Alabama Bankruptcy Exemptions

What Property is Protected in Alabama?

Alabama bankruptcy exemptions allow you to protect a wide variety of property, including the equity in your home, your vehicle and various personal belongings. Other laws protect qualifying retirement funds and benefits. Below is a list of Alabama bankruptcy exemptions. Please note that these are specific to Alabama, and to be able to use these, you must fulfill certain residency/domicile requirements, which we will discuss below.

When debt was accumulated may affect which exemption limits are applied. In In re Middleton, the Southern District of Alabama bankruptcy court determined that older exemption limits applied to debts that arose before the exemption amount increase. They further ruled that when debts arose both before and after the exemption amount increase, filers would be able to use the exemption amounts that are effective on the bankruptcy case filing date.

Can You use Alabama Bankruptcy Exemptions?

Just because you file your bankruptcy case in Alabama doesn't mean that you'll be able to use Alabama bankruptcy exemptions. The bankruptcy code, specifically 11 U.S.C. § 522(b)(3)(A), sets the rules for the bankruptcy exemption scheme you may use when you file. These rules are based on your domicile within certain time periods. Here are the rules:

• You must use the exemption scheme of the state you were domiciled in for the full 730 days before filing bankruptcy. Note that by exemption scheme, we mean that you must follow the exemption rules that your state follows. For example, if your state doesn't allow you to use federal exemptions, you must follow that rule. If your state does allow federal exemptions, then you would be able to use them.
• If you were not domiciled in one state for all 730 days, look at the 180 days immediately before that period. Use the state where you were domiciled for the longer portion of those 180 days than anywhere else.
• If the lookback leaves you ineligible for any exemption: the federal statute provides a fallback allowing the federal § 522(d) exemptions.

Alabama is an opt-out state. Alabama's opt-out law requires you to use Alabama exemptions instead of the federal § 522(d) exemptions. Separate non-bankruptcy federal protections, such as those for qualifying retirement funds, like ERISA, can still apply.

Alabama Homestead Exemption

The Alabama homestead exemption protects your home equity, subject to Alabama's residency and 160-acre limits. A mobile home or manufactured home can qualify as long as it is your principal residence. See Section 6-10-2.

Spouses filing joint bankruptcy petitions can each claim a separate exemption in their own interest. For two eligible spouses, each claiming a homestead exemption on their AL residence, the current combined ceiling can go up to $37,600, limited by each spouse's interest and applicable law.

Is a Homestead Declaration Required to Have an Effective Alabama Homestead Exemption?

No, a recorded homestead declaration is not required to effectively claim your Alabama homestead exemption. Section 6-10-20 permits a declaration, while § 6-10-26 allows a claim after levy and before sale in the circumstances it covers. Bankruptcy has its own exemption-claim process through Schedule C.

Alabama General Personal Property Bankruptcy Exemption

Alabama has what can be described as a "general personal property exemption" of up to $9,400 that can be distributed among your property to protect personal property items that do not have specific Alabama protections. This general personal property exemption can protect certain personal property like your car, cash, and everyday belongings.

Alabama doesn't have a separate general motor-vehicle exemption. You ordinarily allocate the $9,400 personal-property exemption among your car equity, ordinary cash, bank funds, furniture, and other selected property that needs it. Section 6-10-6 also separately protects the clothing, pictures, and books listed above.

Wages: Separate Unpaid Earnings from Deposited Money

In Alabama, Section 6-10-7 protects 75% of covered wages due or to become due to Alabama resident employees or laborers. Section 6-10-6 excludes wages from the indexed personal-property allowance. Other garnishment protections can apply, including Alabama's constitutional exemption. In Renter's Realty v. Smith, the Alabama Court of Civil Appeals affirmed that § 6-10-6.1 was unconstitutional. The 75% rule is therefore not the only rule to check.

For bankruptcy, identify when the work was done and whether payment has arrived. Earnings for services performed after a chapter 7 filing generally fall outside the estate under § 541(a)(6); chapter 13 generally includes post-filing earnings under § 1306. Unpaid pre-filing wages need their own exemption analysis. Do not automatically apply the 75% wage rule to money already deposited in a bank account.

Retirement Accounts and Protected Benefits

Alabama law protects qualifying retirement accounts and several types of benefits, including workers’ compensation, unemployment benefits, and public assistance. Federal law separately protects Social Security benefits, including SSDI.

• Retirement accounts: Alabama Code § 19-3B-508 protects qualifying retirement accounts, including traditional and Roth IRAs, subject to statutory exceptions.
• Social Security, including SSDI: 42 U.S.C. § 407 protects SSDI and Social Security benefits from creditors. This protection is different from the private disability-insurance rule below.
• Unemployment compensation: § 25-4-140 protects unemployment benefits from creditors. There isn't a dollar limit stated in the statute.
• Workers' compensation: § 25-5-86(2) protects covered claims, awards, and compensation from collection for debts or liabilities. Occupational diseases, including qualifying pneumoconiosis, are addressed in § 25-5-110. A diagnosis alone is not a separate exemption; the claim must qualify under workers' compensation law.
• Public assistance: § 38-4-8 protects public assistance that has been paid or will be payable to needy persons named in section 38-4-8.
• Alabama public pensions: Alabama law protects covered teachers', state employees', judges', and peace officers' benefits, but their scope and exceptions can differ. The teachers' and employees' statutes include exceptions for specified criminal restitution, fines, and other court-ordered criminal payments. See the reference below.

Can You Protect Life Insurance and Insurance Payments in Alabama Bankruptcy?

Protection of your life insurance policy and its cash value depends on the circumstances and is not automatic. It is very important to identify what kind of policy you have, whether you own the policy, or whether you are receiving money from someone else’s policy.

• Life insurance: Qualifying proceeds and cash value may be protected under § 6-10-8 and § 27-14-29. Protection depends on who obtained the policy, who is insured, the beneficiary, and whose debts are involved.
• Private disability insurance: § 27-14-31 limits protected disability-income benefits to an average of $250 per month over the disability period. SSDI has separate protections.
• Annuities: § 27-14-32 generally protects annuity contracts, subject to exceptions, but limits protected payments currently due to $250 per month across all contracts. A court may require payment from the excess after considering reasonable family needs.

Other Alabama Exemptions

• Public retirement benefits: Alabama bankruptcy exemptions protect retirement benefits for teachers, state employees, judges, and peace officers. Note that the retirement system can affect coverage.
• Crime-victim compensation: Awards for the victims of crimes are protected from creditors in Alabama.
• Burial plots and worship seats: Alabama law protects burial plots set aside or used for you or your family, and a pew or seat held and occupied for your family’s use in a place of worship.
• Fraternal and mutual aid benefits: Benefits from qualifying fraternal benefit societies are protected before and after payment. Alabama residents also have protection for their interests in mutual aid associations.
• Life-insurance money held by the insurer: Proceeds may be protected from a beneficiary’s creditors if the policy or a written agreement provides that protection. This rule does not cover a beneficiary who is also the policyholder.
• Military equipment and certain POW benefits: Required, personally owned uniforms, arms, and equipment are protected for members of Alabama’s armed forces. A separate law protects the state’s bonus for qualifying Southeast Asian prisoners of war.

Frequently Asked Questions