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If you are considering filing for Chapter 7 bankruptcy, you may be wary of the liquidation process. Unlike a Chapter 13 bankruptcy, which focuses on reorganizing your debt and committing to a multiyear, partial repayment plan, Chapter 7 bankruptcy filers undergo liquidation to compensate creditors.
Even the word “liquidation” can sound scary. You might be imagining a scenario where you lose everything: Sure, your debts may have been discharged, but in the process, you have lost your home, your car, your sentimental possessions, and even your clothing.
The idea that you will lose everything in a Chapter 7 bankruptcy liquidation is a myth. It is true that nonexempt property will be turned over to a trustee assigned by the court and sold. The key word here is “nonexempt:” Many of your assets can be protected from the liquidation process if they are considered exempt. Below, we review what can and cannot be exempted in a Chapter 7 bankruptcy.
Not everyone qualifies for Chapter 7 bankruptcy. One of the chief advantages of a Chapter 7 bankruptcy versus a Chapter 13 bankruptcy is you do not have to pay any additional amount as part of the bankruptcy filing. For this reason, along with the fact that generous exemptions can limit what is ultimately liquidated, many attempt to pursue Chapter 7 bankruptcy if at all possible.
To determine if you are eligible, you will need to work through the Illinois Means Test, which assesses your ability to partially repay. If your household’s income over the past 6 months is less than the average median income for your household size in Illinois, you automatically qualify for Chapter 7 bankruptcy. Note that if you plan to file jointly with your spouse – and thereby take advantage of joint exemptions – you must include your spouse’s income in this calculation.
If your household’s income meets or exceeds the average median income, you may still qualify. You will need to evaluate your monthly level of disposable income by subtracting qualifying living expenses, including costs related to housing, transportation, and sustenance. If the resulting figure is too high, you will be expected to partially repay creditors directly through a Chapter 13 bankruptcy. If the disposable income is acceptably low, you can file for Chapter 7 bankruptcy.
When filing for Chapter 7 bankruptcy, you have the option of choosing between one of two exemption schedules. The federal exemption schedule can be claimed by anyone filing Chapter 7 bankruptcy in any state, so long as their state is not an “opt-out state” that prohibits the use of federal exemptions. Filers can also choose to employ the exemption of the state where you live, which are often more generous.
To claim a specific’s state liquidation exemptions, including Illinois’s, you must have generally lived in the state for at least 2 years prior to filing for bankruptcy. If you have moved to the state within the past 2 years, the bankruptcy court tends to decide your state of residence based on where you lived in the 6 months before 2 years ago. For example, if you lived in Ohio for 5 years and moved to Illinois only 1 year ago, the bankruptcy court would likely require you to file as an Ohio resident, not an Illinois one.
Illinois is considered an opt-out state, meaning it does not allow Chapter 7 bankruptcy filers to use federal exemptions. All filers must use Illinois’s bankruptcy exemption schedule if they qualify as a resident. Even if you could in theory use federal exemptions in Illinois, you are not able to pick and choose between federal and state exemption schedules. Once you commit to one, you must exclusively use its options.
An experienced bankruptcy lawyer can help assess your assets and advise on whether you are likely to be considered an Illinois resident. They can also advise if another state’s exemption schedules might be more beneficial and help you understand your legal options.
As we mentioned above, if you qualify as an Illinois resident, you will be by default using Illinois’s Chapter 7 bankruptcy liquidation exemption schedule. If you are filing jointly with a spouse, you can double several of the available exemption thresholds.
Exemptions permitted in an Illinois Chapter 7 bankruptcy include:
Reviewing the extent and variety of exemptions permitted by Illinois’s state schedule can quickly become overwhelming. The good news is the liquidation process is not designed to strip you of everything you own. Those who do qualify for Chapter 7 bankruptcy are often surprised by how much of their estate can be readily exempted. If you are struggling to understand what you will be permitted to exempt from liquidation or are worried you will lose a bulk of your property, we want to help.
Our bankruptcy attorneys at Bach Law Offices, Inc. have over 40 years of combined legal experience and are prepared to help you navigate Chapter 7 bankruptcy. We can perform a thorough review of your estate and identify what elements will be safe under the state’s exemption schedule and what components might be vulnerable to liquidation. Our team can work with you to strategize on how to minimize any negative impacts of the liquidation process while maximizing the many benefits of Chapter 7 bankruptcy.