A common scenario that we as bankruptcy attorneys often see in personal Chapter 7 bankruptcies is when our clients have equity in their real estate in excess of the Illinois homestead exemption. In Illinois, a Chapter 7 bankruptcy filer is allowed to protect, keep and exempt up to $15,000 of equity in their homestead property, and the exemption doubles to $30,000 for married joint filers. To qualify for this Illinois “homestead” exemption, you generally must be able to show that you lived in the property in question at the time of the Chapter 7 bankruptcy filing.
Real estate equity is determined by taking the real estate’s fair market value and then subtracting a reasonable cost of sale percentage in addition to any liens that exist on the property. The Northern, Central and Southern Districts of the Illinois Bankruptcy Courts all generally accept a 7% cost of sale reduction to account for any broker fees, real estate taxes, etc. at the time of sale. So in an example where an unmarried person owns a homestead property worth $200,000 that has a $120,000 mortgage on it (and no other liens), the formula would look like this: $200,000 – 7% cost of sale = $186,000 – $120,000 mortgage = $66,000 – $15,000 homestead exemption = $51,000 of exposed equity.
Many options exist for bankruptcy clients who have equity in their home in excess of the Illinois homestead exemption:
1) Consider Filing a Chapter 13 Bankruptcy
Typically the most advisable and best option given by bankruptcy attorneys to clients who need the relief of the bankruptcy code but at the same time want to keep their home is to file a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the filer is allowed to repay the equivalent amount of excess equity that’s unprotected by the homestead exemption and therefore keep their home. Chapter 13 bankruptcies are consolidation repayment plans that are based on a filer’s household disposable income and will range anywhere from 3 years at a minimum to 5 years at a maximum. To be able to qualify for a Chapter 13 bankruptcy, a filer must demonstrate that they have the sufficient, steady monthly income to support a feasible repayment plan based on their subjective circumstances.
2) Selling the Real Estate Prior to Filing
The Illinois homestead proceeds of sale exemption allows a Chapter 7 filer to keep up to $15,000 in proceeds of sale of a homestead that has been sold within one calendar year prior to the filing of the Chapter 7 bankruptcy. This exemption also doubles to $30,000 for joint filers. While it makes most sense for those who are willing to part with their home, this option can be extremely beneficial in that allows qualified Chapter 7 bankruptcy filers to receive a discharge on their unsecured debt, and at the same time retain the cash equity from the sale of their former home in a Chapter 7 bankruptcy filing. Note: It’s important to remember to not commingle any of the sale proceeds with your general funds in this scenario.
3) Surrendering the Real Estate to the Bankruptcy Court
Another option is to file a Chapter 7 bankruptcy knowing that excess equity in the homestead exists, and allow the Chapter 7 Trustee to sell and liquidate the real estate. In this scenario, the Chapter 7 Trustee will pay the individual filer their $15,000 proceeds of sale exemption ($30,000 for married filers) out of the equity from the sale. Any funds gained from the sale of the property in excess of the exemption will be used by the Chapter 7 Trustee to repay the Chapter 7 filer’s creditors.
4) Chapter 7 Trustee Buyout
This option allows a Chapter 7 bankruptcy filer to keep their property, but at a literal cost. A Chapter 7 filer must produce matching cash funds to cover the equivalent monies that a Chapter 7 Trustee would receive if they sold and liquidated their homestead in a Chapter 7 bankruptcy. This large cash amount is usually obtained by Chapter 7 filers refinancing the equity out of the property and turning the proceeds over to the Chapter 7 Trustee. However, this option can be risky and is not usually advisable in that it can often be difficult to qualify for real estate refinancing after the filing of a Chapter 7.