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.
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.
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 inTENANCY IN THE ENTIRETY.
When a married couple owns their home in TENANCY IN THE ENTIRETYcreditors 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.
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 free and confidential.
Robert J Adams & Associates has helped thousands of good people, just like you, save their home. Take advantage of our free and confidential consultation today.