Illinois Bankruptcy Laws & Exemptions

Bankruptcy refers to the legal proceedings when an individual or corporation cannot pay creditors any outstanding debts. It grants the debtor freedom from their debt obligations while helping creditors receive some form of repayment. In the United States, the federal court handles all bankruptcy cases as detailed in the U.S. Bankruptcy Code. As such, Illinois bankruptcy laws are the same as in all other U.S. states. They determine how and when to repay debts to offer relief to both parties involved.

Here, we look at the bankruptcy laws in Illinois in more detail, including the different types of bankruptcy filings available. We also look at how individuals and corporations can file for bankruptcy in Illinois and answer all frequently asked questions about Illinois bankruptcy exemptions.

What is Bankruptcy Law in Illinois?

Bankruptcy laws in Illinois define the legal process that reduces, restructures, or eliminates overburdening and unpayable debts. According to the laws, a person, two spouses, or an organization struggling with their financial repayments can declare bankruptcy and go to U.S. federal court. The judge and an assigned court trustee will look over the assets and debts to find the best course of action for all parties involved. In most cases, the court will dissolve the debtors’ assets to pay the creditor and dismiss any remaining debts. In other cases, detailed repayment plans are agreed upon, specifying when to make payments over the next three to five years.

What is the Purpose of Bankruptcy Law?

The primary purpose of bankruptcy law in Illinoisis to define the legal process of debt collection. It principally helps the debtor, whether an individual or a corporation, by acting as a legal structure to settle debts. However, creditors also benefit from these laws. As such, they help to serve three main objectives:

1) To help creditors and debt collectors deal with debtors that can’t pay their outstanding debts, offering them help in collecting the outstanding balance through other means. For example, through the sale of assets or a detailed repayment plan.

2) To help individuals that are burdened with debts gain access to a fresh start in life through discharge of their debts and relief of the legal obligation of repayment. It provides them with freedom from creditors chasing them and ensures the U.S. court handles the loan repayments fairly.

3) To offer corporations and firms the chance to overcome their financial distress via reorganizing their debts rather than being forced into liquidating their assets. This benefits businesses in debt while often giving creditors better returns than they would receive from the company going into liquidation.  

Types of Bankruptcies in Illinois

According to Illinois bankruptcy laws, there are several different types or “chapters” provided. This represents the chapter in the U.S. Bankruptcy Code that references that particular type of bankruptcy filing. Which form of bankruptcy depends on the types of debts, people involved, and overall goals of filing a claim. The majority of bankruptcy cases fall under one of three categories, Chapter 7, Chapter 11, or Chapter 13. Here, we define these types of bankruptcy in detail, alongside looking more briefly at the three less common bankruptcy proceedings, Chapter 9, 12, and 15.

Chapter 7: Liquidation

Chapter 7 bankruptcy, also known as “straight bankruptcy” or “liquidation bankruptcy” is one of the most common forms of bankruptcy filed for in Illinois. When at this stage, the debtor has bypassed the point of reorganizing their debts. They are now in the position where they need to sell their assets to pay off any outstanding unsecured debts. The courts will appoint a trustee whose role is to sell the assets in the correct order, according to the rules of “absolute priority” as detailed in Section 1129(b)(2) of the U.S. Bankruptcy Code. Once the trustee sells all assets,  they usually write off any outstanding debts. This type of bankruptcy claim is available for individuals, small businesses, and large corporations.

Chapter 11: Large Reorganization

Bankruptcy laws in Illinois state that large corporations or some individuals with extremely large debts can file for “reorganization bankruptcy,” as defined in Chapter 11 of the U.S. Bankruptcy Code. This is the most complex type of bankruptcy in which the trustee restructures the debts while allowing business to continue as usual. By doing so, organizations have a chance to survive as healthy businesses. However, the debtor will still need to pay creditors their outstanding debts through the company’s future earnings. If the business emerges as unsuccessful, it will need to file for liquidation bankruptcy, selling its assets to pay off any outstanding balances.

Chapter 13: Repayment Plan

Chapter 13 bankruptcy, known as “repayment plan bankruptcy” or “debt adjustment bankruptcy” is the third type of case according to Illinois bankruptcy laws. This is a great alternative to Chapter 7 bankruptcy for any individuals or businesses wishing to keep their property. When filing for this type of case, a payment plan is set up detailing when and how you will pay off any outstanding debts. The plan, and therefore the debts, will last anywhere from three to five years. However, following the repayment plan, the debtor can keep all exempt and non-exempt property. 

Chapter 9: Municipalities

According to Illinois bankruptcy laws, Chapter 9 bankruptcy is exclusively for use by monetarily distressed municipalities, such as cities, villages, and towns. In these cases, the municipalities receive a payment plan in which to repay their debts. The cities, towns, and boroughs will not need to liquidate any of their assets as part of their repayments.

Chapter 12: Family Farmers

Chapter 12 of the U.S. Bankruptcy Code defines a type of bankruptcy solely for use by family farmers and fishermen in Illinois. To file for this type of bankruptcy, the farmers and fishermen must have regular annual income. Debtors can propose a repayment plan that lasts for three to five years over which they repay their debts to the creditor. While doing so, their business can continue as usual.

