Exempt assets in bankruptcy Lawyer Manual

In both Chapter 7 and Chapter 13, the debtor may exempt certain assets, which do not have to be included in the estate of the debtor, the assets subject to sale to satisfy creditors.

What property can be kept?

In a Chapter 7 case, the consumer can keep all property which is "exempt" from the claims of creditors and is not secured by a mortgage or other lien. Illinois has opted out of the federal bankruptcy exemptions. 735 ILCS 5/12-1201. Residents of Illinois are only able to exempt property that is exempt under Illinois law or non-bankruptcy federal law.

An explanation of exemptions allowed under Illinois law can be found at Debt Collection: Exemption Rights.

In a Chapter 13 case, consumers can keep all of their property if the plan meets the requirements of the bankruptcy law. The plan must provide for secured debts, but in most cases, the repayment terms can be modified.

State exemptions

Real property

735 ILCS 5/12–901 is the Illinois Homestead Exemption statute. It provides the owner/occupier of a home, which includes condominiums and mobile homes, with a $15,000 exemption. If there are two or more owners, an additional $15,000 exemption is allowed. If your client owns a $250,000 house with a $245,000 mortgage, he cannot lose it to his creditors or a bankruptcy trustee as long as he is current on his mortgage payments. However, the $35,000 used mobile home which the client just finished paying off may be taken either by creditors or by the trustee. Upon the sale of the property, the client would be awarded his homestead exemption, $15,000, and the balance of the proceeds would be used to pay the creditors.

Illinois also recognizes a tenancy by the entirety ownership in property that is the debtor’s principal residence. A property that is owned in a tenancy by the entirety is a property that is jointly owned by a married couple or the parties to a civil union as a marital entity and is not owned separately by each. If a couple has a tenancy by the entirety ownership in their home or real estate, then that property will be exempt as long as there are not any debts that are jointly owed.

A renter can claim a security deposit paid to the landlord as exempt under this section.

Personal property

735 ILCS 5/12–1001 deals with personal property exemptions, other than retirement accounts. This statute is extremely important to your client because it lists what cannot be lost to a creditor. The personal property enumerated here is what the Illinois legislature has determined to be the minimum everyone has a right to retain, no matter what they owe or whom they owe it to. The most common and important exemptions are as follows:

• Personal property including family pictures, school books, health aids, and necessary wearing apparel;
• A "wildcard exemption" of $4,000 worth of any other property, not including wages that have been garnished. This is called the "wild card exemption" because the debtor has the right to choose the exempt property. It could be a bank account, a tax refund, household furniture and furnishings, jewelry, furs, collections, or anything or any combination of things as long as the total value does not exceed $4,000;
• A motor vehicle exemption of $2,400 is included. If your client owns a car worth $40,000 but owes $39,000 on it, it cannot be taken.  However, a $6,000 car which the client owns free and clear is at risk, at least theoretically. Note also that the $4000 "wild card" exemption can be "stacked" on top of the $2,400 motor vehicle exemption to create a $6,400 equity exemption of a motor vehicle; 
• Tools of the trade of the debtor which do not exceed $1,500. These are items that a person uses to make a living;
• Life insurance proceeds payable to a wife or husband or a child, parent, or another person dependent upon the deceased;
• Social security, unemployment compensation, public assistance, veteran’s benefits, disability or illness payments and alimony or support payments reasonably necessary for the support of the debtor and any of the debtor’s dependents. This includes the earned income tax credit In re Royal, 397 BR 88 (Bankr. N.D. Ill. 2008); In re Brockhouse, 220 B.R. 623 (Bankr.C.D.Ill.1998); In re Fish, 224 B.R. 82 (Bankr.S.D.Ill.1998).; and
• A payment of up to $15,000 for personal injury is exempt.

All of these exemptions also apply to what a trustee may take from the debtor’s estate in bankruptcy. In reality, however, if the trustee finds the debtor’s assets just slightly to exceed his statutory exemptions, it is probably not worth the trustee's time and expense to pursue them. Of course, what "just slightly" means depends on the case and the trustee. While we try to make sure that everything a client owns fits into one of the exempt categories when we file bankruptcy, a client with as much as a few thousand dollars in non-exempt personal property, furniture, and furnishings, for example, may well be able to keep everything he owns.

Pensions and retirement accounts are exempt under 735 ILCS 5/12-1006. Most are also exempt under 11 U.S.C. § 522(b)(3)(B).