Planning for exemptions in bankruptcy proceedings

Anyone filing for chapter 7 bankruptcy in Illinois should be aware that not every asset will have to be placed in the bankruptcy estate. There are some exemptions, which typically include the following: 

  •        Motor vehicles or certain equity in them
  •        Clothing and household goods that are deemed necessary
  •        Pensions
  •        A portion of equity in a home or earned but unpaid wages
  •        Certain public benefits such as Social Security income and public assistance
  •        Tools associated with the person’s profession

Illinois enables debtors to opt out of federal exemptions and simply go by the state laws.  However, those laws place certain restrictions on some commonly exempt property. For example, state law dictates that only up to $15,000 in a home may be exempt from bankruptcy. The law also states that up to $2,400 in one car may be exempt and only up to $1,500 trade tools may be exempt.

Assets that are not exempt could possibly be converted. For example, nonexempt assets such as cash could be spent on items that would be considered necessary to living, such as rent or food. Additionally, an asset such as a boat or rental home could be sold, and that money could be used to purchase a vehicle.

The American Bar Association points out that while exemption planning is typically permissible, debtors should work with a professional because a misstep could result in getting charged with fraud. Leaving creditors with no real means of recovery could prompt a court to determine that the debtor engaged in fraudulent activity.

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