Key Property Exemptions in a Chapter 7 Bankruptcy

Many people erroneously believe that Chapter 7 bankruptcy is a liquidation bankruptcy. In fact, Chapter 7 bankruptcy stops liquidation. The Automatic Stay prohibits adverse creditor pre-liquidation actions, such as foreclosure and repossession. Additionally, Illinois law includes generous property exemptions that put a force field around most property for the duration of a Chapter 7 bankruptcy.

When bankruptcy ends, this property is easier to afford, because a Chicago bankruptcy lawyer maximizes debt discharge provisions to eliminate credit card and other unsecured debt. Nonlawyer bankruptcy petition preparers only fill out forms. A Chicago bankruptcy lawyer guides you and your family through every phase of this legal process, protecting your most valued possessions along the way.

Government Benefits

Social Security, workers’ compensation, VA disability, and other government benefits are not income, but assets, for bankruptcy purposes. Under state law, these assets are 100 percent exempt. Most Chicago bankruptcy lawyers recommend that debtors deposit these funds into separate accounts to avoid commingling them with other kinds of nonexempt income, such as wage and passive income.

Retirement Account

Frequently, an IRA, 401(k), Keogh plan, or other retirement account is a debtor’s largest financial asset. The Supreme Court has consistently held that earned retirement accounts are completely exempt, regardless of their value. Defined benefit retirement accounts, such as pension plans, are usually 100 percent exempt as well. This exemption usually also applies to 529 college savings plans and other long-term savings accounts.

Slightly different rules apply to inherited retirement accounts. These accounts might not be 100 percent exempt. Earned retirement accounts indicate that the debtor made financial sacrifices. Inherited accounts don’t have that same dynamic and therefore don’t have the same level of legal protection.

Motor Vehicle

Illinois exempts $2,400 of motor vehicle equity. There’s a difference between property equity and fair market value.

If Paulina owns a new car, she probably has almost no equity in the vehicle. Since vehicle loans are amortized, borrowers pay the interest before they significantly pay down the UPB (unpaid principal balance). Used cars are paid off but they have practically no financial value.

Informal exemptions, such as the best interests of creditors rule, sometimes apply as well. If a seizure and sale wouldn’t significantly benefit creditors financially, the trustee cannot seize it, even if it isn’t legally exempt.

Home Equity

Illinois law exempts up to $15,000 in home equity. But don’t let that low figure scare you. Remember that there’s a difference between home equity and fair market value.

Mortgage loans, like vehicle loans, are amortized. In the first few years, nearly all the payments go to future interest. The bank pays itself before homeowners build equity. So, if you’ve lived in your house for less than ten years, you probably have substantially less than $15,000 in equity. Therefore, your home is probably untouchable for bankruptcy purposes.

Another informal exemption could apply as well. Assume Paul and JoAnne bought their $500,000 home with an 80/20 mortgage ($400,000 senior lien and $100,000 junior lien). If their home’s value has dropped to $400,000, the junior lien is an unsecured debt, which means it’s dischargeable in bankruptcy.

Wildcard Exemption

In many ways, this exemption is the big one. State law allows debtors to protect up to $4,000 of otherwise non exempt assets. The wildcard exemption could also apply to money in a checking or savings account. This exemption does not apply to real estate property.

Reach Out to a Hard-Working Cook County Lawyer

No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Source:

uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics