At the end of a contentious legislative session, the Governor signed into law an important piece of legislation strengthening Alabamians’ ability to protect their house and car from being seized by creditors. The bill (SB 327), sponsored by Sen. Cam Ward (R-Alabaster), Rep. Jim Hill (R-Moody) and passed unanimously by legislative members, was due in large part to tireless consumer advocates like Alabama Appleseed, who recognize the importance of protecting the very assets Alabamians working poor are struggling so hard to maintain.
Before the law was changed, a creditor could seize your car, bank accounts, and household goods if the creditor said you were delinquent. You would only be able to keep these items if the total value of this personal property was less than $3,000. In practice, this amount may have been sufficient to protect some items from being seized, however, because cars typically are worth much more than $3,000, it rarely protected vehicles from being seized by creditors. The result left many working poor without a way to work. If you can’t get to work you can’t pay your debts.
Even more oppressive was a creditor’s ability to seize your house if it had more than $5,000 in equity. Building equity in a home has traditionally been considered a stable investment for the future, providing favorable tax benefits (and one that has been encouraged by generous government backed mortgages) in addition to contributing to a stable and productive environment for the family. Yet, under the prior law, if you couldn’t pay a medical bill or private school tuition debt, the equity you had built in your home could be the very thing that would allow a creditor to seize and sell it.
If you were forced to file bankruptcy to manage your debt, the old law would often force people who could not afford to pay creditors into a sometimes impossible repayment plan just to protect their property. In my practice, I had to constantly correct the notion that “they gotta leave me with one house and one car, right?” Wrong. That would have been correct in the age when a house cost less than $5,000 and vehicles cost less than $3,000, however, in today’s world it would be impossible.
As an example, suppose you owe $130,000 on your home and you live in a county where the county tax assessor has valued your home at $136,000, meaning you have $6,000 equity in your home on paper and more than the legal limit of $5,000. If you are sued for an unpaid medical bill, the creditor would be able to sell your home to pay for your debt, even if the debt is more than the equity you have in your home.
The old protections (exemptions) were the lowest in the country, making Alabama, already burdened with some of the highest poverty rates, one of the most creditor friendly states as well.
The new law signed by Governor Bentley on Thursdayof last week went into effect immediately and increased the protection for personal property (the “personal property exemption”) to $7,500 and increased the protection for residential property (the “homestead exemption”) to $15,000. These amounts will be adjusted every three years in order to keep pace with the cost of living. Every state has their own version of exemption laws designed to prevent a creditor from forcing people into financial destitution. Most states recognize that exemption laws are necessary to allow a person the ability to work productively to support their family.
This new law will provide substantial protections to consumers who are constantly being threatened by predatory lenders, medical bills which are not covered by insurance and the rising cost of everyday expenses such as childcare, student loans and utilities. As a person who sees the devastating effect a creditor friendly environment can have on the working poor, I applaud the efforts of Alabama Appleseed, Senator Ward, Representative Hill and Governor Bentley in moving Alabama out of the dark ages of debtor servitude.