If you live in Illinois and discover that you are in debt and do not have the financial means to repay it, Illinois bankruptcy laws can protect you from creditors while you pay off your obligation. This rule allows you to start again without having to worry about bill collectors or a mountain of debt. Furthermore, Illinois state regulations allow residents to shield certain of their assets from creditors during a bankruptcy.
Bankruptcy is a legal procedure that assists those who are drowning in debt. The “debtor” is the individual who files for bankruptcy. The “creditors” are the persons or businesses to which debtors owe money.
The debtor is protected from creditors when they file for bankruptcy. This results in an “automatic stay.” It may be possible for the debtor to remove his debts depending on the form of bankruptcy he has filed.
The United States Bankruptcy Courts are federal courts that are governed by the United States Bankruptcy Code. However, federal law empowers states to set their own laws for how people’s property might be shielded from creditors. This protected property is known as “exempt property,” and it can assist debtors in resuming their lives following bankruptcy.
Some jurisdictions allow people to choose from a list of federal bankruptcy exemptions available under the bankruptcy legislation. Illinois, however, is not one of them. The state law exemptions must be used by filers in Illinois bankruptcy.
Different types of bankruptcy
Let’s look at the two forms of personal bankruptcy to better understand how state exemptions are used throughout the bankruptcy process:
Bankruptcy under Chapter 7
Chapter 7 bankruptcy is sometimes known as “liquidation” bankruptcy because it requires the debtor to turn over all non-exempt property to a bankruptcy trustee, who then sells it and uses the proceeds to repay creditors. Exemptions are important in Chapter 7 filings since debtors lose much of their property that isn’t covered by an exemption. Exempt property, on the other hand, has its obligations “discharged” or “canceled.” This indicates the debtor owes them nothing. To qualify, debtors must fulfill a rigorous income requirement.
Bankruptcy Chapter 13
People with a steady income can use Chapter 13 bankruptcy to reorganise most of their debt and pay it off over three to five years. Payments to the bankruptcy trustee are made under this chapter in line with the court-approved plan. The trustee then pays the creditors, which frequently relieves the debtors of part of their obligations. Because homeowners frequently get to keep their houses, this chapter is quite popular. To qualify for Chapter 13 bankruptcy, the debtor must have adequate income to make payments on his debt.
When a debtor files for bankruptcy, one of the key advantages is that the court issues an automatic stay. The stay halts all creditor collection efforts, including foreclosures and court proceedings. This bans collection agency from harassing the debtor while they try to settle their financial situation through bankruptcy.
Debt: Secured vs. Unsecured
Debts are often divided into two groups during bankruptcy: secured debt and unsecured debt. Under bankruptcy, secured and unsecured obligations are considered differently, and the amount of debt that can be discharged is determined.
If the debtor does not pay the loan, the secured creditor has the right to recover the property. These are often loans for which the debtor has signed a contract authorising the creditor to seek a lien on the collateral property if the debt is not paid. Due to secured creditors’ authority to reclaim property in bankruptcy, debtors are frequently forced to either give up the property or work out a repayment plan with the creditor. Home mortgages and vehicle loans are the most frequent types of secured debt.
When a debt is unsecured, the creditor has no power to seize the debtor’s property if the obligation is not paid. Credit card debts, court judgments, and medical costs are the most prevalent types of unsecured debt. Because unsecured creditors have no collateral, these obligations are most likely to be discharged following the bankruptcy. Unpaid child and spousal support, for example, are priority unsecured obligations that cannot be eliminated.
In Chapter 7, what happens to the debt?
When a person files for bankruptcy under Chapter 7, the majority of unsecured debt is usually discharged. Debtors typically have three secured debt choices.
The property should be returned to the creditor.
The debtor will lose the property if they choose this option, but they will not be required to make any extra payments.
Continue to make payments on the property.
If the state exemption covers the equity in the item, the debtor might pick this alternative.
Purchase the property in its entirety.
Because the debtor is normally obliged to make a cash payment and most of the assets are subsequently given over to the trustee, this alternative is uncommon in Chapter 7 cases.
