What Can I Exempt In A Chapter 7 Bankruptcy?

Understanding What Can And Cannot Be Exempted From The Liquidation Process

If you are considering filing for Chapter 7 bankruptcy, you may be wary of the liquidation process. Unlike a Chapter 13 bankruptcy, which focuses on reorganizing your debt and committing to a multiyear, partial repayment plan, Chapter 7 bankruptcy filers undergo liquidation to compensate creditors.

Even the word “liquidation” can sound scary. You might be imagining a scenario where you lose everything: Sure, your debts may have been discharged, but in the process, you have lost your home, your car, your sentimental possessions, and even your clothing.

The idea that you will lose everything in a Chapter 7 bankruptcy liquidation is a myth. It is true that nonexempt property will be turned over to a trustee assigned by the court and sold. The key word here is “nonexempt:” Many of your assets can be protected from the liquidation process if they are considered exempt. Below, we review what can and cannot be exempted in a Chapter 7 bankruptcy.

Qualifying For Chapter 7 Bankruptcy

Not everyone qualifies for Chapter 7 bankruptcy. One of the chief advantages of a Chapter 7 bankruptcy versus a Chapter 13 bankruptcy is you do not have to pay any additional amount as part of the bankruptcy filing. For this reason, along with the fact that generous exemptions can limit what is ultimately liquidated, many attempt to pursue Chapter 7 bankruptcy if at all possible.

To determine if you are eligible, you will need to work through the Illinois Means Test, which assesses your ability to partially repay. If your household’s income over the past 6 months is less than the average median income for your household size in Illinois, you automatically qualify for Chapter 7 bankruptcy. Note that if you plan to file jointly with your spouse – and thereby take advantage of joint exemptions – you must include your spouse’s income in this calculation.

If your household’s income meets or exceeds the average median income, you may still qualify. You will need to evaluate your monthly level of disposable income by subtracting qualifying living expenses, including costs related to housing, transportation, and sustenance. If the resulting figure is too high, you will be expected to partially repay creditors directly through a Chapter 13 bankruptcy. If the disposable income is acceptably low, you can file for Chapter 7 bankruptcy.

Federal Versus State Exemption Schedules

When filing for Chapter 7 bankruptcy, you have the option of choosing between one of two exemption schedules. The federal exemption schedule can be claimed by anyone filing Chapter 7 bankruptcy in any state, so long as their state is not an “opt-out state” that prohibits the use of federal exemptions. Filers can also choose to employ the exemption of the state where you live, which are often more generous.

To claim a specific’s state liquidation exemptions, including Illinois’s, you must have generally lived in the state for at least 2 years prior to filing for bankruptcy. If you have moved to the state within the past 2 years, the bankruptcy court tends to decide your state of residence based on where you lived in the 6 months before 2 years ago. For example, if you lived in Ohio for 5 years and moved to Illinois only 1 year ago, the bankruptcy court would likely require you to file as an Ohio resident, not an Illinois one.

Illinois is considered an opt-out state, meaning it does not allow Chapter 7 bankruptcy filers to use federal exemptions. All filers must use Illinois’s bankruptcy exemption schedule if they qualify as a resident. Even if you could in theory use federal exemptions in Illinois, you are not able to pick and choose between federal and state exemption schedules. Once you commit to one, you must exclusively use its options.

An experienced bankruptcy lawyer can help assess your assets and advise on whether you are likely to be considered an Illinois resident. They can also advise if another state’s exemption schedules might be more beneficial and help you understand your legal options.

Illinois’s Chapter 7 Bankruptcy Liquidation Exemptions

As we mentioned above, if you qualify as an Illinois resident, you will be by default using Illinois’s Chapter 7 bankruptcy liquidation exemption schedule. If you are filing jointly with a spouse, you can double several of the available exemption thresholds.

Exemptions permitted in an Illinois Chapter 7 bankruptcy include:

• Up to $15,000 of Equity in Your Home. Formally referred to as the Homestead Exemption, the amount doubles to $30,000 when filing jointly with your spouse. This exempted equity can count toward any primary residence, including a house, condo, farm, trailer, or plot of land with buildings. Should you choose to sell your home, the proceeds of the sale can also be exempted for 1 year.
• Up to $2,400 of Equity in Your Vehicle. This can count toward any one motor vehicle, including a car, truck, van, or motorcycle.
• Up to $1,500 in Personal Property. This broad category includes “necessary” clothing, religious texts, schoolbooks, health aids prescribed by a healthcare professional, and family photographs. It also includes several obscure exemptions, including titles for watercraft exceeding 12 feet in length and tuition trust funds.
• Up to $1,500 in Tools of the Trade. Any professional implements or texts can be covered by this exemption. If you are a mechanic, for example, you could exempt up to $1,500 in tools, parts, and manuals relevant to your job.
• $4,000 “Wildcard” Exemption. This special exemption can be employed in a variety of ways to protect personal property that exceeded the value of that particular exemption. Note that the wildcard exemption cannot be used toward real estate, but it can alternatively be used to protect a luxury item.
• Wage Exemption. You can either exempt up to 85% of your gross wages or up to 45 times the federal minimum wage, whichever is higher.
• Alimony & Child Support Exemption. This exemption allows you to protect the monetary amount that is “reasonably necessary” to facilitate ongoing alimony and child support payments.
• Crime Victim Compensation Exemption. Any monetary reward received as compensation for suffering a crime is entirely protected by liquidation.
• Franchise, Permit, and License Exemptions. If you own a business, you are typically allowed to exempt the full value of your licenses and permits, including liquor licenses.
• Insurance Policy Exemption. Health insurance, disability insurance, and unemployment benefits are all protected in their entirety. Life insurance payouts are exempted if the funds are directed to the insured’s immediate family member (spouse, parent, child) or a dependent.
• Retirement Account Exemption. 401(ks) and IRA retirement accounts are entirely exempt from liquidation. Pensions for many types of public sector employees are also protected.
• Worker’s Compensation Exemption. Any and all monetary damages rewarded as a result of a worker’s compensation claim are exempt from liquidation.
• Veteran’s Benefits Exemption. Any and all veteran’s benefits are considered exempt.
• Funeral Exemption. Any funds set aside for future funeral, burial, and cemetery expenses can be exempted.

We Can Help You Make The Most Of Illinois’s Liquidation Exemptions

Reviewing the extent and variety of exemptions permitted by Illinois’s state schedule can quickly become overwhelming. The good news is the liquidation process is not designed to strip you of everything you own. Those who do qualify for Chapter 7 bankruptcy are often surprised by how much of their estate can be readily exempted. If you are struggling to understand what you will be permitted to exempt from liquidation or are worried you will lose a bulk of your property, we want to help.

Our bankruptcy attorneys at Bach Law Offices, Inc. have over 40 years of combined legal experience and are prepared to help you navigate Chapter 7 bankruptcy. We can perform a thorough review of your estate and identify what elements will be safe under the state’s exemption schedule and what components might be vulnerable to liquidation. Our team can work with you to strategize on how to minimize any negative impacts of the liquidation process while maximizing the many benefits of Chapter 7 bankruptcy.

If you are considering filing for Chapter 7 bankruptcy but are worried about liquidation, do not hesitate to contact us online or call (847) 440-5998 to schedule a free initial consultation.