Homestead Exemptions In Illinois

WHEN HOMEOWNERS ARE CONSIDERING  FILING A CHAPTER 7 OR A CHAPTER 13 THEY ARE NATURALLY CONCERNED ABOUT  THE FATE OF THEIR HOME. WILL I LOSE MY HOME?

Illinois  is one of many states that have their own exemptions for homeowners  rather than using the federal bankruptcy exemptions.

The homestead exemption in Illinois is $15,000 for an individual and $30,000when a married couple owns the home together. The $30,000 is available  to same gender married couples, assuming it is jointly owned. 735 Ill.  Comp. Stat. 5/12-901 and 5/12-902 on the Illinois General Assembly website

An  individual must actually reside in the home to qualify for the  exemption. The exemption does not apply to a rental building that the  individual does not reside.

Included in  the exemption are real property (so that includes a 2 or 3 flat); a  home; condominium, mobile home, and a co-operative. It would apply if  the property were placed into Land Trust with the individual as the  beneficiary.

The exemption continues for  the sale of the home for one year. That, however, can be dangerous. If  an individual sells and nets an amount up to $15,000 then files a  Chapter 7 the trustee can hold he case open if the individual does not  buy a new property within a year such can be taken and applied to the  estate.

TAX DEBTS AND OTHER EXCEPTIONS TO THE EXEMPTION

The homestead exemption cannot be applied to properly recorded tax liens; domestic support obligations; or a judgment lien arising out a divorce judgment.

WHAT IF THE EQUITY EXCEEDS THE ALLOWED EXEMPTION?

Whether  a Chapter 7 trustee will attempt to sell a home depends of several  factors: the usual cost of cost of sale, and, in addition, the trustee’s  fees, and an increase if mortgage balances. For example, the market  value is $110,000 and the liens are $85,000 it is very unlikely that a  trustee could sell the property net more than $15,000. Why? There is a  cost to sell real estate: commission, trustee’s fees, attorney’s fees,  etc. Also, if a trustee puts a house on the market the Debtor will  likely stop paying the mortgage and the balances will increase.

DEATH OF A HOMEOWNER

The  Illinois Homestead exemption will continue for the surviving spouse and  to dependent children under the age of 18 until the age of 18. The main  effect is that should one spouse dies, the widow(er) has an exemption  of $30,000. 735 Ill. Comp. Stat. 5/12-901 and 5/12-902 on the Illinois General Assembly website

JUDGMENT LIENS AND THE HOMEOWNER EXEMPTIONS

Judgment  liens are often avoided in Chapter 7 and Chapter 13. If the equity in  the home is less than the Homestead exemption the judgment lien can be  avoided. The test is the market value of the home less senior liens  (mortgages and real estate taxes and, of course, more prior judgment  liens). However, the hypothetical cost of sale cannot be considered.

IS THERE A WAY TO AVOID THE LIMITED EXEMPTION? YES

Illinois allows jointly owned property of a married couple to have the title in TENANCY IN THE ENTIRETY.

When  a married couple owns their home in TENANCY IN THE ENTIRETY creditors  can not take the property for the debts of one spouse. For example,  Spouse A has had a bad business deal and owes a considerable amount of  money and Spouse B was not liable on the debt: up shot, a creditor  cannot sell the house.

Likewise in a  Chapter 7 if the house is in TENANCY IN THE ENTIRETY and the debts of  the married couple are separate a trustee can not sell the house  regardless of the equity.

One caveat: if  property is transferred to in TENANCY IN THE ENTIRETY when there are  significant debts such transfer could be undone.

There  are some exceptions to the protection of TENANCY IN THE ENTIRETY:  namely, tax debts, joint debts and possibly medical bills incurred  during the marriage. Also, properly filed tax liens, and domestic  support liens cannot be avoided.

Since  Illinois now allows same gender marriage such couples should consider  transferring the title of their homes to TENANCY IN THE ENTIRETY.

CHAPTER 13

If the home falls within the exemption there is no effect to the dividend to unsecured creditors.

If, however, the equity exceeds the exemption it could affect the dividend to unsecured creditor.

The  first step would an exercise in a hypothetical sale in a Chapter 7.  What is the net balance after applying the exemption? For example assume  there would be a balance of $10,000 after exemptions and a hypothetical  cost of liquidation. If the total of the general unsecured debts is  $40,000 (and there is no priority claims, such as tax claim) the minimum  dividend to unsecured creditors would be 25%.

For  a more in depth analysis of Homestead exemptions and how it would  affect a Chapter 7 or Chapter 13 call us. Our consultations are  Complimentary and confidential.

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