Alaska Bankruptcy Exemptions and Law

Federal law, mostly the Bankruptcy Code, controls most aspects of consumer bankruptcy in the Last Frontier. State law, mostly Section 9.38 of the Alaska Statutes, controls some aspects.

Bankruptcy Basics

A little over a hundred years ago, Supreme Court Justice James McReynolds laid out the principles of consumer bankruptcy, stating the purpose was to "relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh." Relief from the weight of oppressive debts and freedom from certain obligations and responsibilities are two of the three pillars of bankruptcy. Property exemptions, which we examine below, are the third major pillar.

Since the early 2010s, federal judges and government bureaucrats have ended many of the protections that consumers have against debt collectors. However, bankruptcy's automatic stay still provides relief from the weight of oppressive debts. Section 362 of the Bankruptcy Code prohibits creditor adverse actions, such as:

• Wage garnishment
• Eviction
• Creditor harassment
• Foreclosure
• Collection lawsuits
• Repossession

If you have filed bankruptcy within the last six months, even under another entity's name, the automatic stay might have a more limited effect, especially if a bankruptcy lawyer does not advocate for you. But in most cases, the automatic stay remains in effect until the judge closes the bankruptcy.

Bankruptcy's benefits do not end when the judge's gavel falls. When they close cases, bankruptcy judges discharge (forgive) most unsecured debts, such as:

• Medical bills
• Revolving credit accounts
• Signature loans
• Payday loans
• Credit cards

This discharge frees you from crippling obligations and responsibilities. Typically, unsecured debts force people into bankruptcy in the first place. Two-thirds of consumer bankruptcies are related to high medical bills.

The Kinds of Consumer Bankruptcy

These oppressive debts, responsibilities, and obligations affect different families in different ways. Therefore, the law offers several different bankruptcy options, including bankruptcy under Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code.

Chapter 7 Bankruptcy

As mentioned, high medical bills prompt most bankruptcy filings. Chapter 7 bankruptcy quickly discharges most unsecured debts like medical bills. Debtors who qualify (more on that below) often get a fresh start in just a few months.

Many of these bankruptcies are relatively straightforward, especially if you partner with an attorney. After you file a petition and schedules, the trustee usually requests financial documents, like recent bank statements, and identification documents, like a government-issued photo ID. The trustee reviews these documents to look for red flags of bankruptcy or identity fraud.

Bankruptcy fraud usually involves concealing assets or income from the court. In a few cases, people borrow money immediately prior to bankruptcy and don't intend to repay it. That activity is fraudulent as well. Identity fraud usually means pretending to be someone else in order to get around bankruptcy's restrictions.

If everything goes well at the 341 meeting, which usually occurs about six weeks into the case, most Chapter 7 trustees recommend discharge. In these situations, judges usually sign orders without requiring hearings.

The discharge order affects the obligation but not the collateral consequences of that obligation. So, if Sam files bankruptcy because the IRS filed a tax lien against him, that lien remains even if the judge discharges Sam's back taxes.

Chapter 13 Bankruptcy

Sometimes, unsecured debts like medical bills trigger a snowball effect. People stop paying secured debts, like car payments, so they can spend the money elsewhere. No matter how far behind on payments you are, Chapter 13 bankruptcy allows you to keep secured property.

The Chapter 13 trustee helps debtors develop a monthly repayment plan. The protected repayment period lasts either three or five years. Since the automatic stay remains in place, creditors cannot harass, pressure, or threaten debtors during this period. They must simply wait for the income-based payments the trustee approved.

Furthermore, a bankruptcy lawyer can unlock some advanced Chapter 13 features which could make secured assets easier to afford. Assume George owes $10,000 on a car that's only worth $5,000. If George files Chapter 13 and pays the lender the car's current fair market value, the bank might have to tear up the loan, saving George thousands of dollars.

Am I Eligible for Bankruptcy in Alaska?

McReynolds mentioned that honest yet unfortunate debtors are eligible for bankruptcy. Let's look at these requirements in detail.

Formal Requirements

All debtors must complete a debt counseling course before they file bankruptcy. They must also complete a budgeting class after they file. These inexpensive, brief classes are usually available online.

You must also meet a means test to qualify for Chapter 7. As of November 1, 2020, an Alaska family of four must earn less than $101,965 to file Chapter 7. That's the average annual income for that family size in Alaska. Don't fret if you are over this line. You may still qualify, based on your actual monthly expenses.

