wild card exemption. The wild card exemption protects up to $7,500 for any personal property, meaning assets that are not real estate. Other assets protected by exemptions include burial places, some work tools, unemployment or public assistance benefits, and life insurance.
Bankruptcy doesn’t have to be viewed negatively, but the debtor must pay attention to details to avoid case dismissal. If a debtor is unsure of what they need to do, they should seek an attorney’s guidance.