Illinois Bankruptcy Exemptions and Law
COVID-19 Statement — Many Illinois bankruptcy courts are closed: Illinois has three federal court districts and some courts and offices have closed down or reduced their operations during the pandemic. Since bankruptcy filers must comply with strict schedules and deadlines, during the pandemic many courts are allowing documents to be filed electronically, by mail, by fax, at a dropbox, or other methods. Many court proceedings are being conducted by telephone or video conference. Please check your area bankruptcy court's website for more information on procedural changes the court has made in response to COVID-19.
How Bankruptcy Can Help
If you live in Illinois and find that you have more debt than you can pay off, bankruptcy could protect you from creditors while you eliminate your debt. Bankruptcy offers people with no hope of paying off their debt a way to start over without worrying about bill collectors or a crushing debt load. Additionally, Illinois has state laws that let residents protect some of their assets from creditors during bankruptcy.
The U.S. Bankruptcy Courts are federal courts governed by the U.S. Bankruptcy Code. But federal law lets states write their own rules on what property residents can protect from creditors. This protected property is known as “exempt property" that can be used to help you get on with your life after you have exited bankruptcy.
Some states will offer you the option of choosing the federal bankruptcy exemptions provided for in the bankruptcy code, but Illinois is not one of them. Illinois bankruptcy filers must use the state law exemptions.
To better understand how state exemptions are used during the bankruptcy process, it helps to be familiar with the two types of personal bankruptcy:
- Chapter 7 bankruptcy is sometimes called a “liquidation" bankruptcy because you must turn over all nonexempt property to a bankruptcy trustee who will sell it and use the funds to repay your creditors. Exemptions can play a large role in a Chapter 7 filing because you will usually lose most of the property that is not subject to an exemption. In return for giving up your nonexempt property, you will usually leave bankruptcy free from nearly all of your debt. You must also meet strict income thresholds to qualify to file under Chapter 7.
- Chapter 13 bankruptcy lets people with a steady income reorganize most of their debt to pay it off over three to five years. Payments are made under a court-approved plan that usually eliminates some of your debt. Chapter 13 is popular with homeowners because they can often keep their home.
One of the most important benefits offered by either type of bankruptcy is the automatic stay issued by the court when you file. The stay stops all creditor collection activity, including foreclosures and court cases. This stops collection agencies from harassing you while you work to resolve your debt problems through bankruptcy.
Secured vs. Unsecured Debt
During bankruptcy, your debts will usually be placed into one of two categories: secured and unsecured. The designation is important because secured and unsecured debts are treated differently in bankruptcy and will dictate how much of your debt can be eliminated.
Debt is unsecured when a creditor has no right to repossess your property when you fail to pay. Credit card debt, court judgments, and medical bills are among the most common types of unsecured debt. Because unsecured creditors hold no collateral for their debt, they are the most likely to be eliminated during bankruptcy. But some priority unsecured debts, like unpaid child and spousal support, can't be eliminated.
A secured creditor has the right to repossess your property if you do not pay what you owe. These are generally loans where you have signed a contract giving the lender the right to seek a lien on the collateral property if you do not pay. Since secured creditors will retain their right to repossess the property in bankruptcy, you will usually need to give up the property or work out a repayment plan with the creditor. Home mortgages and car loans are the most common types of secured debt.
What Happens to Your Debt in Chapter 7?
When you file for bankruptcy under Chapter 7, you can usually discharge most unsecured debt. You will usually have three options for secured debt:
- Return the property to the creditor. If you choose this option, you will lose the property but will usually be free from making any additional payments.
- Keep the property and continue making payments. This is sometimes possible when a state exemption covers the equity in the item.
- Purchase the property outright. This is rare in Chapter 7 cases because you usually need to make a cash payment and most of your cash assets will be turned over to the trustee.
What Happens to Your Debt in Chapter 13?
Chapter 13 bankruptcy lets you create a plan to repay your creditors over three to five years. The court must approve the plan and may force your creditors to reduce or restructure your debt. Mortgage payments are not included in the plan, but a trustee may negotiate a payment agreement with the lender if you are behind on your payments. Unsecured creditors are paid with the disposable income left after you have repaid your secured creditors. Any unsecured debt that is not paid will be discharged at the conclusion of the plan.
To file for Chapter 7 bankruptcy in Illinois you must show that your income is low enough to qualify. This is typically done through one of two means tests.
The first means test is simple: If your household income is less than the median household income for a similarly sized Illinois household, you qualify. For example, U.S. Census data shows the median household income for a three-person Illinois household was $91,581 in November 2020. If you live in a three-person household and your income is below $91,581, you qualify for Chapter 7 bankruptcy in Illinois.
If your household income is above the state median, you can still qualify for Chapter 7 bankruptcy based on your disposable income. Your monthly disposable income is calculated by subtracting your monthly expenses from your monthly income. If the calculation shows you have little to no disposable income each month, you can file under Chapter 7.
