Coronavirus Update: All three Alabama bankruptcy districts have limited operations due to COVID-19. Judges and trustees (people who oversee bankruptcies for judges) are conducting most business by telephone. Video hearings, meetings, or conferences are available in a few situations. Clerk's offices are usually closed as well. Pro se debtors without Alabama bankruptcy lawyers must normally use drop boxes.
Most courts have also made some back-office adjustments. Courts have waived the “wet ink" signature requirements on the Social Security Number declaration and other bankruptcy documents. Trustees have made some accommodations for COVID-19 mortgage deferrals and CARES Act financial relief.
In 2019, two-thirds of the families in Alabama could not pay cash for a $400 emergency expense. A disruption like COVID-19, with its one-two punch of job loss and medical bills, forced some families against the ropes. Most others hit the canvass.
When people struggle to get up after a financial hit, creditors often push them back down. Legally, banks can repossess collateral and take other adverse action after one missed payment. Typically, they do not need a court order to go this route. Mortgage forbearances, payment deferrals, and other temporary relief packages are usually marketing gimmicks that simply defer the pain.
Creditors try to keep you down, but an Alabama bankruptcy lawyer lifts you up. Bankruptcy doesn't just send creditors back to their corners; it starts the match over. In many respects, it's like the financial misfortune never happened. As a bonus, an attorney gives you the tools you need to maximize your fresh start.
Alabama Bankruptcy Laws
In the Heart of Dixie, we typically deal with a combination of federal laws and state laws in our everyday lives. For example, we pay federal and state income taxes. Alabama's bankruptcy laws are another good example. The federal Bankruptcy Code governs some parts of a consumer bankruptcy. Parts of the Alabama Code, mostly Title 6, control other aspects.
Beginning in the 2010s, federal judges and bureaucrats slowly but surely ended some key consumer protections in debt collection laws. However, they did not touch bankruptcy. This shield is as strong as ever.
The automatic stay is probably the biggest component of this shield. Once you file bankruptcy, Section 362 of the Bankruptcy Code immediately stops things like:
The automatic stay is only effective if the creditor, or the creditor's agent, receives actual notice of the filing. So, attention to detail is vital. Bankruptcy lawyers excel in this area.
Foreclosure is a good example. Banks frequently buy and sell mortgage loans in large bundles. Lenders and servicing companies are supposed to notify borrowers of such changes, but they don't always do so. Furthermore, as the foreclosure process advances, many banks turn to sheriff's offices, foreclosure companies, and other independent entities. A lawyer must do some additional digging and ensure that all the proper entities receive proper notice. The Automatic Stay stops foreclosure and other adverse actions. But it doesn't undo them.
Bankruptcy is more than a shield. As mentioned, bankruptcy is also a fresh start. The discharge option is the key catalyst to this fresh start. This option applies to most unsecured debts, such as:
Revolving charge accounts
This discharge is optional. For the most part, you decide which unsecured debts to eliminate and which ones to keep paying. For example, Tom might elect to pay a certain medical bill, even though the obligation is dischargeable, to remain in a doctor's good graces.
Property exemptions are the third major benefit of a consumer bankruptcy. We'll discuss those in a few minutes.
Kinds of Consumer Bankruptcy
Financial storms impact families in different ways. So, with apologies to Bob Dylan, bankruptcy offers different kinds of shelter from the storm. The two main types of consumer bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Tom might want to have a long talk with his lawyer before he voluntarily reaffirms a large medical bill. These expenses prompt many bankruptcy filings. If such unsecured debts are the disease, Chapter 7 bankruptcy is usually the cure.
Chapter 7 eliminates most of the aforementioned unsecured debts in only a few months' time. So, families quickly get the fresh financial start they need and deserve.
Generally, these few months pass quickly and without incident. The trustee usually requests financial documents, like recent tax returns, to look for sudden, drastic income changes and other evidence of fraud. These requests do not mean you are under suspicion. They're just procedural.
Then, at an informal meeting, the trustee reviews identification documents, such as a government-issued photo ID. Also at this meeting, your Alabama bankruptcy lawyer addresses any bankruptcy fraud red flags. There's usually an easy explanation.
