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National Association of Consumer Bankruptcy Attorneys
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You already know that the federal bankruptcy laws may be able to wipe out your debt without having to pay a dime to your creditors. But what may come as a surprise is that most people keep all of their property, including cars and homes, while losing their debt.
In short, the law protects almost everything that the typical middle class American owns.
HOW THE LAW PROTECTS YOUR PROPERTY IN A CHAPTER 7
The bankruptcy laws protect your property through “exemptions.” Property is exempt up to a certain dollar value depending on the type of property and what state’s exemptions you are using. Exempt property can’t be taken from you by creditors or the court.
The reason most people’s property is exempt is because the property is not valued at its original purchase price. Rather, the property is valued by what it’s worth today in its current condition. Used property is generally not worth much.
Additionally, you only have to exempt your equity in the property, not the property’s entire value. Equity is the value of the property minus any loans on it.
Finally, the exemptions apply per person and only to your share of the property.
WHAT PROPERTY ILLINOIS LAW PROTECTS
Home: Each person gets a $15,000 exemption of equity in their residence. If you own your home in “Tenancy by the Entirety” your exemption may be unlimited. Yes, unlimited!
Clothing: Each person has an unlimited exemption in their clothing as long it’s reasonable. So unless you have a closet like Princess Diana, you’ll be fine.
Personal Property: Each person can protect up to $4,000 of equity in any personal property. Personal property includes things like cash, jewelry, household goods, electronics, furniture, sports equipment, etc. You can even add this exemption to your car if your car is worth a lot.
Retirement Account: Unlimited in most situations. Yes, that million dollars you’ve been putting away for your retirement may be fully exempt as long as it’s reasonably needed for retirement.
Car: Each person can protect $2,400 of equity in a car. You can double this for jointly owned cars and also combine this with the $4,000 exemption for personal property for a maximum protection of $12,800 of equity in any car.
Education Account: Unlimited in most situations as long as intended to benefit a close relative.
Work Tools/Business Equipment: Each person can protect $1,500 of equity in the tools that they use for work. This exemption can even be applied to your car if you use it while working.
Other protections: Most wages, unemployment compensation, workers comp claims, public benefits, social security, alimony, child support, personal injury proceeds, life insurance proceeds, health aides, and more….
WHAT IF MY PROPERTY IS WORTH A BIT MORE THAN THE EXEMPTIONS IN A CHAPTER 7
If you have property worth more than the exemptions you usually don’t have to worry.
If it’s cash or other liquid assets, you may be able to use it on necessities that I approve before you file. For example, to fix your car, on needed dental care, to pay taxes, or catch up on the mortgage.
If it’s personal property or real estate, most trustees are reluctant to sell property if they can’t make a good amount of profit after paying you the exempted value and the sales costs.
For example, a jointly owned home worth $200,000 with a mortgage of $160,000 usually won’t be sold despite having $10,000 of unprotected equity. That’s because the sale is unlikely to make a profit after you are paid your exempt value ($30,000), the mortgage is paid off, and the costs of sales are taken into account (selling agent, taxes, attorneys fees, etc.)
That’s why almost everyone keeps all of their property, while losing the debt.
WHAT IF MY PROPERTY IS WORTH A LOT MORE THAN THE EXEMPTIONS IN A CHAPTER 7
If your property is worth a lot more than the exemptions and you’re qualified for a chapter 7, then you have three primary options.
First, you could file a chapter 7 and attempt to work out a deal with the court appointed trustee. Some trustees will allow you to “buy back” the un-exempted property at a discount over a period of a year.
Second, if you did not want to take the risk of losing the un-exempted property, you may choose to file a chapter 13. You’d then get to keep the property but would have pay to the court the non-exempt value of the property over 3-5 years.
Third, if you did not want to keep the un-exempted property, you could file a chapter 7. Assuming the court appointed trustee sells the property, you would first be given your exempted value of the property and the rest would be divided among your creditors.
HOW THE LAW PROTECTS YOUR PROPERTY IN A CHAPTER 13
If you’re filing a chapter 13 and you have property that is below the exemption levels, then you get to keep the property.
If you have property above the exemption levels, you can still keep it, but you would have pay to the court the non-exempt value of the property over a period of 3-5 years.