There is a debt ceiling for Chapter 13. These petitioners must have less than $1.3 million in secured obligations and $400,000 in unsecured debts. These figures are current as of January 1, 2021. If you do not qualify for Chapter 13, a bankruptcy lawyer can usually provide other debt-relief options.

Informal Requirements for Bankruptcy

The formal requirements are in the Bankruptcy Code. The informal requirements aren't written anywhere and vary in different jurisdictions. These unwritten rules relate directly to the debtor's honesty and misfortune, or the lack thereof.

Chapter 7 debtors essentially say that they cannot pay their debts, so unless the judge discharges them, they cannot get fresh starts. So, if it appears that the debtor can afford to repay obligations, the trustee may question the debtor's honesty. The trustee usually reviews the income/expense information in Schedules I and J to determine the amount of the debtor's disposable income.

Chapter 13 has the opposite unwritten eligibility requirement. As mentioned, these debtors must remit a monthly debt consolidation payment to the trustee. Unless it clearly appears, once again from Schedules I and J, that the debtor can afford this payment, the trustee might not approve the debtor's repayment plan.

The world keeps turning after petitioners file bankruptcy. If your financial circumstances change and the monthly debt consolidation payment becomes a problem, your bankruptcy lawyer can usually find solutions, such as a payment plan modification or an emergency hardship discharge.

Alaska Bankruptcy Exemptions

Just like there are written and unwritten eligibility requirements, there are written and unwritten property exemptions. If property is exempt, the trustee cannot liquidate it.

Formal Exemptions

Alaska bankruptcy petitioners may choose either the federal exemptions, which are listed in the Bankruptcy Code, or state exemptions, most of which are listed in state law. The federal exemptions include:

• Homestead exemption: If you have less than $25,150 of equity in your home, federal law protects it. Unless you have paid off more than half the loan, you probably have very little property equity. These loans are amortized, which means you pay interest first. A lawyer might use some loopholes, like a tenancy of the entirety, to expand this exemption.
• Motor vehicle: Federal law also protects up to $4,000 of vehicle equity. Once again, unless you have made more than half the payments, you probably have virtually no equity in your vehicle. Older cars usually have very low fair market values, so the equity cap usually isn't an issue.
• Personal property: Tools of the trade, furniture, jewelry, electronics, and other household good are exempt, if they are worth less than about $15,000. This figure refers to the as-is cash value, a/k/a the garage sale value. Frankie's $2,000 television is probably worth about $200 on Craigslist.
• Life insurance: Dividends, equity, and loan proceeds up to $13,400 are exempt. On a similar note, retirement accounts are also exempt if their value is below $1.3 million.
• Public benefits: Some people think that Social Security, VA disability, and other government benefits are income, which is usually not exempt in bankruptcy. But these benefits are exempt assets. Private benefits, like alimony receipts, are usually exempt assets as well.
• Wildcard: Most people use this exemption to protect cash in the bank or a second motor vehicle. Debtors may shield up to $1,325 of property, plus $12,575 of the unused homestead exemption.

Alaska petitioners may also choose the exemptions listed in state law. You must pick one list — either state or federal exemptions. State law generally protects:

• Home equity ($72,900)
• Insurance proceeds, etc. (unlimited)
• Personal property ($10,000)
• Retirement accounts/pension plans (unlimited)
• Motor vehicle equity ($4,050 if the car's fair market value is under $27,000)
• Public and private benefits (unlimited)

As a rule of thumb, most Alaska bankruptcy lawyers suggest that renters use the federal exemptions, because of the wildcard exemption, and homeowners use the state exemptions, because of the much larger home equity exemption.

Informal Exemptions

There are a number of informal property protections. The best interests of creditors rule is a good example.

Assume Angel has an RV. The written exemptions don't protect it. So, the trustee plans to liquidate it. But first, the trustee must run the numbers. She estimates that a buyer would pay about $1,000 for Angel's RV. She also estimates that the RV needs about $500 of repairs and that sales costs, mostly storage costs, would be another $500.

These numbers don't make sense for creditors. A liquidation produces nothing for them. Since a seizure and sale would not be in the creditors' best interests, Angel would probably get to keep her RV, even though it's technically nonexempt.

Connect With an Experienced Lawyer

Protection from relentless creditors, asset protection, and a fresh start could be yours if you work with an experienced Alaska bankruptcy lawyer.

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.