There are two ways to keep an asset in a Chapter 7 Bankruptcy case. The first occurs when the asset has no equity. This mainly applies to assets with secured debt. In this case, if the fair market value of the asset (such as a car) minus the amount owed on the debt equals zero, there is no need to utilize any bankruptcy exemptions to safeguard the asset. Essentially, the Chapter 7 Trustee considers the asset as having no value. As long as you remain current on the payments, you can retain ownership of the asset.
Using Bankruptcy Exemptions to Protect Assets
But, even if the asset does have value, there is no cause for concern, as bankruptcy exemptions exist for precisely this purpose. In Illinois Chapter 7 Bankruptcy, these exemptions are a set of laws enacted by Illinois Lawmakers designed to protect specific assets up to predetermined dollar amounts. They serve to allow individuals filing for bankruptcy to retain essential possessions crucial for maintaining a home and employment.
The Illinois Chapter 7 Bankruptcy exemptions enable you to protect certain assets up to a specific dollar amount. Exemptions allow bankruptcy filers to keep things needed to maintain a home and employment. But paying creditors is also an important consideration. Bankruptcy exemptions balance these interests by letting filers keep necessary property but not unnecessary luxury items. Creditors receive bankruptcy funds when a bankruptcy filer owns “nonexempt” property not covered by a bankruptcy exemption.
Here are some commonly used bankruptcy exemptions:
Illinois Homestead Exemption
In Illinois, the Homestead Exemption is a safeguard for the value in your primary residence. It allows you to protect up to $15,000 ($30,000 for joint filers) of equity in various types of homes, such as farms, mobile homes, lots with buildings, condos, or cooperatives. This exemption also extends to the proceeds from selling your primary residence for up to one year. (735 ILCS 5/12-901, 906.)
If you and your spouse own the residence together as tenants by the entirety and only one spouse files for bankruptcy, you may be eligible to protect even more equity. (See 735 ILCS 5/12-112 for details.)
Illinois Vehicle Exemption
In Illinois, the Motor Vehicle Exemption ensures that you don’t lose your means of transportation when filing for bankruptcy, but there’s a limit to the car’s value. You can safeguard up to $2,400 of equity in one motor vehicle. (735 ILCS 5/12-1001(c))
For instance, imagine Bob owns a 2011 Prius with a value of $8,000. After subtracting the remaining debt of $6,000, there’s $2,000 of equity in the car. If Bob decides to file for bankruptcy in Illinois, he can utilize the $2,400 motor vehicle exemption to completely protect the car. Additionally, if there’s a bit more equity that the motor vehicle exemption doesn’t cover, you can also use the Illinois Wildcard exemption (totaling $4,000) to protect any remaining unprotected equity in assets, including vehicles. It’s important to note that the wildcard exemption must cover all your personal belongings, household items, cell phone, and other electronics as well.
Illinois Retirement and Pension Benefits Exemption
Most tax-exempt pensions and retirement accounts receive protection under Illinois law, allowing individuals to retain these accounts during bankruptcy. This safeguard includes various accounts such as 401(K)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and traditional and Roth IRAs. If uncertain about the tax-exempt status of your plan, reaching out to your plan administrator or custodian and inquiring about its ERISA coverage or tax-exempt status is advisable.
As of 2022, there exists an exemption that shields IRAs and Roth IRAs. However, this exemption applies only if the combined value of all your retirement plans does not exceed $1,512,350. It’s important to note that this exemption is a total limit encompassing all your retirement accounts and is not specific to each individual plan.
Lastly, one of the most crucial aspects of this exemption pertains to the status of an inherited retirement account. Whether these accounts are protected in bankruptcy varies, and understanding their status is very important as they often involve substantial sums of money. Exercise caution before filing for Chapter 7 bankruptcy if you have inherited a retirement account, as there’s a possibility that it may be liquidated by the bankruptcy trustee.
Illinois Wildcard Exemption
As mentioned earlier, Illinois has a $4,000 exemption that covers the resale value of various assets. This exemption is applicable to all your property that doesn’t have its own separate exemption, encompassing items such as electronics, household goods, bank accounts, tax returns, and other assets. This is why it’s called a “wildcard exemption”, because it can be used to protect any property. The list of what can be covered is very long but you don’t necessarily need to cover everything. The first step is figuring out the price. I like to think about the value of an item based on what I could sell it for at a pawn shop or during a quick sale. If the item holds a decent value under these circumstances, it’s advisable to use an exemption on it.
The key consideration is whether a bankruptcy trustee would think it’s worth the effort to sell the item and if that sale would actually bring in any money. If the item wouldn’t make much money at a garage sale, then you probably don’t need to stress about using an exemption.
Illinois Tools of the Trade Exemption
In bankruptcy, “tools of the trade” typically refer to the tools, equipment, or items necessary for an individual to carry out their profession or trade. These items are often crucial for someone’s livelihood. The specific definition may vary by jurisdiction, but common examples include tools, machinery, vehicles, books or instruments that are essential for an individual’s work. In Illinois, the bankruptcy exemption allows individuals to protect up to $1,500 in value for any of these essential items. (735 ILCS §§ 5/12-1001(d))
The concept of tools of the trade is important because bankruptcy exemptions often allow debtors to protect certain property from being used to satisfy their debts. This recognition acknowledges the need for individuals to retain the means to earn a living even in the midst of financial difficulties.
Exemptions for Clothing
Several years ago, I had a client who had recently immigrated to the United States. One of her initial inquiries was whether, when filing for bankruptcy, the police would enter her home and auction off her clothes. It was surprising to learn how the bankruptcy procedures varied in other countries. For me, this gave new meaning to the phrase “take the clothes off your back”! In the United States, the reality is that everyday clothing is 100% protected in bankruptcy. However, the scenario changes when it comes to designer purses and luxury items, which may not enjoy the same level of protection.
What if I Can’t Protect All My Property?
Curious about the fate of assets that cannot be protected? In a Chapter 7 bankruptcy, nonexempt property is typically sold by the trustee, and the proceeds are used to satisfy your creditors. However, in my experience, there is usually the option to negotiate with the trustee and repurchase your property from the Bankruptcy Estate at its fair market value. Typically, the funds for such a purchase must come from a relative or friend.
In Chapter 13 Bankruptcy, your assets are never at risk of being sold. However, you’re required to repay an amount equal to the nonexempt value through the bankruptcy plan. It’s important to note that the exemptions for both Chapter 7 and Chapter 13 bankruptcy are identical in Illinois. The key distinction in Chapter 13 lies in the fact that these exemptions serve to reduce the amount you’ll repay in the bankruptcy plan.
Conclusion
In navigating the complexities of Chapter 7 Bankruptcy and safeguarding your assets, seeking expert legal advice is crucial. Steven Grace, a seasoned bankruptcy attorney, possesses the knowledge and experience to guide you through the intricate landscape of exemptions and protections available in Illinois. Whether it’s preserving the equity in your home with the Homestead Exemption, securing your means of transportation through the Vehicle Exemption, or understanding the intricacies of retirement accounts, Steven Grace is well-equipped to provide tailored solutions. Don’t face bankruptcy alone; contact Steven Grace Bankruptcy Attorney today to ensure your assets are protected and your financial future is secure.
Don’t forget, your financial future is at stake, so ensure you’ve got the right guidance to steer you through this critical process.
