For many people, the word “homestead” conjures up images of fields and farmhouses, straight out of Little House on the Prairie.

But the idea of the homestead is an important one, especially here in Illinois. It’s not about memories of the Old West; instead, it’s about protecting debtors’ most important property, in the here and now.

From Chicago high rises to sprawling rural estates, plenty of Chicago homes qualify as homesteads – and can offer their owners significant protections from creditors, as a result.

This is all thanks to the Illinois homestead exemption. Let’s explore this important rule, and how it applies in bankruptcy for Illinois homeowners.

What is the Illinois Homestead Exemption?

In a nutshell, the homestead exemption is designed to help owners preserve equity in their home, including in the face of bankruptcy and severe indebtedness. Historically, this protection has been meant to prevent homeowners from becoming homeless when the economy crashes.

Generally speaking, this protection allows homeowners to exempt a certain dollar amount of the equity in their home or residential property, including houses, condominiums, and so on. It also applies to proceeds from the sale of such a property, within a year.

The exemption is largely applied automatically in bankruptcy proceedings, but there are still important rules and restrictions around it. Broadly speaking, in order to claim the exemption, a debtor must be able to prove that they are the legal owner of record, with their name associated with the deed and/or title on the property.

As of the time of this writing, the Illinois homestead exemption allows owners to exempt up to $15,000 of home equity. That number doubles to $30,000 for married couples filing bankruptcy jointly. These exact values may change over time.

Illinois law requires homeowners pursuing bankruptcy to use this state exemption, rather than any federal exemptions.

The Homestead Exemption in Chapter 7 and Chapter 13 Bankruptcy

In order to apply the homestead exemption, you must meet residency requirements (i.e., you must have lived in the property as a home for a certain amount of time), and be the legal owner of the property, with your name listed on the deed.

By allowing homeowners to protect their equity in their home, the homestead exemption offers certain advantages during Chapter 7 and Chapter 13 bankruptcy proceedings.

For example? In certain circumstances, the application of the homestead exemption may allow Chapter 7 petitioners to keep their home, even in the face of liquidation bankruptcy. In other cases, even if the home is sold, the debtor must be reimbursed the amount of the homestead exemption from the proceeds of the sale. In Chapter 13, the homestead exemption may allow homeowners to rule the equity in their home off-limits to creditors, which can help lower the payments required in their Chapter 13 repayment plan.

Does the Homestead Exemption Apply In Other Cases?

Broadly speaking, the homestead exemption is intended for single and married homeowners. But there are other cases in which it might apply. For instance, there are special provisions to the exemption, allowing for surviving spouses, surviving children, and other occupants to protect the equity in the home. Surviving spouses can generally apply preserve the equity as long as they reside in the home, for instance, and surviving minors may be able to protect the equity until they turn 18.

Another important aspect to understand? In some cases, couples may own their home via tenancy by the entirety, meaning that they own it as a single joint entity, rather than as two individuals. Under these circumstances, homeowners may be able to exempt more than the standard homestead exemption amount, and creditors cannot attempt to take the property as payment for debts belonging to only one owner.

Finally, it’s important to understand that, while the homestead exemption can offer significant protections to homeowners, it does not provide absolute protection from creditors. For instance, the homestead exemption does not necessarily protect homeowners from foreclosure or seizure if they fall behind on mortgage payments. The bank may still foreclose on the home, as long as they reimburse you with your legal share of the equity after the sale. Similarly, because it is a state statute, the homestead exemption may not apply if your debts are covered by federal law – such as if you’ve incurred significant federal tax debts.  

There Is a Lot More to Discuss

The homestead exemption is an important concept to understand when it comes to real estate and bankruptcy law here in Illinois, and we’ve barely scratched the surface here.

The bottom line? In many cases, talking to an attorney experienced in the fields of real estate and bankruptcy law may be able to help you get a better understanding of the homestead exemption, as well as other important protections that could help you down the line if you’re purchasing a home, or facing the prospect of mounting debts.

If you want to speak with an attorney possessing unparalleled expertise and insight into these matters, drop us a line today. The Gunderson Law Firm has earned an exceptional reputation across Chicagoland for our dedication to providing our clients with exceptional legal representation and services in the practice of bankruptcy and real estate law.