People who file for bankruptcy seek protection from their creditors for the debts they have incurred. The U.S. Constitution gives this power to the federal government, and the federal government has established U.S. Bankruptcy Courts to handle bankruptcy proceedings across the country. When a person files for bankruptcy protection, he or she creates a bankruptcy estate. A bankruptcy trustee manages this bankruptcy estate, selling property to raise money to pay off a debtor’s creditors.
However, a bankruptcy debtor does not necessarily have to turn over everything to the bankruptcy estate. In a Chapter 7 liquidation case, the debtor has to turn non-exempt property over to the bankruptcy trustee. Debtors, whether they are businesses or individuals, are often justifiably concerned about what property they will be allowed to keep and what they must give up.
In a Chapter 13 repayment case, the amount of non-exempt property owned by a debtor helps determine the amount of unsecured debt that has to be paid over the course of the commitment period.
How Exemption Works
Bankruptcy law allows debtors to keep a certain amount of property after going through bankruptcy proceedings. This is called “exempt” property – it is exempt from the bankruptcy estate. Property that cannot be exempted is, appropriately, called “non-exempt” property. Generally, a bankruptcy debtor can exempt a certain amount of his or her property during bankruptcy. If done right, this can potentially save most of the property of someone going through bankruptcy.
Property that is exempt can generally be called the “necessities of modern life.” This generally includes the sort of items that are necessary for living and working. Bankruptcy law is concerned about getting debtors out of crushing debt and putting them back on their feet. Taking everything from them is counterproductive, and bankruptcy law recognizes this fact. Non-exempt property generally covers items that fall outside of the necessities for living and working.
Court rulings and general practice experience have established a general idea of what types of property are exempt and non-exempt. Below are examples of property that a Chapter 7 debtor will usually have to give up (“non-exempt” property), and property that the debtor may usually keep (“exempt” property).
Property That is Exempt under Alabama Statutes
Exempt property (items that a debtor may usually keep) can include:
- Motor vehicles (up to a certain value).
- Reasonably necessary clothing.
- Reasonably necessary household goods and furnishings.
- Household appliances.
- Jewelry that is normally worn, such as a wedding ring (up to a certain value).
- A portion of equity in the debtor’s home.
- Tools of the debtor’s trade or profession (up to a certain value).
- A portion of unpaid, but earned wages.
- Public benefits (including public assistance, social security, and unemployment compensation) accumulated in a bank account.
- Damages awarded for personal injury.
- Personal property up to $3000.
- Homestead exemption up to $5000.
- Qualified retirement accounts (such as an IRA or 401k).
Section 522 of The Bankruptcy Code sets forth certain Federal exemptions. These exemptions are generally only applicable in states that have not opted out of the federal exemptions. The Bankruptcy Code allows each State to determine the amount of property that may be claimed exempt.