To file for Chapter 13 bankruptcy, you need to show that you have a steady income and unsecured debt of no more than $419,275. Your secured debt cannot total more than $1.26 million.
Illinois has created its own exemption system that must be used by anyone filing for bankruptcy in the state. If you have property that falls within one of the exemptions, you can protect it from creditors during bankruptcy and use it to start over after you finish.
Married couples filing jointly for bankruptcy in Illinois can double the size of their exemption if they both hold an ownership interest in the property.
While the cost of living can be quite high in some parts of Illinois, the state homestead exemption is not very generous. You can claim an exemption of up to $15,000 of the equity you have in your home. That amount doubles to $30,000 if you file for bankruptcy jointly and own your home together.
The exemption can be used to protect real or personal property, including condos, mobile homes, buildings, farms, co-ops, or lots. If the homeowner has died, a spouse or child may claim the home.
Illinois will allow you to exempt the higher of 85% of your gross earnings or 45 times the federal hourly minimum wage.
You will be allowed to protect up to $2,400 of equity in a motor vehicle.
The Illinois wildcard exemption can be applied to up to $4,000 in property that would otherwise not be exempt. However, you cannot use it to protect real estate or wages.
Personal Property Exemption
The following types of personal property are exempt:
- Necessary clothing
- A certificate of title to any watercraft that is more than 12 feet long
- A bible and school books
- Family pictures
- Prescribed home health aids
- Prepaid tuition trust funds
- College Savings Pool accounts if the investments were made more than one year before filing and amounts invested were below the federal gift tax limit
Tools of the Trade Exemption
Up to $1,500 in tools, books, and implements necessary to pursue your trade are exempt. National Guard arms and uniforms are exempt.
Pension and Retirement Plan Exemptions
The pensions of most state and local employees (including police and firefighters) are exempt in Illinois. Additionally, qualified retirement accounts like 401Ks and IRAs are exempt.
Government Benefit Exemptions
The following government benefits are exempt:
- Social Security
- Unemployment compensation
- Workers' compensation
- Veterans' benefits
- Workers' occupational disease compensation
- Crime victims' compensation
- Certain federal restitution payments
The following types of insurance benefits may be exempt:
- Life insurance proceeds to the debtor's spouse or child if needed for support
- Life insurance annuity proceeds or cash value if the policy's beneficiary is the insured's dependent
- Health and disability benefits
- $15,000 of the proceeds paid following the destruction of your home
- Benefits from a fraternal society
- Alimony and child support
- Awards from wrongful death lawsuits or settlements
- Personal injury lawsuit awards and settlements up to $15,000
- The property of a business partnership
- Pre-need cemetery sales funds, care funds, and trust funds
Before you can file for bankruptcy in Illinois, you must take a credit counseling course. The course will assess whether you can pay your debts without filing for bankruptcy. If you are filing under Chapter 13, the course may include preparing a payment plan to be filed with the court. You must show that you completed the course within 180 days of filing by including a completion certificate with your bankruptcy filing.
If you are not using an attorney, you will begin the bankruptcy process by downloading the correct bankruptcy petition forms for the district where you are located. If you are unsure where to file, you can search under “U.S. Bankruptcy Courts" in the U.S. Court Locator using your address, city, or ZIP code.
Where Do I File for Bankruptcy in Illinois?
There are three federal court districts in Illinois, and each has a bankruptcy court. The districts have bankruptcy courts in the following locations:
The Northern District of Illinois has bankruptcy courts in:
- Park City
The Central District of Illinois has bankruptcy courts in:
The Southern District of Illinois has bankruptcy courts in:
- East St. Louis
It will cost you $338 to file for Chapter 7 bankruptcy in Illinois and $313 to file under Chapter 13. The fees are the same if you represent yourself (known as filing “pro se"), or are using an attorney. If you can't afford to pay the filing fee, you can ask to pay in installments over 120 days. If you earn less than 150% of the poverty line you can request that the fee be waived.
Most people filing for bankruptcy choose to have a lawyer represent them. While each bankruptcy case is different and fees can vary depending on where you live, most bankruptcy lawyers in Illinois will charge between $1,000 and $2,000 for a fairly straightforward Chapter 7 case. Attorneys will often charge between $2,500 and $3,500 for a Chapter 13 case that is not complex.
Need Help Filing for Bankruptcy in Illinois?
If you are having trouble paying your bills, hiring an attorney to represent you in bankruptcy may seem like an expensive luxury when you could file on your own. However, even simple bankruptcy cases can involve complex court filings and strict deadlines. An experienced local bankruptcy attorney will help guide you through the filing process, represent you in court, and negotiate with creditors to ensure that you exit bankruptcy with as many assets as the law allows.
Note: State laws are always subject to change through the passage of new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means. While we strive to provide the most current information available, please consult an attorney or conduct your own legal research to verify the state law(s) you are researching.