In Chapter 13 Bankruptcy, What Happens to the debt?
This chapter permits debtors to repay creditors over a three- to five-year period. The court’s approval of such a scheme is critical. The court has the authority to require creditors to lower or restructure the debt. Mortgage payments are not included in the plan; but, if the debtor is behind on payments, a trustee may work out a payment arrangement with the lender. Unsecured creditors are paid from the remaining income after secured creditors have been paid. Any unsecured debt that is not paid at the end of the plan will be discharged.
In Illinois, Bankruptcy Eligibility
To be eligible for Chapter 7 bankruptcy in Illinois, the debtor must have a modest income. One of two means tests is commonly used to do this.
The debtor’s household income must be less than the median household income for a similarly sized Illinois household to qualify for the first means test. According to US Census statistics, the median household income for a three-person Illinois household in November 2020 was USD 92,711. So, a debtor living in a three-person family with a monthly income of less than USD 92,711 qualifies for Chapter 7 bankruptcy.
Even though the debtor’s family income is higher than the state median, they may still be eligible for Chapter 7 bankruptcy based on their disposable income. The debtor’s monthly disposable income is computed by deducting his or her monthly costs from his or her monthly income. If the calculations reveal that the debtor has little to no discretionary income each month, they can petition for Chapter 7 bankruptcy.
To petition for Chapter 13 bankruptcy, the debtor must demonstrate that they have a consistent income and that their unsecured debt does not exceed USD 149,275. In addition, the secured debt cannot exceed USD 1.26 million.
Bankruptcy exemption in Illinois
Anyone wishing to file for bankruptcy in Illinois can take advantage of the state’s exemption system. If debtors own property that qualifies for one of these exemptions, they can shield it from creditors during bankruptcy and utilise it to start again.
If both spouses own an ownership stake in the property, married couples filing for bankruptcy in Illinois can double their exemption.
Exemption for homeowners
Even though the cost of living in some regions of Illinois is extremely high, the homestead exemption is not very substantial. Debtors are eligible for an exemption of up to USD 15,000 of their home equity. If they file for bankruptcy together and possess a home, this payment might quadruple to USD 30,000/-. Mobile homes, condominiums, co-ops, lots, buildings, and farms are all examples of real or personal property that might be protected. In the event of the homeowner’s death, the residence might be claimed by a spouse or child.
Waiver of wages
Illinois permits debtors to be free from paying taxes on 85 percent of their gross wages or 45 times the federal hourly minimum wage, whichever is higher.
Exemption for vehicles
Debtors are able to safeguard up to USD 2,400 in car equity.
Exceptional circumstances
Debtors can use the Illinois wildcard exemption to exempt property worth up to USD 4,000 that would otherwise be ineligible. This exemption, however, cannot be utilised to safeguard real estate or wages.
Exemption for personal property
In Illinois, a wide variety of personal property can be exempted. Clothing, family photos, bibles, schoolbooks, prepaid tuition trust funds, a certificate of ownership to any boat above 12 feet, and recommended home health aids are all examples of such exemptions.
Exemptions from government benefits
Unemployment compensation, social security, veteran’s benefits, worker’s compensation, including worker’s compensation for occupational sickness, criminal compensation, and some federal restitution payments are all excluded.
Exemptions from insurance
Life insurance proceeds to the debtor’s spouse or child if needed for support, health and disability benefits, benefits from a fraternal society, and other insurance benefits are excluded under Illinois bankruptcy law.
Additional exceptions
Alimony and child support, partnership property, wrongful death awards or settlements, personal injury lawsuit awards and settlements up to USD 15,000/-, pre-need cemetery sales money, care funds, and trust funds are all excluded.
Conclusion
Bankruptcy is a legal process in which an individual or company is unable to pay its obligations. The insolvency procedure begins with a petition submitted by the debtor or on behalf of stakeholders, depending on circumstances.
The debtor’s assets are all assessed and analyzed, and the assets may be utilized to pay down a portion of the debt. In Illinois, Chapter 7 and Chapter 13 bankruptcy can be filed. Apart from the exemptions granted by federal courts, Illinois permits a list of debtor exemptions.
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