When you file for chapter 7 bankruptcy protections, you likely have already completed the means test and established that your adjusted current income is at or below the state median. Those with a higher income may not qualify for Chapter 7 or liquidation bankruptcy.
Knowing that you qualify for Chapter 7 bankruptcy won’t be the only concern, however, as Chapter 7 bankruptcy can also require the sale of certain assets before the courts will approve your discharge. Unlike other common forms of individual bankruptcy, including Chapter 13 bankruptcy, Chapter 7 proceedings do not include a requirement to repay your creditors through the courts prior to discharge.
In order to prevent abuses of that more rapid discharge of unsecured debts, the courts limit what assets you can protect from liquidation. Generally speaking, you have the right to protect a certain amount of home equity in an Alabama Chapter 7 bankruptcy filing. In fact, lawmakers recently increased the state exemption for equity in your primary residence to better protect homeowners from financial strain.
How you file impacts how much equity you can protect
The Alabama bankruptcy homestead exemption only applies to your primary residence. This can be a single-family home, or a literal homestead or farm comprised of up to 160 acres. Any real estate that does not serve as your primary residence will be subject to sale to repay creditors.
The value of the home itself isn’t what you get to exempt, but rather a specific amount of equity that you have established through your down payment and monthly mortgage payments. The less time you have lived in a property, the less equity you have likely built. Homeowners who have been in a home for a while can sometimes diminish that equity through a home equity loan or line of credit as well.
If you file as an individual for bankruptcy, you have the right to exempt up to $15,000 in established equity in Chapter 7 proceedings. If you and your spouse file for Chapter 7 jointly, you can exempt up to $30,000 of established equity. Anything beyond that amount may wind up liquidated through refinancing to repay your creditors.
Alabama does not recognize federal exemptions
There are both state and federal laws that guide bankruptcy proceedings and the exemptions available to those seeking bankruptcy protection. In some states, those filing for bankruptcy can choose either the state exemptions or the federal exemptions.
However, Alabama is not one of those states. The bankruptcy courts in Alabama will not allow those seeking a discharge to use the federal exemptions. Knowing this can influence your strategy and bankruptcy, as your level of equity may necessitate a different kind of bankruptcy filing or a different approach to the process.