Monday, July 1, 2013

Exemptions - What can you keep in bankruptcy?

One of the most important parts of bankruptcy are the exemptions, which make up Schedule C of the bankruptcy petition.  Exemptions in Illinois are determined by state law.  In other states, they may be determined by state or federal law, or a debtor may have a choice on which exemptions apply.

What is an exemption?

Exemptions are rights you can claim to protect things from being seized to pay your debts.  Exemptions are like highlighters - anything you can highlight with the exemption, you can keep in bankruptcy and protect from your creditors.

In Illinois, the majority of exemptions are listed in 735 ILCS 5/12-1001.  There are a few other exemptions in other code sections, such as the Homestead Exemption (735 ILCS 5/12-901) as well.

  • Homestead Exemption - an individual can protect up to $15,000 in home equity.  Married couples can protect up to $30,000 in home equity.
  • The "wildcard" exemption - this exemption applies to any personal property, and is $4,000 for one person, and $8,000 for a married couple.  This exemption can be split among any number of items of personal property.
  • Auto exemption - this exemption applies only to a motor vehicle, and each person gets one, worth $2,400.  This exemption is a bit different, because it can't be divided between multiple vehicles.  
These three exemptions are the most important and the most used.

How does claiming an exemption work?

Exemptions are rights, and must be claimed or asserted.  In a bankruptcy petition, they are listed in Schedule C.  

An example makes exemptions easier to understand.  We start with the value of the item - let's say a house, worth $150,000.  The house is subject to a mortgage, with a balance of $140,000.  The value of the house, minus the balance owed on the mortgage, is $10,000.  That amount is the net equity in the property.  The debtor asserts his or her homestead exemption of $15,000 against it, and the property is completely exempt - in fact, it is over-exempt, by $5,000.

Below is a table, typical of most debtors.  The debtor owns the house, has a car, has $2,000 in the bank, and has a gold watch worth $500.  The debtor can keep all these things in a Chapter 7 bankruptcy.

ItemValueLienExemptionNet Value
Home$150,000 $140,000 $15,000 $(5,000)
Car$10,000 $8,000 $2,400 $(400)
TV & Furniture$1,500 $- $1,500 $-
Bank Account$2,000 $- $2,000 $-
Clothing$500 $- $500 $-
Gold Watch$500 $- $500 $-

By using the exemption "highlighters," the debtor here can keep his personal belongings.  Because of these exemptions, the vast majority of Chapter 7 bankruptcy cases are considered "no asset" cases, since there is nothing of value that is not exempt.  Most debtors in bankruptcy can keep all their personal belongings.

No comments:

Post a Comment