Assuming everything goes well at this meeting, most judges sign discharge orders without requiring a hearing.
Chapter 13 Bankruptcy
Sometimes, job loss and other financial storms cause secured debt delinquency. People cannot make their mortgage payments for a few months. Very quickly, two or three thousand dollars becomes twenty or even thirty thousand dollars.
In a Chapter 13 bankruptcy, the trustee sets you up on an income-based repayment plan. This plan usually lasts three or five years. Since the automatic stay remains in place, creditors cannot pressure or force you to pay more money or pay it faster. Instead, each creditor receives a share of a monthly debt consolidation payment.
If your financial circumstances change during the protected repayment period, for better or worse, there are options your lawyer can discuss with you, from an early bankruptcy exit to a hardship discharge.
Chapter 20 Bankruptcy
Not all unsecured debts are dischargeable in a Chapter 7 or Chapter 13. That's when an informal Chapter 20 bankruptcy might be an option. Assume Sally owes back taxes to the IRS. She files a Chapter 7 hoping to discharge them. But past due taxes are priority unsecured debts that are only dischargeable in some circumstances. Sally doesn't qualify for discharge under the complex rules.
With the help of a bankruptcy lawyer, Sally might file Chapter 13 immediately after the judge discharges her Chapter 7. Sally is not eligible for a discharge, but she just got one of those. She only needs time to pay off her tax debt-free from IRS harassment. Chapter 13 fits that bill nicely.
Am I Eligible for Bankruptcy in Alabama?
There are some specific discharge requirements for some specific debts. There are also some general filing requirements.
All filers must complete a debt counseling class before they file and a budgeting class after they file. Other requirements are Chapter-specific.
Chapter 7 Qualifications
Some 2005 reforms to the Bankruptcy Code added the means test to Chapter 7 qualifications. You may file Chapter 7 if you have a below-average annual income. As of 2020, this amount was $80,845 for an Alabama family of four. If you are over this line, you might still qualify, based on your actual monthly expenses.
There are also some unwritten qualifications. Remember Tom and his reaffirmed medical bill? If the bill is large enough, or Tom also reaffirms other unsecured debts, the trustee might not approve a Chapter 7, believing that other options are available.
Chapter 13 Eligibility Requirements
These debtors must be underneath a debt ceiling. As of January 1, 2020, families cannot owe more than $1.3 million in secured obligations or $400,000 in unsecured obligations. These totals include current and past-due debt. Once again, if you are over these limits, a bankruptcy lawyer can offer other debt-relief options.
Chapter 13's unwritten qualification usually involves Schedules I and J and the debtor's income/expense balance.
As mentioned, Chapter 13 involves a monthly debt consolidation payment. This payment must be large enough to pay all allowed claims before the repayment period clock hits zero. “Allowed claims" unusually include administrative costs, secured debt delinquency, and a few other obligations.
If the debtor doesn't have enough disposable income to make this payment, the trustee might not approve the plan.
Alabama Bankruptcy Exemptions
There are also some written and unwritten property exemptions. These exemptions protect your assets during bankruptcy. In other words, if your property is exempt, you will not lose it in bankruptcy. The trustee may seize some nonexempt assets and liquidate them to pay your debts.
Written Property Exemptions
Alabama bankruptcy debtors may choose between state and federal exemptions. Some highlights of the state exemptions, most of which are in Title 6 of the Alabama Code, include:
Homestead exemption: Alabama law protects up to $15,500 of equity in a house, fifth wheel, condominium, or anything else used as a primary residence. If you are over the limit, a bankruptcy lawyer can often use your equity as leverage during non-bankruptcy debt negotiations.
Personal property: Furniture, electronics, clothes, jewelry, and all other household goods are normally exempt in Alabama. So are life insurance proceeds, tools of the trade, and certain tax credits, like the EIC.
Retirement accounts: Public pension plans, like teacher retirement plans, and nest egg accounts, like IRAs, are exempt under Alabama law. Most tax-deferred savings accounts, like prepaid college tuition plans, are also exempt.
Current wages: In some states, filing bankruptcy compromises your ability to pay bills. Cash is often not exempt. But Alabama law shields up to 75% of your current wages, in most cases. Judges often extend this exemption all the way to 100%.
