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Bankruptcy & Property Exemptions of Your Equity Part: 1

Published on March 29th, 2018

First of Two Articles: Can keep my house if I have to file Bankruptcy?

This is the first of two articles on protecting your property if you are advised to file for Bankruptcy. I have decided to begin with the exemptions protecting real estate. I have been doing Bankruptcy cases since 1990. I have seen several significant changes. When I started there was no means test. I was living and working in Peoria, IL then and the local office of the United States’ Trustee ( Sort of a Bankruptcy Prosecutor) did motions to dismiss Bankruptcies where they felt a debtor (person petitioning for Bankruptcy) could afford to pay at least 10% over a three (3) year period under a Chapter13 reorganization plan Bankruptcy. That eventually became our current means test.

The Trustee; separate from the US Trustee’s office, is usually a local private attorney who contracts with the U.S. Government to review each case and liquidate (sell) non-exempt assets of a debtor to share among the creditors. When I started the percentage kept by the Trustees was less than Fieve percent (5%) of the value of an asset so not a lot of seizures happened due to the low level of profit available to the Trustee for the effort involved. That all changed in 1995; the Trustees were then and now able to retain Twenty Five percent (25%) of the first Five Thousand dollars ($ 5,000.00) from a seized asset and then Ten percent (10%) on any assets above Five Thousand dollars ($ 5,000.00) up to Fifty Thousand dollars ($ 50,000.00). This turned your friendly neighborhood Trustees into wolves attacking all assets of the debtors.

I practice in Illinois and Illinois has its own exemption statutes. Some states use a set of exemption which are part of the United States Code (Federal Statutes) but as each state was allowed to choose to use the exemptions from the United States Code or their own statutes, Illinois chose to use its own. The statute in Illinois providing for exemption (protection) of a debtor’s equity (value) in a residence is found in the Illinois Compiled Statutes at Chapter 735 Section 5/12-901 (735 ILCS 5/12-901).

When I started it was Seven Thousand Five Hundred dollars ($ 7,500.00) for a single debtor and Fifteen Thousand dollars ($ 15, 000.00) for two spouses filing a joint petition. Now it is Fifteen Thousand dollars ($ 15, 000.00) for a single debtor and Thirty Thousand dollars ($ 30,000.00) for two spouses filing a joint petition.

This sounds simple on its face but there are a lot of pitfalls that lie for the unwary. If you have more than the exempt amount in equity in your home it is ripe for liquidation by the trustee and you get a check for the exempt amount. It also only applies to the property you use as a residence. In the late 1990’s I had a client whose mother had thought she had prepared a deed on her home to avoid probate by deeding the house to my client and his siblings. That deed was supposed to have retained the right for the mother to live in the house for the rest of her life and then it became her children’s. However the deed was not correctly drafted and the land was the actual property of my client and his siblings. We had to arrange to buy back my client’s share of his mother’s home to keep it from being sold.

If you hope to get Bankruptcy Relief and keep your home, carefully checking values and making sure only your residence is at issue is as thorny issue. Consulting an attorney on any matter where the Courts or the Government is involved is your best move.

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