Bankruptcy is one of the strongest financial tools available to people struggling with debt. However, many people are hesitant to file because they think they will lose their property in the process. This is a common misconception. Not only does bankruptcy help protect your property from being taken, it also eliminates your qualified debt. When you call us at DebtPros, you will speak with an experienced bankruptcy lawyer in Chicago who will carefully assess your financial situation and provide the best advice on how to eliminate your debt.
In this blog we will cover how “exemptions” and the “automatic stay” protect your property in bankruptcy from creditors and trustees.
What is an asset in bankruptcy?
An asset refers to property you own or have the right to own. When you file for bankruptcy, you must list all your assets. These can be tangible or intangible. Tangible assets are physical in nature, like real estate, vehicles, clothes, furniture, and many more. Intangible assets are harder to ascertain. For example, the right to receive a refund would be an intangible asset, or a contractual right to receive property or money. Simply owning assets does not mean you will lose them in bankruptcy. You can use exemptions to shield them from liquidation.
What are bankruptcy exemptions?
In general, exemptions are state and federal laws that protect your assets from creditors. If your property is exempt, creditors are precluded from selling your property. Many exemptions apply only to certain types of property.
is exempt, creditors are precluded from selling your property. Many exemptions apply only to certain types of property.
Here are some common exemptions in Illinois:
- Homestead $15,000; $30,000 if filing with a spouse
- Personal Property $4,000
- Vehicle $2,400
- Pension/Retirement Fully exempt if tax-exempt
- Personal Injury Lawsuits $15,000
- Life Insurance Fully exempt if payable to a spouse or child
As you can imagine, shielding your property from creditors is critical, which is why you must hire an experienced attorney who knows the exemption laws in Illinois. Having represented thousands of debtors in Chicago bankruptcy proceedings, you can trust our bankruptcy lawyers to utilize every possible exemption at your disposal.
How do exemptions work in bankruptcy?
Apart from state exemptions there are also federal bankruptcy exemptions. However, not every state allows you to use them. In Illinois, you must use state exemptions when filing for bankruptcy. Now that you have completed your petition, it is your bankruptcy lawyers’ job to go through all the exemptions with you. Having non-exempt property in bankruptcy may have serious consequences depending on which type you file – Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a type of bankruptcy where non-exempt assets can be sold to pay your creditors. Although most Chapter 7 bankruptcies do not result in any liquidation of assets, it is important to understand why and how it could happen. When you file Chapter 7, a trustee is assigned to your case. The trustee’s job is to get creditors paid.
The trustee can only sell unexempt property. Thus, it is important to use every exemption available to prevent liquidation. For example, if you own a house worth $100,000, and have a mortgage balance of $75,000, the trustee cannot sell your house because you are able to use a homestead exemption of $15,000. The same would be true of a bank account with less than $4,000 in it if you apply the “wildcard exemption.”
On the other hand, Chapter 13 bankruptcy does not involve any liquidation of assets. Instead, it requires you to make monthly payments to repay your debt pursuant to a plan of reorganization. Even though your property cannot be sold in a Chapter 13, it is important to use exemptions. Your proposed chapter 13 plan can pay general unsecured creditors, like credit cards, less than what you owe them.
There are a few factors or tests that determine how little you can pay your general unsecured creditors. One factor is called the “liquidation test” or best interests of creditors test under section 1325(a)(4) . This test requires you to pay your unsecured creditors at least as much as they would have been paid in a Chapter 7 bankruptcy. Therefore, unexempt property may cause an increase in your monthly Chapter 13 payments and the percentage you must pay unsecured creditors back.
What is the automatic stay?
Apart from exemptions, filing a bankruptcy petition immediately creates an injunction against certain creditor collection efforts while you are in the case. This injunction is called the automatic stay and is provided for under Section 362 of the Bankruptcy Code. The primary purpose of the automatic stay is to help debtors repair their financial situation by providing breathing room from creditors.
The most common examples of acts that creditors are prohibited from doing include:
- Calling or harassing you
- Garnishing your wages
- Repossessing your vehicle
- Foreclosing on your house
- Filing or continuing a lawsuit to collect a debt, and
- Sending you letters or emails
If a creditor violates the automatic stay, your bankruptcy lawyer can file a motion for sanctions against them. The judge can then decide whether to award you damages. Before filing a motion for sanctions, however, to violate the automatic stay, the creditor must have received proper notice of your case. Additionally, there are exceptions to the automatic stay. Some examples include:
- Criminal cases
- Civil cases involving family or domestic issues
- Child support, and
- A limited ability to offset tax refunds
The automatic stay therefore protects your assets from creditors by preventing them from taking money or property from you while you are in the case. Many of our clients file to prevent their house or car from being repossessed or foreclosed. Even though the automatic stay prohibits this, a creditor can file a motion for relief from the automatic stay for “cause.”
Call our Chicago bankruptcy lawyers today!
If you are considering filing for bankruptcy, call us today for a free consultation. We will help you protect your assets and eliminate your debt. At DebtPros, you will speak directly with a bankruptcy lawyer in Chicago who will listen closely to your unique financial situation and assess whether bankruptcy is right for you.
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