Wildcard: This exemption shields otherwise nonexempt property, such as cash in a savings account or other personal property. The maximum amount is $7,550.
Married couples who file joint bankruptcies may double these exemption amounts. Expect, of course, the current wage exemption. You cannot protect 150% of your current wages.
Alternatively, Alabama debtors may choose the property exemptions which are listed in the U.S. Bankruptcy Code and other areas of federal law. Some highlights include:
Home equity ($25,150)
Motor vehicle equity ($4,000)
Retirement accounts ($1.3 million)
Personal property ($18,000)
Life insurance ($13,400)
Social Security, VA disability, and other government benefits (unlimited)
Child support and other private benefits (unlimited)
Wildcard ($1,325 plus $12,575 of the unused homestead exemption)
A bankruptcy lawyer can review your case and recommend a slate of exemptions based on your needs. For example, state exemptions do not shield Social Security payments, and the federal wildcard exemption is usually lower.
Unwritten Property Exemptions
The as-is cash value rule is a good example of the many unwritten property exemptions in a consumer bankruptcy.
Assume Gary has paid off his $150,000 house. He must declare the as-is cahs value on Schedule A, as opposed to the fair market value. A home investor might offer Gary as little as ten cents on the dollar for a no-inspection, as-is cash sale. If that's the case, his equity is well below the federal homestead exemption.
Other informal exemptions include an obscure bankruptcy loophole called the best interests of creditors rule. Assume Robin owns a bass boat she cannot protect under the written exemptions. The trustee estimates the boat would fetch $1,000 at an auction. The trustee also budgets $500 for repairs to the boat and $500 for the auction fee, storage costs, and other sales expenses. Since the sale would net nothing for creditors, the trustee cannot go through with the seizure. This approach would not be in the creditor's best interests.
How Do I Start Bankruptcy in Alabama?
Debtors who file no-asset Chapter 7s and have professional bankruptcy backgrounds can easily file their own bankruptcies (start by downloading the forms for a DIY consumer bankruptcy). Anyone else should think twice about a DIY bankruptcy. The process discussed above is very complex, and this outline is only the beginning.
A nonlawyer BPP (Bankruptcy Petition Preparer) bankruptcy is another good way to start, at least in a few cases. BPPs can only take your money and fill out forms. They cannot give you any legal advice. They certainly cannot represent you in advanced exemption, qualification, or discharge matters.
Investing money with an Alabama bankruptcy lawyer is a tough call, especially when funds are scarce. But this investment always pays off. Isn't a fresh start free from oppressive debt worth investing in? Furthermore, these partnerships give debtors peace of mind like no DIY or BPP bankruptcy can possibly provide.
Where Do I File Bankruptcy in Alabama?
If you live in the northern half of the Yellowhammer State, you are probably in the Northern District. The Southern District covers the southwest quadrant, and the Middle District covers the southeast quadrant. Alabama bankruptcy lawyers can access the ECF (Electonic Case Filing) system from almost anywhere, so a court's physical location is usually irrelevant.
How Much Does Bankruptcy Cost in Alabama?
Bankruptcy filing fees, which vary in different cases, are usually about $350. Most judges require complete upfront payment. A few judges grant fee waivers or allow installment payments. Professional fees also vary in different cases. Most Alabama bankruptcy lawyers offer sliding scales and payment plans.
Frequently Asked Questions About Alabama Bankruptcy
Can I keep my car if I file Chapter 7 in Alabama?
Absolutely, as long as you keep making any necessary payments. The state and federal exemptions apply to equity amounts, not fair market values. Most new car owners have little or no equity in their vehicles. Most used cars have very low financial values.
What is the minimum debt to file bankruptcy?
There is no minimum debt requirement for bankruptcy. Generally, if you spend more than 10% of your income on credit cards and other unsecured debts, you should consider Chapter 7. If you are one month or more behind on your mortgage or other secured debt, you should talk to a bankruptcy lawyer about Chapter 13.
What is the income cut-off for Chapter 7?
As of late 2020, an Alabama family of four must earn less than $80,845 a year. This amount changes every few months. It also varies in different states, and even in different regions in the same state.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.
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