Alabama Bankruptcy Exemptions

>The Alabama bankruptcy exemptions are laws that let you keep what you need to work and live when filing for bankruptcy and are crucial for a fresh start. However, exemptions protect essential assets only, not unnecessary luxury goods. To prevent a costly property loss, you'll want to understand the exemptions available under Alabama law and what happens to property you can't protect with an exemption.

Using Exemptions When Filing for Bankruptcy in Alabama

Unlike some states, Alabama residents can't choose between the Alabama state bankruptcy exemptions and the federal bankruptcy exemptions. However, you can use the federal nonbankruptcy exemptions.

Other Alabama Bankruptcy Exemptions

Below, you'll find more Alabama exemptions.

Alabama Public Benefits and Wage Exemptions

• Crime victims' compensation (Ala. Code § 15-23-15(e).)
• Unemployment compensation (Ala. Code § 25-4-140.)
• Workers' compensation (Ala. Code § 25-5-86.)
• Southeast Asian War POW benefits up to $500 (Ala. Code §§ 31-7-1, 2.)
• Public assistance, including earned income tax credit (Ala. Code §§ 38-4-8; 38-5-5.)
• 75% of disposable income, or 30 times the federal minimum hourly wage, whichever is greater, for earned but unpaid wages. The judge may approve more for low-income debtors. (Ala. Code § 6-10-7.)

Alabama Insurance Exemptions

• Life insurance proceeds (Ala. Code §§ 6-10-8; 27-14-29.)
• Disability proceeds up to $250 per month (Ala. Code § 27-14-3.)
• Annuity proceeds up to $250 per month (Ala. Code § 27-14-32.)
• Mutual aid association benefits (Ala. Code § 27-30-25.)
• Fraternal benefit society benefits (Ala. Code § 27-34-27.)

Other Alabama Exemptions

• Business partnership property (Ala. Code §§ 6-10-9; 10-8A-5.03; 10-8A-5.04.)

Verifying Bankruptcy Exemptions

This is not an exhaustive list, and exemption laws can change. Check for current figures on the Alabama State Treasurer's website. The base amounts change every three years, with those posted on July 1 going into effect the following April 1 (the base figures above—$18,800 homestead and $9,400 wildcard—are valid as of April 1, 2024). An enhanced homestead exemption of $56,400 applies to filers age 62 or older or those with qualifying disabilities for cases filed on or after June 1, 2026. Also, read the statute for qualification requirements, as we haven't included them here.

Almost everyone who files for bankruptcy benefits from meeting with a bankruptcy lawyer. A local bankruptcy attorney will ensure a smooth and uneventful bankruptcy by complying with filing requirements and helping you protect all possible property.

Bankruptcy Exemption Timing Rules

It's tempting to move to a state with significantly more generous bankruptcy exemptions when filing for bankruptcy. But it doesn't work that way. Filers must live in the state for at least two years to prevent abuse of the system. Otherwise, they must use the previous state's exemptions. Here's how it works.

• If you've made your permanent home (your "domicile") in your current state for at least two years, you can use the state's exemptions (or the federal exemptions if allowed).
• If your domicile hasn't been in the same state for two years, the rules get more complicated. You'll use the exemptions of the state where you lived the longest during the 180 days immediately before the two-year period before filing.

Did you get that? If not, here's a way to figure it out. Count back two and a half years. Then ask yourself where you lived the longest during the first six months of that two-and-a-half-year period.

Example. Suppose you planned to file on January 1, 2026. Your two-and-a-half-year period would start July 1, 2023, and you'd qualify to use the exemptions of whichever state you resided in the most from July 1, 2023, through December 31, 2023. You wouldn't have to file your case there, but you'd use that state's exemptions.

Homestead exemption. The homestead exemption protects your ownership interest in your home, and you must comply with a federal timing requirement. You must live in the home for more than 40 months before filing for bankruptcy. Otherwise, your homestead exemption is capped at $214,000 if you file on or after April 1, 2025 (the amount changes every three years). This cap won't apply if you bought your home using home sale proceeds from that same state. (11 U.S.C. § 522(p); amount valid for cases filed April 1, 2025–March 31, 2028.)

What Happens to Property You Can't Exempt

It will depend on the chapter you file. In Chapter 7 bankruptcy, you lose property not covered by an exemption. The bankruptcy trustee responsible for managing your case will sell the property for the benefit of your creditors.

In Chapter 13 bankruptcy, you can keep all your property. However, that flexibility comes at a price. You'll pay your creditors the value of any property not covered by an exemption through your Chapter 13 repayment plan.

For example, say you own a car outright worth $3,000, and your state has a vehicle exemption of up to $5,000. Here's what would happen in each chapter.

• Chapter 7 bankruptcy. If you file for Chapter 7 bankruptcy, you'll get to keep your car because the exemption would fully protect the equity. In the same example, if your vehicle were worth $15,000, the bankruptcy trustee would sell your vehicle, pay you $5,000 for the exemption, and distribute the rest to your unsecured creditors.
• Chapter 13 bankruptcy. In Chapter 13, you wouldn't need to pay extra to your creditors through your repayment plan. However, if the car were worth $15,000, you'd need to pay your creditors at least $10,000 (minus sales costs) through your plan.

Keep in mind that these examples don't include a vehicle loan. Below, you'll find more information about protecting financed homes and cars in an Alabama bankruptcy.

Protecting a Financed Home or Car in Bankruptcy

Many wonder if they can wipe out a home mortgage or car loan and keep the property without paying for it. The simple answer is no. If you still owe a balance on your mortgage or car loan, you must pay as agreed to prevent the lender from foreclosing or repossessing the property.

Why? Because when you purchased the property, you gave the lender a property "lien." The lien created a secured debt, allowing the lender to take back the property if you don't pay as agreed, even in bankruptcy.

Protecting Financed Property in Chapter 7 Bankruptcy

Chapter 7 doesn't have a mechanism that will let you catch up on a mortgage or car payment over time. So, the mortgage or car payment must be current. You'll lose the property if you're behind on the payment when you file for Chapter 7.

The lender will ask the bankruptcy court to allow foreclosure or repossession during the bankruptcy or wait until Chapter 7 ends.

Protecting Financed Property in Chapter 13 Bankruptcy

You don't lose property in Chapter 13. However, before the bankruptcy judge approves or "confirms" your plan, you must prove you earn enough to make the monthly payment and pay the late payments by the end of the three- to five-year plan.

Some filers can pay less on financed property if they qualify to reduce an auto loan to the car's current value or strip a junior mortgage, credit line, or lien from a home.

For more information, read about:

• what you should know about filing for bankruptcy
• catching up on arrearages in Chapter 13, and
• how mortgages work in bankruptcy.