Bankrutpcy Exemptions

One of the most common fears of my clients upon deciding to file for Chapter 7 bankruptcy is that they will lose all of their property. While this fear is a valid feeling, the truth could not be further away. 99% of Chapter 7 bankruptcy filers are able to get a full discharge of their debts and not lose a single item of property: there are three reasons for this:

Reason 1: You do not own the property.
When filing for Chapter 7 bankruptcy, the only property subject to sale is property that belongs to you and not what is owned by someone else. The two pieces of property of the most concern are your house and your car. Fortunately, almost no debtors lose their homes or cars in this economy. The reason for this is that home values have (for the most part) fallen below the amount owed on their mortgages. What this means is that even though your name is on the title for the house, the bank owns all of the equity in the house. Therefore, the house is not owned by you, it is owned by the bank. When filing for Chapter 7 bankruptcy, the trustee does not care about what the bank owns and will not be interested in your home unless you own some of the equity. The same principal holds true for cars.

Reason 2: All of your property is covered by the Illinois statutory exemptions.
When filing for Chapter 7 bankruptcy, the presumption is that you will get a complete discharge of all of your debts as long as you surrender all of your property to a trustee for distribution to the creditors. However, in Illinois, there are statutes that describe certain items of property that are deemed so important that no trustee is allowed to take them from you; these are called statutory exemptions. Some of the most frequently used exemptions are:

$15,000 of equity in a home;
$2,400 of equity in a vehicle;
$1,500 of equity in "tools of the trade;"
$4,000 wildcard exemption;
100% of all 401k, IRA, Pension, and retirement savings.

If you are filing with a spouse, these exemptions are doubled. The trustee usually requires a value of your assets to be reported at 10% of what you paid for them; for most debtors, the $4,000 wildcard exemption is more than sufficient to save all property you own.

Reason 3: The trustee is not interested in selling your property.
The final reason is that the trustee is simply not interested in your property because they cannot receive enough money from a sale. Remember, the trustee values your property at 10% of what you paid for it...and then they have to send someone out to take it to auction...and then it has to sell at auction...and then the trustee needs to be paid out of the sale...and then each creditor needs to be paid a "meaningful payment" out of the sale...by the time this process is finished, each party may receive a few dollars and this is simply not worth the trustee's time and effort. So this is to say that even if some of your property is not covered by the statutory exemptions, the trustee probably does not want it.