Chapter 15: Cross-Border Cases

One of the more recent adaptations of Illinois bankruptcy laws was the addition of Chapter 15 to the U.S. Bankruptcy Code. Added in 2005, this chapter deals with cross-border cases. Often where the debtor files the petition for bankruptcy is  in the debtors’ home country, but either their assets or creditors are in another country. This is a separate type of bankruptcy filing because it promotes cooperation and communication between U.S. courts and foreign parties.

How to File for Bankruptcy in Illinois

Bankruptcy laws in Illinois allow for both the debtor and creditor to file for a bankruptcy claim. However, a bankruptcy case usually begins with the debtor filing a petition with the U.S. federal court. This can either be an individual, spouses together, a small business, or a large corporation. Many people choose to file the petition alone and represent themselves in court, while others gain help from a bankruptcy attorney. While legal counsel is not necessary, it is less risky to have  legal counsel with thorough knowledge of bankruptcy laws.

Regardless of whether filing for bankruptcy on your own or with the help of a legal professional, here is a step-by-step guide of the complicated process:

1) Compile all Financial Records: Any individual or corporation declaring bankruptcy needs to present financial records to the courts. This includes a list of all owed debts, assets, income, and expenses. Therefore, the first step is to compile all of these records so the U.S. federal courts know as much about the situation as possible.

2) Go Through Pre-Bankruptcy Counseling: Prior to filing for bankruptcy, the debtor must go through pre-bankruptcy credit counseling. This is where a counselor will review all current finances to see whether there is any way the debtor can repay loans without declaring bankruptcy. It is mandatory before filing a bankruptcy claim in Illinois and ensures the courts that the debtor has exhausted all other possible avenues for repaying debts.

Pre-bankruptcy credit counseling must take place at least 180 days before filing for a claim. Having completed the counseling, the debtor receives a certificate, which they need to file along with all financial records when declaring bankruptcy. According to Illinois bankruptcy laws, the court will automatically dismiss all claims if the debtor misses this step. 

3) File a Bankruptcy Petition: After completing credit counseling, the debtor can file a bankruptcy petition. This involves completing many complex and lengthy legal documents and forms that are on the U.S. Court’s website. In the petition, the debtor has to state which type of bankruptcy they are filing for, so there’s a thorough understanding of the different Chapters. If the documents are incorrect, it could affect the outcome of the case, potentially resulting in the trustee seizing and selling the debtor’s property.

4) Meet with Creditors: Illinois bankruptcy laws state that once the court accepts a petition and appoints a trustee, the debtor must meet with the creditors. This meeting is optional for the creditors, giving them the chance to ask questions about the debtor’s situation. However, it is mandatory that debtors attend the meeting.

Illinois Bankruptcy Exemptions

A concern of many debtors who file for bankruptcy is that they will lose all their assets, including equity of residential property, automobiles, home furnishings, and money held in retirement accounts. However, thanks to Illinois bankruptcy exemptions, this is never the case.

Illinois bankruptcy exemptions are a list of property valued up to a specified amount that cannot be distributed to creditors as part of a bankruptcy claim. Each state has a list of exemptions that are unique for the state, with some being more lenient than others. These lists differ in the type of property that can be protected, up to what value in equity is safe, and whether these exemptions double if two spouses are jointly filing for bankruptcy. The type of bankruptcy claim being filed also determines how the Illinois bankruptcy exemptions will affect your case.

To qualify for Illinois bankruptcy exemptions, the debtor must have been a state resident for a minimum of 730 days prior to filing the claim. If not, the bankruptcy exemption list for their previous state of residence will apply.

Frequently Asked Questions

1. Can you choose between state and federal exemptions when filing for bankruptcy in Illinois?

No. Unlike many U.S. states, debtors cannot choose between the Illinois bankruptcy exemption list and the federal one. Illinois’ list of exemptions applies in all cases. However, the debtor can use federal non-bankruptcy exemptions to provide additional protection of property.

2. What is the homestead exemption in Illinois?

The homestead exemption in Illinois protects up to $15,000 of equity in the debtor’s residential property. This covers all types of home residences inclusive of farm buildings, mobile homes, building lots, and condominiums.

3. Does Illinois permit doubling exemptions for spouses filing for bankruptcy? 

Yes. Illinois bankruptcy laws allow the figures detailed on the state exemption list to double when spouses file for bankruptcy together. However, to double the exempt property, both spouses must be joint owners.

4. Where can I find changes to the Illinois bankruptcy exemptions list?

Illinois updates its exemption list periodically to respond to the changes in the economy. You can find a list of all current exemptions and changes to the list on the Illinois General Assembly website.

5. How many bankruptcy courts are there in Illinois?

There are several bankruptcy courts in Illinois in each of its three districts: within the Northern District there are offices in Rockford and Chicago; within the Central District there are offices in Peoria, Springfield, and Urbana; and within the Southern District there are offices in East St. Louis and Benton. Debtors should file their case in the court office closest to their major place of residence during the past 180 days prior to filing a claim.

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